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          Big “I” National News

Producer Compensation Issue Update

St. Paul Travelers Settles with NY, CT and IL on Contingent Commissions

Business terms of three-state agreement similar to Zurich settlement.

On Aug. 1, 2006, The St. Paul Travelers Companies, Inc. and its subsidiaries (collectively “St. Paul Travelers”) announced that it entered into an Assurance of Discontinuance (“Assurance Agreement”) with the state attorneys general for New York, Connecticut, and Illinois to resolve their investigation concerning practices “relating to the marketing, sale, renewal, placement or servicing of insurance and reinsurance and their accounting and public reporting practices, including those relating to nontraditional and finite insurance and reinsurance….”

The Assurance Agreement includes a number of examples of allegations that St. Paul Travelers (or their predecessor companies before they merged in April 2004) unlawfully deceived policyholders, regulators and other authorities and shareholders by: (a) participating in schemes to steer business with Acordia, Inc., Hilb Rogal & Hobbs Company, Arthur J. Gallagher & Co., and Willis Group Holding Ltd; (b) tying reinsurance placements to the placement of retail insurance; (c) participating in rigging of bids for excess casualty insurance through Marsh & McLennan Companies, Inc. (“Marsh”); and (d) improperly using insurance transactions to bolster the its own and its clients’ and earnings.

While the Assurance Agreement states that St. Paul Travelers is not admitting or denying any of the allegations described above, it included a statement of apology for the improper activities of some of its employees.

The business terms of the Assurance Agreement are very similar to the business terms of the settlement by the same three states with Zurich, and are described below in the Business Terms section.

Jay Fishman, Chairman and CEO of St. Paul Travelers, issued a memo dated Aug. 1, 2006, to company employees and producers describing the settlement in general terms. In that memo, Fishman addressed compensation to be paid to producers by stating, “I want to assure you that we intend to continue to compensate our producers competitively while fully complying with the settlement and all applicable laws.” He also described other business practice modifications as “largely intended to increase transparency and strengthen the ongoing training and education of our employees.” In addition, he stated that “Serving our customers in a manner consistent with the highest ethical and professional standards continues to be of paramount importance to all of us at St. Paul Travelers. We as a company have been and will continue to be committed to business practices that are consistent with those standards.”

Business Terms

1. Monetary fines and penalties. St. Paul Travelers agreed to pay $37 million into an Excess Casualty Fund to be paid to St. Paul Travelers’ policyholders who purchased or renewed St. Paul Travelers’ excess casualty policies (excluding excess workers’ compensation policies) through Marsh from Jan. 1, 2000 through Sept. 30, 2004. It also agreed to pay a $40 million fine or penalty, $24 million of which will go to New York, $8 million to Illinois and $8 million to Connecticut.

2. Disclosure notice. Starting six months from the date of the Assurance Agreement, St. Paul Travelers agreed to send a notice with the insured’s policy stating that information concerning the company’s Compensation practices and policies can be obtained from a Web site or from a toll-free telephone number.

For the purpose of the Assurance Agreement:

Compensation means “anything of material value given to a Producer including, but not limited to money, credits, loans, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses,” including Contingent Compensation. Compensation specifically excludes “customary, non-excessive meals and entertainment expenses.”

Contingent Compensation means Compensation contingent on any Producer: i) placing with St. Paul Travelers a specific number of policies or dollar value of premium; ii) achieving with St. Paul Travelers a specific level of growth in number of policies or dollar value of premium; iii) meeting a specific rate of retention or renewal of in force St. Paul Travelers policies; iv) placing or maintaining business with St. Paul Travelers to achieve a specific loss ratio or other measure of profitability; v) giving St. Paul Travelers preferential treatment in the placement process (such as last looks, first looks, right of first refusal or limiting the number of quotes from other carriers); or vi) obtaining anything else of material value from St. Paul Travelers. This definition specifically excludes Compensation paid by St. Paul Travelers to its captive or exclusive agents for lines of insurance or products identified in marketing materials clearly as St. Paul Travelers’ lines or products.

3. No payment of Contingent Compensation for excess casualty insurance. For 2006 through 2008, St. Paul Travelers offices in and issuing policies in the United States cannot pay any Contingent Compensation to Producers for placements of excess casualty insurance policies. In addition, St. Paul Travelers’ offices located and issuing policies outside the United States cannot pay Contingent Compensation to Producers on placements of excess casualty insurance policies issued or renewed to insureds domiciled in the United States where the policy is principally covering property or operations in the United States. Starting in 2009, payments of Contingent Compensation are subject to the requirements described below in number 4.

4. Additional limits on payment of Contingent Compensation. St. Paul Travelers agreed not to pay Contingent Compensation on any insurance line (or product/segment) if: i) insurers not paying contingent compensation on that line (or product/segment) (including to direct writers and insurers employing only captive agents for that line (or product/segment)); and ii) insurers with signed agreements with the New York attorney general or other state attorneys general with this restriction against paying contingent compensation for that line (or product/segment), together represent more than 65% of the national gross written premiums in that particular insurance line (or product/segment) in the calendar year for which market share data is most recently available. If these conditions are met, this restriction goes into effect on Jan. 1 of the next calendar year. The basis for the 65% market share calculation is information from the National Association of Insurance Commissioners, A.M. Best or another agreed upon source if needed data is unavailable from either of those. If the 65% market share drops below 60% in any subsequent calendar year, St. Paul Travelers can notify the attorneys general of the change and pay Contingent Compensation if the attorneys general do not object within 60 days to St. Paul Travelers’ determination that the market share is below 60%.

5. Controls on Book Rolls. St. Paul Travelers agreed not to accept transfers of 25 or more policies unless the arrangement includes written notice to affected insureds of the reason for the policy transfer (including any Compensation paid to the Producer relating to the transfer) and a statement that the insured can review and get information on the company’s Compensation policies and practices from a Web site or toll-free number. This provision is not included in the Zurich settlement with the attorneys general of New York, Connecticut and Illinois.

6. Controls on Service Centers. St. Paul Travelers agreed to require anyone communicating on its behalf with any consumer or insured through a company service center to “immediately and clearly identify themselves to the consumer and/or insured as representing St. Paul Travelers.” This provision is not included in the Zurich settlement with the attorneys general of New York, Connecticut and Illinois.

7. Support legislation/regulations to abolish Contingent Commission.  St. Paul Travelers agreed to support legislation and regulations in the United States to: i) eliminate Contingent Compensation for insurance products or lines; and ii) require greater Compensation disclosure.

8. Implement standards of conduct and training. St. Paul Travelers agreed to implement written standards of conduct relative to Compensation paid to Producers, including training company employees in business ethics, professional obligations, conflicts of interest, antitrust and trade practices compliance, and record keeping.

9. Cooperation with attorneys general and superintendent. St. Paul Travelers agreed to timely and fully cooperate with the attorneys general of New York, Connecticut and Illinois on their investigations and seek to have officers, directors, employees, and agents do the same.

10. Controls on finite and non-traditional reinsurance. St. Paul Travelers agreed to adopt policies to prevent transactions: i) intended solely to manipulate accounting results ii) with insufficient risk transfer to qualify for reinsurance; and iii) with undisclosed side agreements.

More Information

Incentive compensation remains a legal and effective means of compensating sales professionals in every industry, with varying structures that account for profitability and productivity. Compensation that rewards a sales force for excellence is a sound business practice. In the insurance industry, an agent or broker invests substantial time to identify the insurance consumer’s wants and needs; understand the complex terms of policies available; assess the products available to seek and present choices about coverage, price, service and financial strength of carriers; and remain available to assist with questions and changes as needed. IIABA believes that the compensation structure, including contingent commission, is not the real problem—the problem is the alleged illegal activity to obtain that compensation, and IIABA supports the prosecution of such illegal activities.

The Assurance Agreement is complex and includes many terms and details. To review the Assurance Agreement or for a more detailed summary and analysis of it and its implications for agents and brokers, go to the Legal Advocacy page of www.independentagent.comunder IIABA/Industry Information & News in the section called Litigation (and Related Materials): Involving St. Paul Travelers.

For more information, please contact Kathleen Graber, Associate General Counsel at kathleen.graber@iiaba.netor (703) 706-5432.

Technology Update

Disaster Planning: Ready for Implementation

This week, Tropical Storm Chris was a reminder that a disaster can strike anytime, in any area. Perhaps you’ve already taken the time to sit down with employees to go over the steps they should take if a storm or other disaster occurs. The last thing to cover is how to implement the plan.

The following checklist is based on recommendations contained in ACT’s reports and is designed to assist agencies in updating their current disaster plans:

When a Foreseeable Disaster is Imminent

• FedEx a tape of the latest database to the agency management system’s data center.
• Consider e-mail and automatic call outs to customers with emergency contact information.
• Staff should complete processing of all work that is outstanding, especially for coverage relating to the disaster.
• Make sure all needed lists are updated in paper form as well as exported to a laptop and portable storage device. Tight security is imperative.
• Make sure all employees know their assignments and have made clear how they can be reached in emergency.
• If possible, load your agency management system application onto a laptop along with your latest data file for instant access. Take all security precautions to protect your data.
• If you utilize an online data backup service, upload to them if possible.
• Wrap and label all employee work to be done to protect it.
• Take reasonable steps to protect all equipment.
• Redirect your phone numbers before the disaster.
• Disconnect all electrical equipment from the wall.
• If destruction of file server is imminent, consider taking the server with you if you know how to disconnect it and handle it safely.
• Shut off water and gas lines.
• Have needed provisions on hand, including enough cash for a few weeks.

Needed Provisions

• Fans, extension cords, batteries, flashlights, battery-powered lamps and radios and low heat, low-energy lighting available to use with your generator.
• Sufficient bottled water to handle employees’ and customers’ needs for two weeks.
• Canned or dry food goods that do not require refrigeration or cooking, as well as beverages and snacks for employees and customers.
• Can openers, paper/plastic utensils, plates and cups, trash bags, bleach, paper towels and cleaning supplies, and hand wipes.
• First aid supplies and blankets.
• Have paper ACORD claims forms available, carbon paper, other office supplies and digital cameras.
• Matches, barbeque grill, fuel for grill.

Customers’ and Employees’ Special Needs in Disaster Aftermath

• Be aware there will be significant emotional and psychological effects after major events.
• Provide drinks and food.
• Have a volunteer or staff member manage the client process, create waiting lists and direct claims process traffic.
• Staff should caucus each day to adjust response as necessary.

Carrier Issues

• Understand in advance each of your carrier’s CAT plans, the local presence they will have and how they will permit you to make multiple claims efficiently.
• Understand how your MGAs, E & S brokers and their carriers will handle claims.
• Seek draft authority or methods to provide customers with emergency funds immediately.
• Seek the ability to file claims online, since other types of communication may be intermittent or nonexistent.

E & O Considerations

• Document in writing prior to the anniversary date if you are unable to replace coverage.
• Advise customers of significant reductions in coverage when you replace coverage with a new carrier or write/renew the coverage with a surplus lines carrier and secure customer’s written acknowledgement of the reduction in coverage. Where an admitted carrier renews the policy, state laws usually put the obligation on the carrier to notify the customer of reductions in coverage (not so with a non-admitted carrier).
• Be especially careful to follow all of the laws with surplus lines placements, point out coverage reductions or coverage gaps to customers, along with the fact that surplus lines carriers are not typically covered by the guaranty fund. Get binders, certificates or other evidence of insurance from the surplus lines broker because the retail agent does not have binding authority for this business.
• Advise the customer in writing of any adverse change in the carrier’s A.M. Best rating during the policy term.
• Request a signed rejection form from customers that refuse available coverage for flood insurance (and/or earthquake insurance in appropriate areas). Clearly communicate to customers the exposed limits on their risks.
• Create a well documented file.

Additional Resources

• ACT’s Key Considerations in Disaster Planning & Management, located under “Agency Improvement Tools” at www.independentagent.com/act.
• ACT’s The Lessons Learned from Recent Disasters & Recommendations for Improved Response for Independent Agencies and the Industry (2006), available from jeff.yates@iiaba.net.
• ACT’s The Independent Agent’s Guide to Systems Security; What Every Agency Principal Needs to Know (including prototype agency security policy), located under “Agency improvement Tools” at www.independentagent.com/act.
• IIABA’s Best Practices of Crisis Management—A Step-By-Step Business Recovery Planner, located under “Best Practices” at www.independentagent.com.
• National Institute for Occupational Safety & Health at www.cdc.gov/niosh/topics/prepared/; click on “small business disaster planning guide.”

Jeff Yates (jeff.yates@iiaba.netis executive director of ACT. This article reflects the views of the author and should not be construed as an official statement by ACT.

On the Hill

Estate Tax Reform Goes Down to the Wire

Senate makes last pre-recess attempt to pass legislation.

As the Senate prepared to adjourn for its annual August recess this week, the crucial issue of estate tax reform appeared headed down to the wire, with both sides expecting a close vote on the issue. Although a bipartisan majority of the Senate supports reform, the question remained, at press time, whether there was enough support to reach the 60-vote threshold needed to end debate and move forward to a vote.

Last week, the House sent its final pre-recess compromise bill to the Senate. It would exempt from tax estates worth up to $5 million, make it easier to pass on the full exemption to a spouse, index the $5 million exemption to inflation, and tax assets beyond the exempted amount, up to $25 million, at the 15% capital-gains tax rate. Under existing law, the current estate tax relief will expire on Dec. 31, 2010. Without further legislation, some estate taxes would revert to rates ranging from 20 to 40%. Additionally, the new bill includes several important “tax extenders,” which include a research and development credit, a work opportunity tax credit, a college tuition deduction and a state sales tax deduction. The legislation also included an increase in the minimum wage.

The bill was geared toward gaining the support of 60 members of the Senate. Despite bipartisan, majority support in the Senate, all previous estate-tax legislation has failed to pass this procedural threshold. The new bill is the work of House Ways and Means Committee Chairman Bill Thomas (R-Calif.), who has been coordinating with Senate Majority Leader Bill Frist (R-Tenn.) to find a bill that can pass both houses of Congress.

“Once again, we applaud the hard work of Chairman Thomas and his colleagues in the House to pass this much-needed, permanent estate tax reform legislation,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “It is a reasonable compromise, and we hope this bill will make it through the procedural hurdles in the Senate, where Majority Leader Frist is also doing yeoman’s work on this issue. This legislation is very important to our members and small businesspeople across America.”

The Big “I” supports the elimination, or at least the significant reduction, of estate taxes to encourage investment and growth in small businesses. This is crucial to the 300,000 Big “I” members across  America,

many of whom own their own agencies and whose families face significant tax burdens when these businesses are passed along to their heirs. The prospect of heavy estate taxes also diminishes the value of small businesses if they are sold.

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.

Forms & Substance

What About That Boat Rental?

As summer vacation season continues, boat rental might be on the horizon for some of your clients—but will their homeowners policy cover it?

"We have a client with his homeowners, boat (21' Robalo, $33,000 hull and $300,000 liability limits), and umbrella coverage through our agency. He will be vacationing at a lake next week and will be renting a 21-ft. pontoon boat with a 50hp outboard motor and an estimated value of $15,000. He will be using the pontoon boat for touring the lake and fishing. The marina where he is renting does not offer any physical damage coverage, making our client responsible. Is there an insurance solution to this exposure?"

So, let's take a look at this exposure, along with the potential for third-party liability and what protection the typical homeowners insured does or doesn't have....

The marina evidently did not provide any hull coverage on their own watercraft (or they just don't make a loss damage waiver available). If not, that's pretty amazing. Apparently, though, whether insured or not, it seems that many, if not most, marinas, like rental car companies, hold the insured liable for damage. It appears that the rental agreement is to just make the marina insurer's subrogation claim more "official." Unfortunately, unlike the ISO Personal Auto Policy, the ISO Homeowners policies provide very little coverage for the rental of many nonowned watercraft.

Some boatowners policies do not exclude physical damage to nonowned watercraft, but they appear to be the exception, not the rule. Unless an alternative boatowners market can be found to replace his existing coverage with a form that addresses these exposures, your client better be a risk taker. Some boatowners policies do provide third-party liability coverage while using nonowned watercraft...again, the form will have to be examined.

There's always the risk management technique of avoidance...don't rent the boat. Otherwise, the alternatives may be retention (get that second mortgage ready) and loss control.

With regard to coverage for damage to watercraft under the 1991 ISO HO-3 Homeowners policy, it will provide up to $1,000 under Section I and $500 under the voluntary property damage additional coverage of Section II for a boat in the "CCC" of the renter. These limits increase to $1,500 and $1,000, respectively, in the 2000 HO-3 form. That is most likely not enough coverage even for a jet ski rental.

All of this illustrates the importance, as an agent, to ascertain (through a thorough risk review and ongoing communications) the unique exposures of each insured, and to select the appropriate carrier and product to properly address those exposures. After all, isn't that the true strength of an independent agent?

To read the entire article, including a more complete analysis of what is and is not covered under an ISO homeowners policy, go to: http://www.iiaba.net/VU/Lib/Ins/PL/Homeowners/WilsonRentalWatercraft.htm.

L&H Trends

The Producer Next Door

Look to captive salespeople in other industries for producer talent.

There are a variety of paths that producers can take before they end up working at an independent agency. In some instances, former company underwriters decide that they want to increase their income and/or gain independence by working in an agency. The independent agency ranks also have a fair number of former professional sales people who left their previous sales position for a common reason: protected sales territories.

There are a number of well known industries—such as pharmaceuticals, office equipment and office forms providers and consumer products – that have established territories for their marketing/sales force. This means that someone in the home office is in control of that salesperson’s earnings capacity. In fact, it’s a well known adage that if a salesperson for a national business products company had above average production numbers, it was because their sales territory was too large. An equitable remedy was to reduce their territory so that they would generate more sales from a smaller geographic area.

While lack of control of sales territory is a frequent reason for someone to jettison their career as a captive salesperson there are other reasons. For example, a former successful rep for a national business forms company decided to leave when he began reporting to a new district manager that insisted that the reps ended their day at the office, presumably to ensure that they were working a full day. “That was the straw that broke the camel’s back for me because I lived on the west side of the city and the office was on the east side,” the rep said.

Independent agencies offer prospective producers three attractive features:

• They do not have a protected territory. The producer is free to sell to anyone in any area (subject to licensing and business reasoning) and can even select geographic areas or industries of interest to market to or develop program business;
• There is no income limit per se, although agents are certainly affected by the commission levels set by various carriers and by the revenue sharing arrangement in the agency; and
• Agencies can provide adequate support – clerical, professional and technological. Many salespeople start out as a “one man band” and soon find that they waste too much time on the less important clerical and service aspects which ultimately cap their ability to achieve significant earnings.

There are a number of other valuable benefits that independent agencies can provide such as training, licensing, professional liability coverage, the ability to get appointed with well respected companies and other advantages. But, as valuable as these other services are, independent agency principals would be wise to remember that independence is a primary reason that drives most former captive sales persons to an independent agency and accordingly the agency should not fail to capitalize on this distinction.

While it will take time to teach the insurance business to a successful salesperson from another industry, it’s important to realize that the person that calls on you to market copiers, postage machines, payroll services, etc. may be the very person who can help your agency grow.  

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.