T H U R S D A Y ,  A U G U S T   9 ,  2 0 0 7 

Big “I” National News

P&C Trends

Going Against the Grain
Consumer study finds one trend in auto insurance purchasing habits, independent agencies find another.

Forty percent of U.S. adults would purchase auto insurance directly via phone, online or mail without first consulting an agent, according to the 2007 Customer Focus^® Insurance Study.

The statistic represents an 11% jump since 2003, according to Vertis Communications, which conducted the study on insurance customers’ buying behaviors. But independent agents are seeing a much different trend when it comes to auto and other insurance products.

While customers are getting more comfortable with the idea with direct insurance, not everyone is flocking to buy through the Web, phone or mail, says Mike Cvechko of Allegheny Insurance Services Inc. in Elkins, W.Va.

“Of the consumer buying public within a 100-mile radius (of our agency), I would say maybe 5% to 10% would be comfortable going on the Internet or calling GEICO,” Cvechko says. “I think they want to do business with people they know and trust. They are looking for a trusted advisor, someone they go to church with and see in the community. I think there’s been enough press and we’ve done enough good things in our marking area where the customers realizes the advantage of having an agent and being able to walk in and resolve their problems. The insurance industry is on the low-end of the totem pole as far as trust, so people are a lot more comfortable dealing with people who are in their town or community.”

Daren Wilson, president of Albright Agency in Ponca City, Okla., says many of his customers who leave for direct carriers often return after finding the big companies lacked personalized service when they needed it most.

“We continue to see growth in our business every year and I don’t know that it (direct insurance) is necessarily hurting us at this point,” Wilson says. “One thing we are seeing is that people who have shopped online in the past returning to us. A lot of times it because there has been a misunderstanding of what they are buying and the bad news is that they are finding out at a time of a loss. We’re in a fairly small community and we have dealt with those who thought GEICO was better, but we are the trained professionals, we’re service-oriented people who are trained to offer the most comprehensive plan and we usually have the best rates.”

The study also found the number of adults considering purchasing identity theft insurance jumped from 12% in 2003 to 17% in 2007, a trend Brian Boyle of Boyle Insurance Agency, Inc. in Woburn, Mass., attributes to an increase in public awareness.

“We’ve seen an increase of 20% in our personal lines clients who have purchased identity theft. People are reading about it in the paper and it takes a lot of the work out of it…because they notify all the credit companies,” he says.

Cvechko’s agency has also seen a spike in insureds requesting identity theft coverage and says there has been a big push in his agency to educate customers about identity theft.

“There are some good marketing pieces out there that we’re using to education the consumer. I think people are a lot more aware of it now,” he says. “We’re just coming off of a huge campaign and I would say 50% of customers have it.”

While the demand for identity coverage is up, there has been a decrease in the number of adults ages 50 to 64 old considering hospital/surgical benefits---down from 28% in 2003 to 21% in 2007, according to the survey. Demand for other types of specialty insurance purchases, such as long-term care, mortgage, critical illness, high face-value life, juvenile and accident products, have either declined or were unchanged since 2003, according to the study.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

Producer Compensation Issue Update

Is the Tide Turning?

Marsh Receives Important Changes from New York Authorities.

Despite the appearance of finality to the settlement agreements concerning producer compensation, the agreements provide the parties with the opportunity to change the terms, even years later. With respect to Marsh McLennan, this right was preserved in a provision of its initial January 2005 settlement with the New York attorney general and the New York superintendent of insurance allowing the broker to ask for changes in the event that compliance was “impracticable.” Marsh did that and on Aug. 6 Marsh and the New York authorities amended Marsh’s original settlement.

In the 2005 settlement, Marsh agreed to accept no fees except: “a specific fee to be paid by the client; a specific percentage commission on premium to be paid by the insurer set at the time of purchase, renewal, placement or servicing of the insurance policy; or a combination of both.” The amendment just agreed to allows Marsh also to accept “a specific fee for service(s) to be paid by the insurer set at the time of purchase, renewal, placement or servicing of the insurance policy; or a combination of fee and commission.” Marsh must still fully disclose the compensation prior to the binding of any policy, and the client must consent in writing prior to the policy being bound. The amendment also relieves Marsh of the disclosure requirements previously applicable to MGA Compensation. Further more, the amendment provides the disclosure requirements can be limited by the New York authorities if those authorities agree that they present an “unreasonable administrative burden” on Marsh. 

In other words, Marsh can now accept fees and/or commission from carriers when set at the time of purchase, renewal, placement or servicing, previously prohibited under the initial settlement. And, Marsh also may seek to limit its pre-binding compensation disclosure obligations to clients (other than with respect to MGA Agreements).

This amendment to the settlement was discussed by Marsh President and CEO Michael Cherkasky in an investor call on Aug. 7. In that call, Cherkasky stated that these payments for specific services were “completely different” from supplemental compensation that is allowed in other companies’ settlement agreements. Cherkasky also said that Marsh would make a “very public statement” in the next several weeks or month regarding what they plan to do with the newly permitted fees for services.

Until Marsh makes such an announcement, it is unclear what changes Marsh will institute in their compensation structure. However, one thing is clear --- the producer compensation story has not yet reached its final chapter. The compensation landscape continues to change and some companies that settled early are seeking and receiving changes to their settlements. 

IIABA hopes that this amendment also signals that the New York authorities are reviewing their prior stance and coming to the realization that the Big “I” has always known: there is a great value in the services that agents and brokers provide to insurance transactions and they should be paid appropriately and fairly for all they do.

For more information about producer compensation issues, log in as a member to www.independentagent.com, go to Legal Advocacy and select IIABA/Industry Information and News or contact Kathleen Graber, associate general counsel at 703-706-5432; kathleen.graber@iiaba.net.

Legal Advocacy

Insurers Get Major Victory in Katrina Litigation
Court finds State Farm’s policies excluded flood damages.

On Aug. 2, a Federal appeals court in New Orleans handed several insurers a big victory in the ongoing litigation surrounding 2005’s Hurricane Katrina.

The case In Re Katrina Canal Breaches Litigation involved alleged ambiguities in insurance policies concerning water damage. The plaintiffs were policyholders whose property was damaged by the flooding caused by the breaches in the New Orleans levees. The defendants included Unitrin Preferred Insurance Company, Hanover Insurance Company, Standard Fire Insurance Company, Travelers Property Casualty Company of America, Allstate Insurance Company, Liberty Mutual Fire Insurance Company, State Farm Fire and Casualty Company and Encompass Indemnity Company.

All of the plaintifs’ policies excluded damages caused by flood. But they argued that they were entitled to recovery based on their belief that their damages were caused by negligence due to faulty design, construction and/or maintenance of the levees. Since flood damage caused by negligence was not specifically excluded, the plaintiffs argued that the policies were ambiguous and should be interpreted against the insurance companies.

The lower trial court decided that all of the policies except State Farm’s were ambiguous as to whether water damage was covered because they did not distinguish between flood damage caused by an “act of God” (such as excessive rain) and flood damage caused by people (such as a levee breach). The same court determined that the State Farm policies clearly excluded all flood damage from any cause, so State Farm was dismissed from the case, which was upheld on appeal.

The appeal filed by the plaintiffs against the remaining insurers reached a different decision than the lower court on the purported ambiguity of the policy language and concluded that the levee breaches were excluded from coverage under the policies. The court said that: “This event was a ‘flood’ within that term’s generally prevailing meaning as used in common parlance, and our interpretation of the exclusions ends there. The flood is unambiguously excluded from coverage under the plaintiffs’ all-risk policies…”

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

On the Hill

House Committee Passes Terrorism Insurance Bill
TRIREA to continue needed terrorism insurance backstop.

The House Committee on Financial Services took a major step toward extending the federal terrorism insurance backstop by passing H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA).

The Big “I” strongly supports the bill, sponsored by Rep. Michael Capuano (D-Mass.) and House Financial Services Committee Chairman Barney Frank (D-Mass.), and thanked the committee for moving the legislation forward.

“The Big ‘I’ commends Rep. Capuano and Chairman Frank for advancing this bill that will continue to keep terrorism insurance coverage both available and affordable. We also thank Ranking Member Spencer Bachus, Subcommittee Chairman Paul Kanjorski and Subcommittee Ranking Member Deborah Pryce for their leadership on this important issue,” says Big “I” CEO Robert Rusbuldt. “We are encouraged by today’s action and hopeful that the program will be extended before its expiration at the end of the year, thereby bringing certainty to policyholders, insurers, and the insurance market as a whole. This legislation is crucial for the business customers of independent agents and brokers and for our nation’s economic security.”

The bill would extend the federal backstop on a long-term basis with reasonable trigger levels. In addition, it would help to ensure coverage from catastrophic terrorist attacks by including nuclear, biological, chemical and radiological (NBCR) events. The Big “I” supports a reasonable mechanism to include NBCR coverage and applauds the committee for including provisions that recognize both customers’ need for such insurance and insurers’ difficulty in underwriting these exposures. The Big “I” also strongly supports the bill’s creation of a blue-ribbon commission to propose long-term solutions to covering terrorism risks and is pleased that the views of independent insurance agents and brokers will be represented on the commission.

“The Big ‘I’ has consistently supported the continuation of the terrorism insurance backstop and has noted in testimony before Congress that action is needed before the program expires at the end of this year,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Our members are pleased with this progress, and we look forward to working with the House leadership and Senate toward final passage in both chambers before year’s end.”

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.




L&H Trends

Cause & Effect
What the sub-prime interest rate problem may mean for agents.

According to an old adage, the difference between a recession and depression is that when your neighbor is out of work, it’s a recession and when you are out of work, it’s a depression.

Many independent insurance agents reading about the recent problems in the sub-prime mortgage markets may believe there will be little effect on them. That may or may not be the case.

The first casualty of the sub-prime lending problem is that lower-income and/or credit-impaired borrowers will be unable to get a mortgage or will have higher monthly payments due to having to pay higher interest rates. Ironically, this is not the only group of borrowers that are impacted. The Wall Street Journal reported that the “jumbo” mortgage market---mortgages of $417,000 and up---are also seeing higher interest rates due to tightened lending requirements. For agents selling homeowners coverage, particularly in growth areas like Phoenix, San Antonio and Las Vegas, this may translate into fewer new personal lines customers. And, the failure to pass immigration reform legislation means that in areas with an influx of immigrants---particularly those who do not have legal residency status---it will be harder to purchase a home.

The increase in mortgage costs also means that consumers will have less discretionary income for insurance and may be tempted not to purchase flood insurance, when applicable, or forgo policy riders that they should consider. It may also impact automobile policies as homeowners seek to reduce their expenditures by lowering their policy limits. Independent agents should be sensitive to the sub-prime borrowers and try to craft policies that provide adequate liability limits so that the customers won’t find themselves in a catastrophic financial situation down the road.

Life-health agents should anticipate that some policyholders may be tempted to let their policies lapse as they find themselves cash strapped to afford their mortgage and put gas in their vehicle. Again, creative solutions may be necessary to ensure that customers have health insurance even if they have to have higher deductibles and co-pays in order to lower the monthly insurance premium.

Another fallout from the sub-prime meltdown is the stock market, where ripples from the financial sector of banks and other institutional investors have created market volatility resulting in wide swings in the stock market. These swings result in heightened investor anxiety and can lead to reduced consumer confidence in our overall economy, resulting in reduced consumer spending and lagging consumer purchases of both big-ticket items like cars and a reduction in local spending at restaurants, movie theaters and other main street businesses that independent insurance agents write the commercial insurance for. These businesses may find it increasingly difficult to meet their commercial insurance and employee benefits costs.

While it does not appear that the sub-prime problems will create long-term financial havoc, not everyone in the economy is impacted equally and independent agents are well advised to keep a big dose of empathy handy to assist customers that do find themselves adversely impacted.

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