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Marsh Struggles to Cure Contingent Indigestion |  Spitzer’s Guilty Plea Spree |  Deferred Annuities Oversight Increases| OFC Supporters Look to Senate |  Family Member Autos: A Hidden E&O Exposure | Big "I" National News

 V I E W :   P & C   T R E N D S
Marsh Struggles to Cure Contingent Indigestion

Marsh & McLennan Companies (MMC) reported last week that its second-quarter earnings fell by 57% in spite of what President and CEO Michael G. Cherkasky termed very strong results in non-risk and insurance broking areas within the MMC family. Unfortunately, what we may be seeing now are MMC’s inevitable signs of indigestion due to its consumption of what New York State Attorney General Eliot Spitzer called “above market” contingent commissions in his complaint filed Oct. 14, 2004.

Let’s put in perspective MMC’s current situation. In January, MMC agreed to settle with Spitzer and to set aside $850 million to compensate clients and, among other things, discontinue the practice of receiving contingent compensation from insurance carriers. Spitzer’s complaint says that in 2003 MMC took in an estimated $800 million in contingent commission payments. According to 2003 industry figures available in A.M. Best’s “Aggregates and Averages,” that would be a whopping 30% of the $2.6 billion in contingents all p-c insurers paid to all agencies in the United States .

What happens when you remove what turns out to be closer to $850 million in contingent commissions from the MMC Risk & Insurance Services operating companies? When coupled with all the ensuing negative publicity and competitive pressure from other agents and brokers, 2004 operating income at MMC dropped 83% from $1.8 billion to $300 million.

Source: Marsh & McLennan Companies, “Results Through Year-end 2004”

So, will there be a “plop-plop-fizz-fizz” for MMC? According to the Wall Street Journal, “(in) adapting to life without these commissions, the company has undergone drastic and painful changes.” Plans to cut staffing levels by about 5,000 staffers and to drop “tens of thousands” of unprofitable clients should yield $375 million in annual savings starting next year, the company said.

Who knows where it will all end up for MMC, but for a firsthand look you can tune your browser to see Cherkasky discuss the restructuring of his “badly bruised company.” You can get the interview via a CNBC web cast. Click here  and then the CNBC link in the article sidebar. (Be forewarned that the beginning of the clip contains 10 seconds or so of an interview with Sun Microsystems’ president and COO, so be patient.)

*Last week’s trivia winner: My compliments to astute reader Joe F. Rolando, member agent from Sandy, Utah. Berkshire Hathaway is not part of the S&P 500, although it may yet one day become a part, due to the lack of liquidity associated with owning its primary class of stock.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. 

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P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Spitzer’s Guilty Plea Spree

New York Attorney General Eliot Spitzer is racking up the guilty pleas in his investigation into the insurance industry. Within the past week, Spitzer garnered six guilty pleas from former and current insurance executives, bringing his grand total to 16 since October 2004.

The guilty plea spree kicked off last Wednesday, Aug. 3, when Todd Murphy, former Marsh Inc. senior vice president, pleaded guilty to a misdemeanor fraud charge. The next day, four more individuals entered guilty pleas in connection to Spitzer’s investigation. James Spiegel, former Zurich senior underwriter, and Regina Hatton, former Marsh Global Brokering senior vice president, both pleaded guilty to felony fraud charges. Nicole Michaels, a Marsh broker, plead guilty to a misdemeanor restraint-of-trade charge. On Friday, Jason Monteforte, former Marsh broker, pleaded guilty to attempted restraint of trade. Kevin Bott, former Liberty International assistant vice president, pleaded guilty to a misdemeanor restrain-of-trade charge.

In other news, former American International Group, Inc. CEO Maurice “Hank” Greenberg challenged AIG’s May 31 financial restatement via a white paper, according to Dow Jones Newswire. The white paper says that Greenberg “disagrees with many of the accounting changes made and believes that many of the changes are damaging to the interests of AIG and its stockholders.”

The white paper also states that Greenberg did not have a direct role in some of the decisions that the restatement reversed, and that some of AIG’s current executives “changed their minds” about how to account for some items.

“Significantly, many of the AIG and Pricewaterhouse Coopers personnel who were involved in the restatement were the same personnel who made or participated in the initial accounting determination that they have now reversed,” Dow Jones quotes the white paper as saying.

Also making news this week:

• On Friday, Berkshire Hathaway, Inc. revealed in its quarterly filing with the Securities and Exchange Commission that its General Reinsurance Corp. unit is still under investigation by government authorities examining its accounting of finite reinsurance. According to the Los Angeles Times, authorities also “were questioning whether General Re or its subsidiaries ‘conspired with others’ to misstate financial statements.”
• Berkshire also announced that it fired Milan Vukelic, CEO of General Re unit Faraday Group, in July, two months after he was placed on leave, according to the LA Times.
• MetLife, Inc. announced it received subpoenas from the Florida attorney general and the Oklahomainsurance commissioner. Both subpoenas concern compensation practices.
• The New York Insurance Department announced Aug. 3 that “it would no longer pursue the new requirements outlined in its Circular Letter 8, citing the NAIC Blanks Working Group’s recent adoption of additional disclosures regarding finite reinsurance for the annual statement of p-c insurers, including required attestations by a company’s chief executive and financial officers,” according to BestWire. Circular Letter 8 was borne out of “concern that some companies were using finite reinsurance to manipulate financial reporting results.”

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

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L & H   T R E N D S
Deferred Annuities Oversight Increases

Annuity sales practices, especially sales to seniors, are garnering a lot of attention. Although the bad apples always seem to get the most publicity, there is no denying that the number of disciplinary actions taken by the National Association of Securities Dealers has significantly increased during the past year. As a result, the NASD has issued a proposed rule related to deferred annuity practices that will step up compliance, particularly by broker/dealer principals that oversee annuity transactions. The key word that comes into play is suitability. The NASD has been very concerned about the suitability of deferred annuities sales, especially in light of increasingly complex product features that involve product guarantees and lengthy surrender penalties.

According to NASD’s Web site, “...some members continue to engage in problematic sales practices in this area, and some investors continue to be confused by certain features of these products. As a result, NASD seeks comment on a proposed rule relating to transactions in deferred variable annuities. The proposed rule includes suitability, disclosure, principal review, supervisory and training requirements tailored specifically to transactions in deferred variable annuities.”

Once the rule is finalized, independent agents can expect their broker/dealers to have additional disclosure and documentation procedures. How else will someone be able to adequately review the sale of a deferred annuity unless he or she has adequate information regarding the purchaser’s financial situation, age, investment objectives and other relevant data? This will increase the paperwork burden on the agent and the agency.

But the NASD’s increased vigilance is not the end of the story. A number of states are implementing requirements related to annuity sales oversight. States such as California, New Jersey , Massachusetts and Missouri have or are proposing new rules relating to the sale of annuity products, particularly targeting annuity sales to seniors. In virtually all cases, deferred annuities with long surrender penalties sold to seniors are under scrutiny.

Most independent agents who sell deferred annuities treat seniors ethically. The question is to what degree the burden of compliance will extend to traditional sales of deferred annuities. Remember that Roth IRA distributions are tax-free, whereas deferred annuities distributions are subject to ordinary income. Agents selling deferred annuities on the basis of product features will have to holistically look at their customers’ entire financial situations to be able to rationalize why they recommended that particular investment vehicle. With this area under the microscope, professional liability coverage for broker/dealers continues to escalate. In light of the continuing regulatory oversight, review your agency’s practices.

This environment highlights the need for continual training to keep agents abreast of the changing tax laws. Income and estate tax developments are relevant to deferred annuities sales. What happens in 2010, when 2001’s estate tax provisions sunset, impacts deferred annuities. When paid to beneficiaries, deferred annuities do not receive the step-up in basis that occurs when receiving shares in stocks or mutual funds. Thus, gains in a deferred annuity are less favorably taxed. These types of issues necessitate you be up to speed on legislative developments. If possible, fulfill your CE requirements with related classes that will help you and your customers stay current with the latest developments.

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

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O N   T H E   H I L L
OFC Supporters Look to Senate

With a resurgent push for optional federal chartering (OFC) on the part of some in the insurance and financial services industries, supporters of the proposal are looking to the Senate for support.

Industry sources reportedly told Liability & Insurance Week that the House Financial Services Committee leadership is clearly committed to pursuing the State Modernization and Regulatory Transparency (SMART) Act, and that they are focusing their efforts on senators John Sununu (R-N.H.) and Tim Johnson (D-S.Dak.). The two senators reportedly are expected to introduce an OFC bill before the end of 2005.

Among those lined up behind the OFC push are the American Insurance Association (AIA), American Council of Life Insurers (ACLI), the American Bankers Association and Financial Services Roundtable. The Big “I” continues to oppose OFC and is the leading supporter of the SMART Act proposal, which is similar to a concept proposed by the Big “I” more than three years ago.

OFC supporters have, in recent weeks, begun aggressively pushing their cause, with a new group, “Agents for Change,” seeking publicity in the press for its pro-OFC position. Fewer than 500 agents belong to the so-called organization, bankrolled by the Financial Services Roundtable (a trade association of the largest financial services conglomerates). Compare those numbers to the 300,000 Big “I” members who overwhelmingly oppose OFC and support SMART. Most press accounts have noted the discrepancy and/or included pointed rebuttals from the Big “I” Capitol Hill office.

“We strongly believe that reforms are needed, but they should be prudent, common-sense reforms that preserve state-based regulation,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “The SMART Act would use federal tools to accomplish needed reforms, but it wouldn’t throw the baby out with the bath water like the proposals to create an optional federal charter.”

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

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F O R M S   &   S U B S T A N C E
Family Member Autos: A Hidden E&O Exposure

One of the most overlooked---and potentially catastrophic---coverage gaps in a personal auto policy involves autos owned and separately insured by resident family members. This exposure most likely exists in many of your personal lines accounts.

This scenario occurs in dozens of times in your personal lines book of business: You insure the typical American family, let’s say the Bundys. Al and Peggy are married with children. Al and Peggy own a car, a 1963 Dodge Dart. Their daughter, Kelly, is 19 and living at home. She has her own car and insurance (or so you think). Bud, their son, is 17 and has no car of his own.

It's Al's bowling night, so he takes the family car. Bud, to the shock of everyone, gets a date that night and works a deal to borrow Kelly's car, a 1962 Corvair Monza. He has an at-fault accident that seriously injures the occupants of another vehicle.

Now the Bundys get two more shocks. Kelly discovers that she did not pay her renewal bill, so her insurance lapsed---leaving no coverage for her or Bud. Al turns the claim in to his insurance company and it is denied. The adjuster cites Liability Exclusion B.3. in the company's ISO PP 00 01 Personal Auto Policy:

B. We do not provide Liability Coverage for the ownership, maintenance or use of:

3. Any vehicle, other than “your covered auto,” which is:

a. Owned by any “family member;” or

b. Furnished or available for the regular use of any “family member.”

However, this Exclusion (B.3.) does not apply to you while you are maintaining or “occupying” any vehicle which is:

a. Owned by a "”family member;” or

b. Furnished or available for the regular use of a “family member.”

The bottom line is that under Al’s policy, there is no coverage for anyone other than him and Peggy for the use of another family member’s auto.

If you insure families who have resident family members (children or other relatives) with their own vehicles and insurance, keep in mind that the operators of those vehicles are covered only by the policies on those vehicles (with excess coverage under a policy, if any, on which they are named insureds or resident spouses).

In the example above, Bud is an insured under Al and Peggy’s policy while operating the next door neighbor’s auto, but not while operating his sister Kelly’s car. And, isn’t it quite possible that a young person like Kelly might fail to renew her coverage? At best, you can probably only count on having minimum limits available---with no contribution by the parents’ policy.

In this scenario, about the only thing you could do is forbid Bud to drive Kelly’s car (good luck) or insist that Kelly carry auto/umbrella limits equal to Al and Peggy (yeah, sure). There is no ISO endorsement to add coverage to the parents' policy for this exposure; you either have to avoid it or make sure that the other family member is properly insured.

For more information, click here.

Bill Wilson (bill.wilson@iiaba.net) is Big “I” director of the Virtual University.

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