T H U R S D A Y ,   A U G U S T   1 8 ,   2 0 0 5

Carriers Face Credit Score Setback |  Industry Shoulders Increasing Percentage of Weather-Related Losses |  Is There an Insure Mae in the Offing? |
 Retirement Planning Goes to the Beach | Frist to Call for Cloture Vote on Death Tax |
Best Practices: Develop a Vision for Change | Big "I" National News

I N   T H E   S T A T E S
Carriers Face Credit Score Setback
Ninth Circuit decision on insurance scoring
and adverse action requirements

The controversial federal court that several years ago ruled that elements of the Pledge of Allegiance are unconstitutional has once again handed down a startling decision that could have sweeping ramifications. This time, the San Francisco-based United States Court of Appeals for the Ninth Circuit is taking aim at the insurance industry and, specifically, insurance companies’ use of consumer credit reports.

A recent decision from a three-judge panel of the Ninth Circuit may have a significant effect on the manner in which insurers utilize consumer credit information, and could potentially create millions of dollars of legal liability for personal lines carriers. The decision, which came in the consolidated cases of Reynolds v. Hartford Financial Services and Edo v. GEICO, addresses the obligations that insurers using credit information have to consumers under the federal Fair Credit Reporting Act (FCRA).

The FCRA requires insurers to alert consumers when they take an “adverse action” based on information contained in consumer credit reports. These are the typically pro forma notices that provide the affected consumer with the name and contact information of the reporting agency that provided the consumer report to the insurer, a statement explaining the consumer’s right to obtain a free copy of the report and a description of how the consumer can dispute the report’s accuracy.

The FCRA was somewhat unclear in specifying when such notices must be provided by insurers, and the court addressed this ambiguity. While the industry has widely recognized that adverse action notices are required whenever a consumer is declined or non-renewed, incurs an increased rate at renewal time or faces a similar unfavorable change in policy terms because of credit information, some carriers have argued that the notices are not required if the rate charged in an initial policy is higher because of the consumer’s credit history.

The key substantive finding of the Ninth Circuit is that a company must send an adverse action notice whenever a higher rate is charged because of a consumer’s credit information, regardless of whether the rate is for a new policy or a renewal. In other words, if consideration of a consumer’s credit history causes an insurer to charge a higher price for a policy than it would otherwise charge, then the Ninth Circuit would require an adverse action notice to be provided.

The court also considered the content of adverse action notices and identified several pieces of information that must be communicated. Specifically, the Ninth Circuit said an adverse action notice must, at a minimum: 1.) State that an adverse action based on a consumer report was taken; 2.) Describe the action; 3.) Specify the effect of the action and 4.) Identify the party or parties taking the action. This level of specificity is not outlined in the FCRA, and the existing adverse action notices of many insurers would likely not meet the standard outlined by the court.

Perhaps most significantly, the court found that the insurers involved in these cases “willfully” violated the law, an unexpected determination that has profound consequences and could open up personal lines carriers to near limitless civil liability. Under the FCRA, any person who willfully fails to comply with the adverse action requirements is liable to each consumer for damages of not less than $100 and not more than $1,000. These civil penalties were intended to be harsh and applicable in rare instances, yet the decision suggests it is easy for plaintiff attorneys to show “willfulness.”

The adverse action notice procedures of the insurers in this case are commonplace, and many insurers had accepted the plausible interpretation that notices were not required in connection with new business. Even the lower court judge that considered these cases ruled for the carriers and agreed with their interpretation. Nevertheless, under the logic of this decision, an insurer’s failure to issue an adverse action notice in instances when required or the failure to issue an adequate disclosure could lead to liability of $100 to $1,000 per consumer. Such costs could add quickly and even threaten the viability of some personal lines companies.

This decision only pertains to those states and territories covered by the Ninth Circuit: California; Oregon; Washington; Arizona; Montana; Idaho; Nevada; Alaska; Hawaii; Guam and the Northern Mariana Islands.

The most likely course of action is for the losing parties to request an en banc rehearing from the entire Ninth Circuit Court of Appeals. If that option fails, an appeal to the U.S. Supreme Court is likely. Stay tuned.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations.

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P & C   T R E N D S
Industry Shoulders Increasing Percentage of Weather-Related Losses

Flooding. Droughts. Mudslides. Wildfires. Storm surges. Lightning. When Mother Nature decides to unleash her fury, havoc ensues. But even after a weather-related incident calms, the insurance industry still feels its sting. According to “Insurance in a Climate of Change,” an Aug. 12 article in the journal Science, the insurance industry is shouldering 25% of the world’s total economic losses caused by weather-related catastrophes.

Written by Evan Mills, a scientist at the U.S. Department of Energy’s Lawrence Berkeley National Laboratory, the article says that the percentage has increased dramatically since the 1950s and continues to grow.

“Global weather-related losses in recent years have been trending upward much faster than population, inflation or insurance perpetuation, and faster than non-weather-related events,” Mills writes. “Specific event types have increased far more quickly than the averages. For example, damages from U.S. storms grew 60-fold to $6 billion a year between the 1950s and 1990s. As the climate changes, populations are moving more into harm’s way, but demographic factors do not appear to explain the increase.”

While images of catastrophic events such as a hurricane or days-long wildfire constantly play across the evening news, smaller events take their toll. According to Mills, 60% of weather-related losses are small in nature.

Property damage, while the most obvious, is not the only loss that weather-related events cause. Others to contend with include business and supply-chain disruptions, loss of utility service, equipment breakdown from extreme temperatures, data loss from power outages.

From 1980 through 2004, Mills found that “the global economic costs of weather-related events totaled $1.4 trillion (inflation-corrected), of which $340 billion was insured.”

As the climate continues to change, so do the risks associated with weather-related claims. Storm frequency and intensity, multiple-damages from one event and “shifts in special distribution of events” could affect insurers. Health-related problems stemming from climate changes, such as respiratory diseases caused by increased pollens and molds, also pose potential risks.

“As a result, in some cases, insurance premiums might not be enough to pay for claims,” according to the paper. “In a bad year, weather-related claims, plus unrelated claims from earthquakes or terrorist incidents, together with uncorrelated declines in financial markets (where insurers hold their loss reserves) could form the kind of ‘perfect storm’ that drives some insurance companies to the edge of solvency.”

Mills finds some promising signs that the industry it is proactively addressing increasing weather-related risks, citing those coupling catastrophic models with climate models.

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

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 V I E W :   P & C   T R E N D S
Is There an Insure Mae in the Offing?
Wharton Study pushes larger federal role

With little fanfare last Thursday, Aug. 11, nine faculty and associates of The Wharton School of the University of Pennsylvania released a 224-page report containing recommendations for Congressional action concerning the Terrorism Risk Insurance Act of 2002 (TRIA). Beyond the risk management professors’ recommendation to temporarily extend TRIA, the report concluded that there is a need for a greater federal role in insurance and to set the stage for a new federal insurance mechanism of some kind.

My compliments to these scholars. They know how to put together a not-so-lean but a very-mean report. It should have a major impact on TRIA discussions and even the level of federal involvement in our day-to-day insurance lives. After reading the report, I have two observations.

First, lest any of you think this all academic or big broker stuff, do not be mistaken. Below is an exhibit showing how the estimated $32 billion in Sept. 11 losses shook out by coverage-type. Only about 10% of the losses were actual losses to the WTC properties; the biggest coverage-type is a standard part of virtually every business owners package policy issued today---business interruption. Moreover, much of the report’s discussion centers on the impact of TRIA and a line of insurance nearly everyone writes in workers’ compensation. What happens with coverage of terrorism will impact all of us everyday…everywhere.

Source: Wharton Risk Center with data from the Insurance Information Institute.

Second, do not underestimate the impact a report like this can have on how Congress views insurance and what it sees as the proper federal role. After 188 pages of facts and well-documented analysis, you arrive at Chapter 10: The Future of Terrorism Insurance. I somewhat lightheartedly refer to this chapter as the possibility of an “Insure Mae.” After reading the Wharton report, it does not seem far-fetched.

While staying clear of any direct mention of a federally backed, government-sponsored enterprise (GSE) like a Fannie Mae, Freddie Mac or the now defunct Sallie Mae, the authors’ analysis of our tax system’s disincentive of insurer to buildups large catastrophe reserves, along with a couple of references to the law of large numbers, seems to at least recommend a broader role than any one state residual fund. Combine all that with the success of previously mentioned GSEs as tax-advantaged and aggressive marketplace solvers for widespread financial problems, and a Fannie Mae gone “terror-indemnity” seems to spring off the page.

Jeffersonians everywhere had a tough week last week. First there was the Optional Federal Charter Coalition calling for a bigger federal government role in insurance. Then there was New York Attorney General Eliot Spitzer calling for the end of the federal antitrust exemption and an ensuing broader federal role in not just the “business of insurance” but the broader “business of insurers.” And now, one of the more prestigious ivory towers of insurance and risk management is advocating various strategies for dealing with terrorism that only the federal government could ostensibly fulfill. Many headlines and press releases will address the former two topics as they directly threaten the infrastructure of business as we know it. Don’t be surprised, however, when this third, more quiet, area makes the biggest and fastest moving infiltration of g-men into insurance.

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

Web Resources

1. http://hnn.us/articles/1849.html (History of Fannie Mae and Freddie Mac)
2. http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=1261 (Summary of Wharton Study)
3. http://knowledge.wharton.upenn.edu/papers/1299.pdf(TRIA and Beyond: Terrorism Risk Financing in the U.S., 224 pages)
4. www.insurancejournal.com/news/national/2005/08/10/58203.htm (Article on Wharton Study)

Postscript: The IIABA favors the extension of TRIA---either the current program or a modified one---for its marketplace-stabilizing effects. The Big “I” staff is working with other industry trade associations and Congressional staffs on the variations of terrorism loss- financing legislation under consideration. For those of you who did not know, your Big “I” Capitol Hill staffers work in an office building just a single city block from the Cannon Congressional Office building and only three blocks from the Capitol itself. Your Capitol Hill staffers are guided by a dedicated group of agent volunteers on the Government Affairs Committee who work to ensure that you and your clients have continued access to critical protection for terrorism-related and other catastrophe losses. If you have any questions about what Fortune magazine repeatedly has rated one of the top 25 most-successful lobbying teams, please contact Charles Symington at charles.symington@iiaba.net.

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 V I E W :   L & H   T R E N D S
Retirement Planning Goes to the Beach

With just a couple of weeks of summer remaining, many of us will try to pack in one last vacation with the family before school convenes. According to an old adage, people spend more time planning for their vacations than they do for their retirement. Is this true? To tackle that question, let’s turn to the great empirical philosopher John Locke.

Before tuning out this article, independent agents should be aware that there is an important application for increasing their financial sales, so please read on.

Among Locke’s many insightful observations, the one that I’ve carried with me for more than 25 years is that one of the weaknesses of the human mind is the inherent desire to discount the future for present pleasure. For example, why would someone drink to the point of creating a hangover when he knows that in the morning he’ll have a splitting headache and perhaps other side effects? Locke would argue that the person gets caught up in the moment and discounts future pain for present gain. He postured that if at the time that someone was drinking alcohol they also felt the commensurate headache with each sip, they would stop drinking at the point they felt the unpleasant side effects. When I was a college student studying Locke, this example hit home.

According to Locke, agents should remember that the opportunity for a customer to take a trip with the family, join a country club or participate in some other fun activity will be competing with your plea for them to increase their retirement savings to meet their long-term goals.

How can you combat the short-term thinking in today’s culture of consumerism? One of the best ways is to point out the peace of mind (current pleasure) that comes from knowing that people will have reasonable standards of living in retirement. This concept also applies to life insurance sales. How many times have agents heard, “But I’ll be dead when the policy pays off”? Again applying Locke’s doctrine, stress the current peace-of-mind benefit of knowing that their families will be provided for in the event of their deaths.

Locke’s observation also can be applied to other activities, such as studying hard at college when other kids in the dorm are goofing off, not ordering a dessert when you’re trying to lose weight for that class reunion or---for independent agents---sending out letters, making phone calls and seeing prospects when you could be on the golf course. Remember to think about the desired future results and translate that into current sales activities.

Lest anyone think I’m not practicing what I preach, yes, I’m heading to the beach for a week, but the rental prices dropped 30% this week and I reminded my family that the water temperature is at its highest. After all, I have of a lot of savings left to do for retirement.

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
Frist to Call for Cloture Vote on Death Tax

In an Aug. 11 Wall Street Journal op-ed, Senate Majority Leader Bill Frist (R-Tenn.) pledged to pin down his fellow senators on whether they support a permanent repeal of the estate tax, also known as the “death tax.” The majority leader announced his intentions to hold a cloture vote that, in essence, will indicate whether senators support or oppose ending the tax permanently.

Under the tax bill passed in 2001, full repeal is set to take place in 2010, but the bill’s “sunset” would reinstate the tax in 2011.

“For those who plan to live beyond Jan. 1, 2011, the current death-tax reform law will do them no good,” Frist observes.

In his op-ed, Frist paints a dire picture of the effects that reinstating the estate tax in 2011 could have on family businesses. He discusses individuals who spent their lives building family businesses only for their families to be forced to sell their enterprises upon their deaths to pay the estate taxes.

“With the future uncertain for so many families and businesses, the need for Congress to act today is urgent,” Frist writes. “I had hoped to bring this critical issue to a vote before the Senate adjourned for the recess, but an anticipated filibuster slowed me from reaching this objective. Therefore, when the Senate returns the first week after Labor Day, I will ask my fellow senators to state their position on this issue, to make it known by casting a vote whether they favor or oppose the death tax. There will be no more hiding on the issue of permanent death-tax repeal.”

The Big “I” supports repeal or significant reform of the estate tax and will continue to lobby senators on both sides of the aisle to vote for permanent repeal.

“Our 300,000 agents, brokers and their employees would face severe and detrimental consequences if the death tax were to reappear in 2011,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Many of our member agencies would have to be sold, rather than passed along, which would be harmful not only to the families of our agents and brokers, but also to their numerous employees who might stand to lose their jobs. That is why we need permanent, significant estate tax reform to give America’s small business owners the certainty they deserve.”

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

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 V I E W :   A G E N C Y   M A N A G E M E N T
Best Practices: Develop a Vision for Change

A vision for change is the concept of what or where you want to be after a change occurs. Suppose you want to grow your agency by 10% annually for the next five years. The change is the 10% in revenues. Your vision may be what your office space or staff might look like after the growth and how you will invest or save your newfound profits.

Change is a process, and your vision keeps you focused on that process to accomplish the change.

Increasing revenues, the goal of the example above, is not always easy. It requires a consistent focus on a process of either reducing expenses or increasing sales---or both. In other words, it takes reduced expenses and increased sales to reach your goal. The process includes all the details of how you accomplish both tasks.

The process is what makes change difficult. How easy would it be if a single sale resulted in such exceptional growth? Dedication to the process---to doing what we must do---that makes change happen. And, unfortunately, the process takes time.

Barriers to change are another difficulty. An inability to cut expenses or the loss of a top producer could greatly affect your goals. You must overcome barriers for change to take place. What enables you to overcome the barriers, stick with the process and gain the revenues? Your vision.

Your vision must be compelling. It must compel you to say “no” to increased spending and “yes” to establishing a focused sales plan. You must want to grow your agency more than you want to stay at the status quo. Without a compelling vision, planned change does not happen.

What visions do you need? Many effective leaders focus on a vision for 1.) their agency/team and 2.) their personal leadership style and skills. We begin by outlining models of their visions.

Change activities in the Best Practices agencies we studied are many and varied, but they all contained common themes. These themes form the vision and define the processes:

1. World-class customer satisfaction

• Services that customers need and value
• Services that exceed customers’ expectations for value
• Services of uncompromising quality

2. Manages sales/production

• Sales focused on targeted customer/client groups
• Use of sales management tools and techniques

3. High productivity/low costs

• Simplified work processes
• Effective use of automation

4. Continuous improvement

• In customer satisfaction, sales, productivity and company relationships

Next week’s article will cover more traits and characteristics of agencies that have achieved exceptional leadership and growth using their vision for change---and how you can be like them.

If you would like to know more about the innovative concepts that the Best Practices program can offer your agency, attend the Best Practices Management Instituteon Sept. 12, 2005, during the 2005 Big “I” Convention in New York.

Madelyn Flannagan (madelyn.flannnagan@iiaba.net) is Big “I” vice president of education and research. This article is the second in a series covering Best Practices agencies’ management strategies.

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