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 Big "I" National News

S P E C I A L   R E P O R T :   H U R R I C A N E   K A T R I N A
Hurricane Katrina Causes Unprecedented Damage
Current insurance industry estimates top $20 billion

Four days after Hurricane Katrina came ashore, the insurance industry is having difficulty determining a precise loss estimate, Standard & Poor’s said yesterday. The day after the hurricane hit, the high range of damage estimates was $19 billion. However, late Wednesday, when the magnitude of the flooding was clear, estimates exceeded $20 billion.

S&P now estimates that Katrina could top the $22 billion in damages from Hurricane Andrew in 1992, making Katrina the worst storm ever to hit the United States.

The aftermath of this storm for the industry is playing out differently than last year’s Florida hurricanes. Since it was one event, there is a high probability that reinsurers will bear a brunt of the cost. Primary insurance writers in Mississippi and Louisiana, where the damage was heaviest, also do not have the back-up of state-run reinsurance programs, as they did in Florida. Florida's program paid out an estimated $3.4 billion to primary writers for last year's storms there. But insurers active in Katrina's path will have to depend on private reinsurance or their own resources.

Losses from water damage might also play a heavier role in Katrina's wake than in Florida. With wind and water damage often covered in separate policies for homeowners, determining the source of damage to a property and whether it is covered could prove a large and contentious issue. Lastly, although Florida's storm damage was heavily residential, there are significantly more damaged commercial properties in Louisiana and Mississippi, especially in the oil, gas, chemical and gaming sectors.

At this early stage of damage assessment, Standard & Poor's believes that widespread ratings changes are not imminent.

Which carriers will Katrina hit hardest? According to the Property Casualty Insurers Association (PCI), State Farm, Allstate, Nationwide, St. Paul Travelers and Zurich are among the carriers with the largest personal and commercial market shares in the affected states. Here is how the market breaks down according to PCI estimates:

Top Ten Homeowners Insurers by Market Share:

Alabama
State Farm Group 30.0%
Alfa Insurance Group 20.8%
Allstate Insurance Co Group 11.0%
Zurich Insurance Group 5.7%
St Paul Travelers Companies 3.8%
Nationwide Corporation 3.6%
United Services Automobile Association Group 3.3%
Auto Owners Group 3.1%
Country Insurance & Financial Services Group 2.1%
Cincinnati Financial Corporation 2.0%

Louisiana
State Farm Group 34.7%
Allstate Insurance Co Group 20.8%
Louisiana Farm Bureau Mutual 6.0%
Zurich Insurance Group 4.2%
St Paul Travelers Companies 3.9%
Liberty Mutual Insurance Group 3.9%
United Services Automobile Association Group 3.4%
American International Group 2.4%
American National Financial Group 2.3%
Allmerica Financial Corporation 2.0%

Mississippi
State Farm Group 30.4%
Mississippi Farm Bureau Mutual 19.7%
Allstate Insurance Co Group 9.9%
Nationwide Corporation 7.0%
Zurich Insurance Group 5.7%
Metropolitan Group 4.3%
Shelter Insurance Companies 2.8%
United Services Automobile Association Group 2.7%
Alfa Insurance Group 2.5%
St Paul Travelers Group 1.9%

Top Ten Commercial Property Insurers by Market Share
(This includes fire, allied lines and commercial multiple peril non-liability)

Alabama
St Paul Travelers Companies 8.1%
Zurich Insurance Co Group 7.6%
Alfa Insurance Group 5.5%
Auto Owners Group 5.0%
State Farm Group 4.2%
FM Global Group 4.1%
Cincinnati Financial Corporation 3.6%
Alleghany Group 3.0%
Nationwide Corporation 2.8%
QBE Insurance Group Ltd. 2.7%

Louisiana
St Paul Travelers Companies 10.5%
Zurich Insurance Co Group 6.8%
State Farm Group 5.7%
American International Group 4.4%
Ace Ltd. 3.9%
United Fire & Casualty Group 3.8%
CNA Insurance Group 3.8%
Liberty Mutual Insurance Group 3.7%
FM Global Group 3.7%
Allmerica Financial Corporation 3.6%

Mississippi
St Paul Travelers Companies 10.2%
Zurich Insurance Co Group 9.2%
Mississippi Farm Bureau Mutual 7.8%
American International Group 7.1%
State Farm Group 3.9%
Nationwide Corporation 3.4%
Alleghany Group 3.3%
FM Global Group 3.1%
WR Berkley Corporation 2.5%
American Modern Insurance Group 2.3%

Stay tuned to future issues of IN&V as we continue to follow Hurricane Katrina’s impact on the insurance industry.

Katie Butler (katie.butler@iiaba.net ) is editor in chief of IA.

Big "I" Ready to Respond

The Big "I" has received numerous offers of assistance from state associations and individual members. The national association is currently coordinating with the affected state associations on ways that the membership at large can help. We will share plan details with you as they develop.

In the mean time, the Big "I" has already sent 250 Catastrophe Packs (CAT PACKS) to the Louisiana, Mississippi and Alabama state associations for member agents.  These packs include logo items for agents to use in the field: windbreaker, poncho, flashlights, hard hat, clipboard, polo shirt, T-shirt, duffle bag, etc. Unfortunately, our state associations do not have the means to distribute these items at this time. In addition, InsuBanc has announced plans to help affected agents by offering special loan pricing (see story below).

Check www.independentagent.com and future issues of IN&V for updates on how you can help members affected by this tragedy. If you have questions, please contact Dave Evans at dave.evans@iiaba.net.

InsurBanc to Offer Special Loans to Affected Agencies

InsurBanc, the independent agency community’s full-service financial services provider, has put together a special loan program for qualifying agency principals affected by Hurricane Katrina.

Realizing that independent agency owners affected by the hurricane may have special financing needs during the next several months, InsurBanc is offering special pricing on short-term loans for hurricane-related expenses. InsurBanc will offer this assistance to independent agents who have been financially affected in Mississippi, Alabama and Louisiana and Florida.

"The hurricane had a devastating effect on thousands of people," says Big "I" CEO Robert A. Rusbuldt. "InsurBanc’s loan program will help minimize the financial impact on independent agency owners who are feeling the effects most closely, so that they can start getting their lives and businesses back to normal."

Rather than having to tap into personal money and credit cards, or waiting for other emergency funds to become available, this program will help qualifying agency principals get back to work immediately.

"Our unique expertise in agency financing allows us to offer these loan products quickly and inexpensively to qualifying agency principals to help them get back to serving their clients insurance needs," InsurBanc Executive Vice President Bob Pettinicchi says.

To learn more about the special loan program, contact InsurBanc at 866-467-2622 or lending@insurbanc.com.

P&C Trends
Hilb Rogal & Hobbs Reaches Agreement with Connecticut
Settlement retains contingent commissions for agency accounts

Hilb Rogal & Hobbs (HRH) announced it reached an agreement with the Connecticut State Attorney General’s Office on issues relating to agent and broker compensation. The agreement between Connecticut Attorney General Richard Blumenthal, Insurance Commissioner Susan Cogswell and HRH resolves the state’s investigation into the agency and brokerage practices and compensation structure of HRH. HRH says it is the eighth largest broker in the world and is the fourth large insurance broker to enter into such a settlement with state officials. As part of the agreement, HRH admits no wrongdoing.

This settlement is unique from the other four in that it recognizes a difference between agency and broker transactions, and it enables HRH to continue to receive incentive compensation in connection with agency accounts. The other four settlements banned the receipt of such compensation.

The agreement requires HRH to:

• Establish a $30M fund, which ultimately will be distributed to HRH’s clients who choose to participate.
• Institute a series of business reforms over the next 60 days. HRH agrees to provide enhanced compensation disclosures to both its agency and brokerage clients. In transactions in which HRH brokers business, it agrees to disclose its commission or other compensation received from an insurer and obtain the written consent of the client in advance. In addition, HRH agrees to forgo any contingent commissions on its brokerage business. On the agency side, HRH may continue to receive contingency commissions.
• Disclose all quotes received in connection with an insurance placement on the brokerage side and do the same upon request on the agency side.
• Provide all clients with a "customer bill of rights."
• Establish a business practices committee of the company's board of directors, which shall review compliance with the compensation guidelines and standards.

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

 VIEW: P&C Trends
INTEGRO: Caveat Mathematica
Big startup faces tall order

I’m not sure about the exact translation, but in my book caveat mathematica means something like "be wary of the math." The caution I urge is that the mathematical reality of starting an insurance intermediary from scratch while trying to keep $320 million of Wall Street investment capital happy will be a tall order. While not impossible, a look at the arithmetic leads me to the conclusion that Integro’s attitude needs to be to "swing for the fences," and it will need a slugging percentage on par with Sammy Sosa circa 2001.

For those of you not familiar with Integro, it is a new startup insurance broker formed by several former Marsh McLennan top executives. Its name is also Latin and means to "to renew or to make better." The potential concern of other big brokers was pointed out recently in the Sept. 5 issue of Fortune magazine. "It’s been a brutal year for the world’s largest insurance brokers. Marsh & McLennan, AON and Willis paid millions of dollars to settle New York Attorney General Eliot Spitzer’s charges that they steered business to insurers that paid them special commissions. Now the Big Three have another worry: Dozens of their top executives are jumping to a new rival that is being launched to take advantage of the turmoil that Spitzer has created in the market." The article goes on to say that in addition to raising $320 million in capital, Integro has already hired 100 employees and expects to hire 400 more.

Will Integro, starting from scratch, be able to capture new business at a pace that keeps investors like GE’s pension plan and hedge fund Highfield Capital happy? Let’s take a look. Below is what I refer to as a reverse engineered income statement, which can be an useful analysis exercise. It involves starting at a bottom line (that is, after-tax profits) and working backward to see where the business must start in sales and market penetration. Assuming investors will require an average return on their investment of about 20%, Integro will have to produce profits in today’s dollars of about $64 million every year.

1. $64 million - Average annual pre-tax profits required to support investment

• Assumes a typical required rate of return for startups of 20%.

2. $106 million - Pretax equivalent profits

• Assumes a 40% combined state and federal tax rate.

3. $355 million – Commissions

• Assumes a return on revenues of 30%.

4. $3 billion – Premiums

• Assumes an average commission of 12%.

The above analysis shows there is little room for anything short of solid hit ratios and big successes for Integro employees. Working up from profits to premiums, Integro will have to grow to penetrate 1% to 2% of the entire commercial market of approximately $250 billion. It will have to do that with 500 employees averaging revenues of $700,000 each. Given those metrics, Integro’s choice of not trying to capture 400,000 of the approximately 20 million average businesses in the United States makes complete sense (an average carrying capacity of 800 commercial accounts per employee is 400,000 ÷ 500). Moreover, its strategy of pursuing large accounts seems logical, if not required. But, can it get a high enough percentage penetration of the Fortune 1000-class insurance buyer?

To answer that question, you need to know approximately what the Fortune 1000 class of companies pay in insurance premiums. It’s an unpublished figure as far as I know, but if you use an industry study done by an Integro competitor, Marsh & McLennan, you can draw some conclusions. Periodically, Marsh does a survey known as the "Casualty Cost of Risk" and publishes the results. The businesses surveyed by Marsh on average pay $2.32 in insured and self-insured property-casualty losses, with large companies paying less and smaller companies more. Based on that information, the Fortune 1000 are probably incurring a cost of risk of about $20 billion (that is, based on Fortune 1000 total revenues of $9.4 trillion and a cost of risk of just over $2 for every $1,000 in revenue). So the question is, will Integro and its 500 employees easily penetrate three of every 20 big businesses and get at least 12% of their cost of risk?

It will be interesting to watch as this new startup intermediary goes forward. The marketplace blesses those who take risk and have initiative, so I am hopeful they will do well. As they say in Latin carpe diem, or "seize the day." They will have to.

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

 VIEW: Agency Management
Attitude is Everything
What Terrell Owens can teach you about hiring

The world of sports sometimes appears to be more drama than sports. The sports pages are filled of stories of bad behavior and bad attitudes. Fortunately, most people take comfort in the fact that most professional athletes are good people. The media, however, find it boring to tell relay positive things like how former NBA star David Robinson is helping change lives for the better through his school in San Antonio. Instead, newspaper articles dwell on the antics of Terrell Owens.

Many of us shake our heads, but the Terrell Owens saga contains a lesson for independent agency principals. The fact is that the Philadelphia story (I couldn’t resist) of Terrell Owens is just a continuation of his persona with the San Francisco 49ers, which ultimately lead to his departure. While everyone realizes that Owens is a great individual player, reconciling his attitude within the team is daunting. Yet Owens’ personality was well known when the Eagles picked him up.

When independent agencies hire a new employee---whether it is a producer, CSR, IT personnel, etc.---they have two important issues to consider: First, is the person qualified to perform the duties of the position? Do they have the requisite skills to get the job done? Second, do they have the right attitude to reliably work with agency staff and customers? Or do they create issues that hinder getting the job done? As the adage goes, "No one man is an island," and in a business context, it means performing daily tasks without creating unnecessary conflict. It doesn’t matter how talented a producer might be; if they alienate agency colleagues, they are more trouble than they are worth.

During the hiring process, how can you check for attitude? While academic grades and insurance designations may indicate knowledge, they won’t provide insight into attitude. Checking prior references may confirm dates of employment but many companies will only verify dates of employment and won’t comment on a former employee’s tenure or reason for departure.

Given our legalistic society and the specter of wrongful discharge lawsuits, what can you do before extending an employment offer? A very useful tool is an assessment examination (notice I didn’t say test) to gain insight into the applicant’s personality. One well known assessment profiling company, Caliper, focuses on various capabilities and attitudes. For example, one area that is measured is empathy, which deals with someone’s ability to look at situations from another person’s point of view. Clearly if the agency was looking to hire a CSR, a low score for empathy would be a reason for concern. While assessment exams won’t guarantee a good hire, they can certainly help the agency avoid a bad one.

Professional sports teams perform assessment testing. The question is: Do they acknowledge the results?

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

On the Hill
CBO Questions Adequacy of Proposed Asbestos Fund

Reuters reported this week that the Congressional Budget Office (CBO) believes the $140 billion asbestos compensation fund under consideration in Congress might be insufficient to cover all asbestos victims’ claims during the next 50 years.

An Aug. 25 CBO report indicates the fund, if created, would have to pay out between $120 billion and $150 million to those who were exposed to asbestos. The report also indicated that it would be impossible to account for potential additional claims, above and beyond those already calculated.

The proposed legislation, sponsored by Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) and Sen. Patrick Leahy (D-Vt.), would end asbestos litigation and pay victims from the trust fund.

The bill passed the Senate Judiciary Committee last May but has not come to the floor of the full Senate amid questions from both sides of the aisle. Republicans have expressed concerns about the fund’s solvency and potential leakage back into the court system, and Democrats have questioned whether it will be adequate and fair. The Big "I" shares the concerns about leakage back into the court system.

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

Agency Management
Engage Your Associates

If you want to achieve change in any venture, it’s often hard to do it alone. You can drag others along kicking and screaming with threats and mandates, or you can engage them in the process. Effective leaders engage their associates by using a participatory leadership style and by building effective teams.

"Engage your associates" means:

• Empower them to solve problems and make decisions.
• Empower them to identify and implement improvements.
• Include them in goal-setting and planning that affects them.

According to the dictionary, engage means: To entangle, to involve, to put under pledge, to win and attach. Best Practices leaders strive to entangle their associates in the agency. They involve them in a process for defining and accomplishing the agency’s vision and objectives. These agencies have associates participate in:

• Setting overall vision, strategy and objectives for the agency/team.
• Defining plans and tactics for reaching the objectives.
• Solving day-to-day problems.
• Defining policies and procedures.
• Defining standards for quality of services and client satisfaction.
• Improving and simplifying work processes.
• Identifying and reducing unnecessary costs.

Why should you engage your associates? Here are three benefits that Best Practices leaders report receiving because they are engaging their associates:

1. Better solutions to problems. Whether it is a simplified workflow/process that increases productivity, or creative ideas for improving customer satisfaction, associates bring a wealth of experience and insights to agency problem solving.
2. Better implementation of solutions. People resist change less than they resist being changed. They are more successful at change initiatives in which they feel ownership, in which they feel they have had a part, in which they feel engaged.
3. Higher productivity. An engaged team produces more and better results in less time and at less cost. Associates like to be included and consulted. They like to contribute above and beyond their job, to help the team reach its goals. Engaged associates feel more connected with the agency’s goals and are more motivated to contribute their best.

In short, effective leaders engage their associates because they know it is absolutely essential to reaching a vision for their agency.

If you would like to know more about the innovative concepts that the Best Practices program can offer your agency, attend the Institute on 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 fourth in a series covering Best Practices agencies’ management strategies. Next week, we’ll cover how Best Practices agencies ensure their associates’ activities and energies are focused on accomplishing objectives and goals for business results.