T H U R S D A Y ,   S E P T E M B E R   8 ,   2 0 0 5

Storm and Flood Damage Estimates Skyrocket |  Katrina Ignites Wave of Coverage Concerns |  Educate Katrina Victims on Tax Considerations |  Big "I" Establishes Katrina Relief Fund |  NFIP Tries to Weather Katrina |  Carry Through Your Theme to Align Employees | 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
Storm and Flood Damage Estimates Skyrocket

More than a week later, Hurricane Katrina is hardly old news. With hurricane victims’ heartbreaking stories and images of bacteria-contaminated water saturating the entire city relayed 24/7 on news channels, it’s clear the storm and subsequent flooding will have long-ranging impacts on the country. And the insurance industry factors heavily into that equation.

When Katrina slammed into Louisiana and Mississippi Aug. 29, extensive wind and coastal surges were the main culprits, inflicting damage that industry estimates placed between $9 billion and $25 billion. By the following day, New Orleans residents were left wishing that were the extent of the problems when the city’s levees, unable to withstand Katrina’s force, burst open and unleashed an avalanche of water on the city. More than a week later, New Orleans remains a water-logged shadow of its former self.

The city is now completely evacuated, and that massive displacement of people is one of the largest problems for area agents, according to Jeff Albright, CEO of Independent Insurance Agents and Brokers of Louisiana.

"What is unique about this situation is that the Greater New Orleans area has been totally evacuated," Albright says. "The displacement of people is creating problems we’ve never seen before in this country."

Finding people---both agency staff members and clients---who are now scattered across the country, is the single biggest problem, Albright says. And even if an agency is able to locate its staff members, finding an office space and nearby housing for staff is a near-impossible task.

To assist area agents in their communication efforts, the IIABL Web site contains lists of both companies’ emergency contact information and agencies’ emergency contact information. The Web site also solicits office space for anyone to share with agencies.

Since New Orleans residents won’t be able to return to survey their property damages for up to three or four months, agents’ overwhelming task of claims processing has yet to begin.

The damage is so extensive that estimates are more like "guesstimates" that change daily.

"The economic and insurance consequences of the 2005 Great New Orleans Flood will depend highly on how quickly authorities can respond to the event," says Laurie Johnson, Risk Management Solution’s vice president of technical marketing. "The speed at which pumps are reactivated and additional pumping capacity is added will determine how rapidly the flood waters are removed. But this is only the first step in restoring services to flooded areas of the city."

RMS currently estimates that insured losses will fall between $20 billion and $22 billion and that economic losses will exceed $100 billion, of which at least 50% is attributed to flooding in New Orleans. RMS further estimates that at least 150,000 properties have been flooded. Additionally, it places the cost of interrupted economic activity at more than $100 million a day.

Fitch Ratings originally estimated Katrina-related damages to be between $9 million and $25 million, but said last Friday that damages will likely be on the high end of that scale, if not more. It calls the hurricane and flood one of the largest—if not the largest—insured losses in history, and it "will have a material negative effect on 2005 industry earnings and, to a lesser extent, on surplus," says a company press release.

"A loss of this magnitude always has the potential to stress or even render insolvent some insurers," the release says. "It is the smaller insurers with exposures concentrated in the affected areas that are at greater risk for insolvency."

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

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Katrina Ignites Wave of Coverage Concerns

The Big "I" Virtual University has been bombarded with questions from agents with Hurricane Katrina-related coverage concerns.

Some of the most frequently asked coverage questions concern homeowners’ insurance. Many television sources are broadcasting misleading information, so make sure you communicate the facts to your clients.

For example, the VU received the following question from a New Orleans agent who evacuated the city and is servicing clients from Houston:

"Would loss of use cover the inaccessibility of property because of damage or imposition of martial law and would the loss of use commence at the time of mandatory evacuation or when loss occurred? In the event of rented property, would loss of use subrogation be allowed for tenants against owners?"

Here’s the answer:

Additional living expenses coverage is only triggered if there first has been a covered loss. If the damage is due to an excluded peril such as flooding or windstorm (if excluded and required to be covered by a state windstorm association), there’s no coverage. If there are expenses in evacuating prior to loss, those expenses aren’t covered.

The only expenses covered are those incurred after loss because the dwelling is unfit to live in. Below is what the current ISO HO policy says. As you can see, the civil authority coverage also only applies after loss.

D. Coverage D – Loss of Use

The limit of liability for Coverage D is the total limit for the coverages in 1. Additional Living Expense, 2. Fair Rental Value and 3. Civil Authority Prohibits Use below.

1. Additional Living Expense

 If a loss covered under Section I makes that part of the "residence premises" where you reside not fit to live in, we cover any necessary increase in living expenses incurred by you so that your household can maintain its normal standard of living.

Payment will be for the shortest time required to repair or replace the damage or, if you permanently relocate, the shortest time required for your household to settle elsewhere.

2. Fair Rental Value

If a loss covered under Section I makes that part of the "residence premises" rented to others or held for rental by you not fit to live in, we cover the fair rental value of such premises less any expenses that do not continue while it is not fit to live in.

Payment will be for the shortest time required to repair or replace that part of the premises rented or held for rental.

3. Civil Authority Prohibits Use

If a civil authority prohibits you from use of the "residence premises" as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in 1. Additional Living Expense and 2. Fair Rental Value above for no more than two weeks.

If you are an agent in the affected areas dealing with coverage concerns, or are an agent elsewhere in the country who is discussing issues with clients, visit the Virtual University for continually updated coverage concerns related to this and other disasters.

For more information and a compilation of resources, visit the VU’s Hurricane Katrina Resource Page by clicking here. The page is available to Big "I" members and nonmembers, so feel free to pass it along to your customers as well.

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Educate Katrina Victims on Tax Considerations

The magnitude of devastation Hurricane Katrina caused is beyond comprehension, and the loss of life is heartbreaking. Although many survivors are still struggling with daily necessities such as finding a place to sleep and getting dry clothing, they eventually will have to deal with the financial aftermath of the storm. We can hope many of them will have adequate insurance coverage to help them rebuild or repair their properties. Of course, no amount of insurance can replace losing a lifetime of personal mementos.

What advice can independent agents share with customers as they start to rebuild their lives? In the wake of Hurricane Katrina, people who resided in the affected locations are now residents of declared federal disaster areas. While that fact allows the residents to qualify for federal aid, there are other considerations.

The tax laws provide that noncovered casualty losses are deductible (after a $100 deduction) after they exceed 10% of adjusted gross income. For example, for a family with $100,000 of adjusted gross  income and unreimbursed casualty losses of $25,100, only $15,000 would be deductible [($100,000/10% = $10,000)($25,000 - $10,000 = $15,000)]. Unfortunately, that means that many working people are unable to deduct a substantial portion of their uninsured losses. A further complication is that taxpayers have to arrive at an adjusted basis in developing the value of loss, such as adding the cost of improvements and subtracting depreciation, in arriving at the deductible value.

The good news is that if Congress follows the earlier pattern of recent federally declared disasters, affected taxpayers will be able to treat the disaster as occurring in the prior year's tax year so they can file amended returns and receive immediate refunds. Independent agents should monitor Congress’ actions following the hurricane to alert their customers of any tax breaks. Also refer to IRS Publication 584B, which sets forth the rules and schedules for calculating the deductible casualty loss.

Congress also could make other tax rules more taxpayer friendly. For example, it could waive the 10% excise tax from 401(k) plans for affected people to use for hurricane-related expenses such as lodging, meals, etc. Clearly, the financial aspects are secondary to the residents of these devastated areas. However, it’s everyone’s responsibility to help in any way possible, and independent agents are in the front lines of assistance and advice.

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

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Big “I” Establishes Katrina Relief Fund
Fund will aid independent agents, families, industry colleagues

IIABA launched the Big "I" Katrina Relief Fund last Friday to assist those whose lives have been tragically altered by Hurricane Katrina and its aftermath.

"We are trying to do all that we can to help our colleagues, friends and their families who have been affected by this terrible catastrophe," Big "I" CEO Bob Rusbuldt says. "In times of such hardship, it is important that we band together as an industry, but more importantly, as Americans. We have received overwhelming inquiries from our members and state associations across the country looking for ways to help. These tax-deductible charitable contributions will allow independent agents in these devastated communities to pick up the pieces and start helping their neighbors and customers."

All donations will assist insurance industry colleagues, including independent agents, brokers, their employees and their families in the impacted areas.

"We are proud to make the first donation to this fund in the amount of $10,000," says Big "I" President Thomas Grau, CPCU. "Our contributions are not limited to dollar amounts, however. We have sent hundreds of catastrophe packs to our member agencies that include the basics for agents to work and serve their clients. We have offered to send national staff to the devastated region to assist our member agencies, and we are working on several different methods to help our members handle claims as efficiently and as quickly as possible."

Thanks to all the groups and individuals who have contributed to the fund thus far. In recent days, Safeco donated $25,000 and the Massachusetts Association of Insurance Agents donated $20,000.

If you prefer to contribute via credit card, please go to www.iiaba.net and click on the Big "I" Katrina Relief Fund link.

Make checks payable to "Big ‘I’ Katrina Relief Fund" and mail to:

Big "I" Katrina Relief Fund
c/o InsurBanc
10 Executive Drive
Farmington, CT 06032

All funds contributed to the Big "I" Katrina Relief Fund are tax deductible as charitable contributions.

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O N   T H E   H I L L
NFIP Tries to Weather Katrina
What affect will the hurricane have on flood insurance legislation?

The National Flood Insurance Program (NFIP) was established in 1968 by the federal government to provide a line of coverage generally considered too risky for private insurers to sell. Although the NFIP is a voluntary program, many lending institutions require it in flood-prone areas as an addendum to a mortgage contract. Since its creation, the NFIP has paid close to $13 billion in insurance claims and, with the exception of a few historical disasters such as Hurricane Andrew, insurance premiums—not tax dollars—fund all of the program’s claims and expenses. Despite this, the NFIP is not without its share of opponents in Congress.

During the 108th Congress, the NFIP was given its first real facelift—a comprehensive reform measure intended to bring an end to serial abuse by property owners who treated the NFIP less like a privilege and more like an entitlement. Repetitive flood victims ignoring the need to mitigate their property’s vulnerabilities and relying instead on the NFIP as a subsidy outraged Rep. Doug Bereuter (R-Neb.). After years of reauthorizing funding for a program largely considered fundamentally flawed, Bereuter, along with a host of other lawmakers, authored the Flood Insurance Reform Act (FIRA) of 2004 which was hailed by Congress, the industry and consumer groups alike as a meaningful restructuring of a program long since gone awry. But on the heels of Hurricane Katrina, did FIRA go far enough?

There is no question that claims from Hurricane Katrina will run into the billions of dollars and will require the federal flood insurance program to seek additional funds from the Treasury. The current law allows the NFIP to borrow as much as $1.5 billion from the government—close to twice the average annual payout—should some sort of natural disaster threaten the program’s solvency; however, early damage estimates suggest that $1.5 billion won’t even scratch the surface. Furthermore, the law caps annual premium increases at 10%, meaning that a "government loan," whether low interest or even interest free, is an unrealistic remedy for recouping losses since the program could never fully rebound. This leaves only one alternative: Punt it to the taxpayers.

There is no question that the federal government is the only body capable of handling the blitz of flood insurance claims on the horizon (it would be the kiss of death for any company regardless of how well it reinsures risk), but should this be the standard moving forward? Should we allow people in flood-prone areas of the country to ignore the inherent risks of coastal flooding and the preventative measures made available to them to instead wait for Uncle Sam to come to their rescue in the form of ad hoc disaster relief? This undermines the intent of the program as well as all the forward-thinkers in this country who take advantage of an actuarially priced program to prepare for unpredictable and unavoidable property damage.

With Congress returning to work after the August recess, you can expect renewed scrutiny of the NFIP in the coming months as the claims debacle takes shape. Representative Bob Ney (R-Ohio), chairman of the Subcommittee on Housing and Community Opportunity, has already made the lingering flaws associated with the NFIP a top priority this year, and he has held several hearings in Washington and Ohio to illustrate the need for additional reform measures. The Big "I" expects the debate to significantly increase in light of Katrina, and this will set the stage for highlighting lingering problems and potential solutions for provisions not addressed in FIRA.

In the interim, independent agents have a long road ahead, regardless of whether or not they sell flood insurance. Claims adjusters will have to determine the percentage of covered loss versus flood damage when assessing claims, which will likely lead to disputes and legal wrangling over alleged collusion. There is an obvious business incentive to determine that more damage is flood related because it is covered under the federal program, which will call into question the objectivity of several flood claims. FEMA will be under the Congressional microscope to ensure that the NFIP does not turn into NBC’s next "Fleecing of America," while at the same time paying claims in a reasonable fashion. Independent agents will need to be the voice of reason throughout this process, since their insureds will have few others to turn to with their questions and concerns. This presents a welcomed opportunity to underscore the need for flood insurance, the oft-misconceived notion that flood insurance is covered under a standard homeowners’ policy and the relative ease of obtaining it through an affordable pricing system.

The Big "I" will continue to play a role in reforming the NFIP in Washington, and Big "I" members will continue to raise awareness of how important community participation in the NFIP is. Together we will protect and improve the program and abide by the federal government’s initial intent 40 years ago when it created the NFIP.

Patrick O’Brien ( patrick.o’brien@iiaba.net) is Big "I" director of federal government affairs.

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 V I E W :   A G E N C Y   M A N A G E M E N T
Carry Through Your Theme to Align Employees

How do you stack up against Best Practice agencies? Here’s a pop quiz to compare your agencies’ practices with those of Best Practices agencies. Circle the appropriate number in response to how well you currently do perform of the following best practices. As you read on, pay attention to practices in which your score is in the 1 to 3 categories.

What does "align your associates" mean? According to the dictionary, align means "to bring into line, especially on the side of a cause." So, "aligning your associates" means to focus them all on specific causes. It means to direct and channel their activities and energy to the attainment of goals and objectives such as:

Achieving the agency’s annual business goals:

New business revenues/commissions

Retention

Profit

Cost reduction

Achieving the agency’s change vision:

World-Class customer satisfaction

Managed sales/production

High productivity/low costs

Continuous improvement

Why should you align your associates? One answer to this question is evident in this Best Practices formula for an effective team:

Effective Team = Effective People + Shared Objectives + Team Spirit

Align your associates with shared objectives so they will be an effective team. Aligning your associates also provides benefits such as:

A shared sense of purpose and commitment exists throughout the agency/team.

Activities and resources are focused on the highest priority goals.

Teamwork is facilitated; there is enhanced cooperation and mutual assistance in the accomplishment of common goals.

Associates have a sense of:

Accomplishment, as goals are achieved.

Pride in their own and their team’s accomplishments.

Family, community and of belonging to a winning agency/team.

Is there a quick silver bullet that will let you achieve alignment now? Best Practices research shows that just by applying one simple technique, this could be a really easy task. Maybe it is not an overnight fix, but one that is fun and simple to do.

One thing you might want to consider is to align your associates with themes, or compelling statements of objectives that are particularly important to the agency. As you know, many business organizations have been working to define their themes for the past few years. The results have included a variety of statements, such as:

· Vision

· Values

· Mission

· Core Aims

· Philosophy

· Beliefs

· Principles

· Aspirations

You and your team need themes because they:

Focus your associates’ attitudes, behaviors and activities on objectives that perpetuate the agency’s growth and development.

Promote consistency of attitudes and behaviors.

Create goal-focused teams of interdependent people.

Provide clarity and purpose.

Help set priorities.

Provide a guiding beacon, a compass, when the agency/team could be easily led astray by chaotic situations.

Most of the Best Practices agencies we studied have developed these themes:

Mission: a concise statement of the agency’s core purposes.

Vision: a concise statement of what the agency is striving to become.

Shared Values: the key principles and beliefs that guide the behaviors of everyone in the agency.

Let’s take a look at how simple one aspect of putting this practice into place might be. Working with your associates, define your agency’s mission.

Let’s start with an example of a very well crafted mission statement from a Best Practices agency:

OUR MISSION

We, the leaders and staff members of <agency>, strive to be the premier insurance agency in our market area. We seek quality corporate and personal clients, and are committed to a quality of service which noticeably exceeds our clients’ expectations. In achieving these objectives, we employ a distinctly competent staff and we focus on continuous improvement of all associates, and of our full range of insurance, risk management, employee benefit and financial planning services.

Why is this mission statement a good model?

It begins with "Our" and "We." It is written for a team, for people who are aligned. More frequently, mission statements refer to the agency. They seem to be written more to impress customers and prospects than to align staff. Clients and prospects will be more impressed by statements that convey a strong sense of alignment and teamwork. And, the agency name will obviously be prominent wherever the mission is displayed.

It sets the principal objective; ". . . to be the premier insurance agency in our market area." How can you beat the simple objective of being the best? Teams like being the best. Customers like dealing with the best.

It sets high standards for the quality of service it provides.

It hints at how it provides such high quality services, i.e., with competent staff and dedication to continuous improvement.

It lists the agency’s principal businesses.

Finally, this statement is clear and concise; with no wasted words.

Remember, to be effective, themes must be states of mind, commitments. Treat them like paper or like electronic files, and the investment of time and energy that went into preparing them will be largely wasted. Communicate them continuously and well, and they will return value far in excess of your investment in preparing and distributing 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 Institute Sept. 12 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 fifth in a series covering Best Practices agencies’ management strategies. Next week’s final installment will show your how shared values and a clear vision could lead to your success.

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