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Big “I” National News

P&C Trends

Surplus Lines Shine
Study finds surplus lines edge out commercial p-c market.

Property-casualty surplus lines have consistently outperformed the general commercial  p-c insurance market in both premium growth and underwriting profit, according to Conning Research and Consulting, Inc.’s new study, “Property-Casualty Surplus Lines: Profiting from the Right Strategy.”

“The surplus lines market has outperformed general commercial lines over the past 10 years. In fact, through 2006, the surplus lines market 10-year average annual direct premium growth was 19.5% versus just 7.6% for total commercial lines,” says Clint Harris, analyst at Conning Research & Consulting. “It’s not just about premium growth, however. For the same period, the annual average combined ratio was 104.4% on a calendar-year basis for surplus lines and 107.1% for total commercial lines.”

Direct premiums written in non-licensed (non-admitted) p-c insurers were about $32.6 billion in 2006, with the majority of the premium in the surplus lines market. And while surplus accounts for less than 7% of the total insurance premium, it has been an important market for customers who are unable to secure admitted insurance and for nearly 200 companies and insurance groups that report more than 25% of direct premiums written in non-admitted states. It’s also essential to agents like Jim Roe of Arlington/Roe & Co. in Indianapolis, Ind. Roe’s agency produces approximately $115,000,000 of annual premium and with surplus lines/non-admitted insurance accounting for approximately 50% of his book of business, he relies heavily on the market to cover non-traditional insureds.

“We are currently working on a program for a major hospital association whose members have a great amount of exposure to potential misuse of personal patient information. This exposure is exacerbated by the storage of all this information through technology,” he says. “The standard admitted market has limitations on the broad contractual coverage that is needed to protect these health care institutions from financial loss; therefore we are using the resources of the surplus lines market to tailor make the coverage to properly protect the buyer from a technology error or omission.”

The Thomas-Fenner-Woods Agency in Columbus, Ohio, also writes about $2 million in surplus lines and the agency recently relied on the non-admitted market to cover one of its insured’s construction projects.

“We have an insured that is located in Columbus, but is building student housing apartments around the country, and with little notice informed us they were building a $25 million project in Lafayette, Louisiana. We have a builders’ risk program for that contractor, but we had to go to E&S market and had to layer property coverages…the premium was close to 10 times what they would have in paid in Ohio,” Dave Fenner, co-owner of the agency, says.

According to Conning, rapid growth in premium rates was the main driver of the increase in premium for the general p-c industry and subsequently for the commercial market from 2001-2003 with total industry premium growth peaking in 2002 at 16.1%. Commercial lines peaked in 2002 with a growth rate of 19.2%. Yet the growth in premium for the surplus lines market, which peaked at an 82.8% growth rate, was due to both premium growth rate and rapid movement of accounts from the general market into surplus lines. The out-sized growth of surplus lines is also due to the insurance industry’s having been in hard market, according to Paul Buse, president of Big “I” Advantage^SM

“That hard or difficult market for insurance purchasers began about 2002 and lasted until about the beginning of this year. Several factors contributed to this, including Sept. 11 and its aftermath with concerns over terrorism, but then very high levels of hurricane activity in 2005 also contributed to the hard market,” Buse says. “With a hard market, one tends to see more premium placed in the surplus lines insurers as standard, admitted market insurers become more selective in what they will insure. Surplus lines insurers also have the luxury of being able to tailor their policies more freely and that can allow a surplus lines insurer to take on a risk that it would refuse if it could not trim or otherwise customize coverage as might be the case with the insurer looking at the risk on a non-surplus lines (admitted) basis.”

Soft underwriting cycle conditions will likely be the biggest threat to surplus lines over the next two years, but there are several changes in the regulatory environment that could offer both opportunities and threats to the market, including: deregulation, which would allow admitted insurers into the surplus lines markets through increased rate and premium flexibility; tort reforms and the passage of the Non-admitted and Reinsurance Reform Act and/or an optional federal charter.

“The biggest opportunity for the surplus lines community is to continue to expand the underwriting and distribution talent for which our end of the business is known. Starting out at Lloyd's of London in the 1600s, the surplus lines community has always traded on and been successful at individual risk underwriting, especially risks that no one else would take. There will always be a need for this individual risk underwriting talent and market,” Roe says. “The biggest threat is government regulation and intervention. If an Optional Federal Charter were to pass in Congress, the surplus lines market as we know it today could disappear. It would not, however, eliminate the need for specialty underwriting and coverage. As the Conning study notes, the surplus lines industry has a better solvency record than the more regulated standard admitted industry.”

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

On the Hill

Standing Firm on TRIREA
CFA calls for TRIA cutbacks while Big “I” pushes for extension.

Just before lawmakers were scheduled to debate terrorism insurance on the House floor on the anniversary of Sept. 11, the Congressional Budget Office (CBO) released a report on Sept. 6 concluding that H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA), would increase direct federal spending by $10.4 billion between 2008 and 2017 and by an additional $13.7 billion after 2017. The report also found the loss to taxpayers, which includes estimates of additional revenue generated by TRIA, would be $8.4 billion between 2008 and 2017.

TRIREA, introduced by Rep. Michael Capuano (D-Mass.) and House Financial Services Committee Chairman Barney Frank (D-Mass.), would extend the federal backstop for catastrophic terrorism losses, which expires at the end of this year. The bill would extend the backstop on a long-term basis (15 years) with reasonable trigger levels, helping to ensure coverage for catastrophic terrorist attacks, including nuclear, biological, chemical and radiological (NBCR) events. The House Financial Services Committee passed the legislation before the August recess. 

In response to the CBO report, the Consumer Federation of America (CFA) called on Congress to sharply cut back TRIA to cover only those terrorism losses that the increasingly profitable insurance industry cannot handle on its own. CFA Director of Insurance J. Robert Hunter, again went on the attack.

“This raid on the federal treasury comes at a time when the insurance industry is earning record profits and is refusing to pay legitimate claims to thousands of policyholders damaged by Hurricane Katrina and other storms,” Hunter says.

The Big “I” strongly disagrees. It feels this legislation is crucial for the customers independent agents serve and the nation’s economic security. While floor consideration of TRIREA has been postponed in order to allow lawmakers an opportunity to address the budgetary impact of the legislation, the Big “I” is hopeful that Congress will extend the program before it expires at the end of the year, providing the insurance market with the certainty it needs. The Big “I” has made this a top priority, and continues to lobby aggressively to pass extension legislation.

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

On the Hill

Big “I” Testifies on Importance of Natural Disaster Legislation
New York agent addresses House committees on need for national solution.

The Big “I” testified last week before a joint hearing of the House Committee on Financial Services Subcommittee on Housing and Community Opportunity and the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises to discuss H.R. 3355, the Homeowners' Defense Act of 2007.

Steve Spiro, an independent agent and president of Spiro Risk Management Inc., in Valley Stream, N.Y., testified on the importance of natural disaster legislation. On behalf of the Big “I,” the only producer trade association testifying at the hearing, he thanked Reps. Ron Klein (D-Fla.) and Tim Mahoney (D-Fla.) for introducing the Homeowners' Defense Act, intended to address the growing problem of natural disasters risks.

Spiro expressed the Big “I” belief that the bill deserves serious consideration and that these proposals could potentially be a part of a comprehensive solution to the problem of natural catastrophe insurance. He pointed out that the key to the success of any solution is how the private market will react and whether it will result in increased coverage.

“We strongly believe our industry must come together with policymakers to find a common solution that will encourage participation in at-risk markets,” Spiro said. “We believe the Homeowners Defense Act of 2007 provides a number of provisions that could have a positive impact on the availability and affordability of natural disaster insurance. However, there are important questions associated with these provisions that must be answered.”

Spiro also pointed out that one strength of the Homeowners’ Defense Act of 2007 lies in its attempt to have a plan in place to encourage greater availability of reinsurance for the private markets. Spiro stressed that the goals of the legislation are consistent with the Big “I”’s long-standing principle that the best solution is for a program to be in place before the events happen and assistance from the government should be limited.

“Any solutions should have a clear, well-structured mechanism that encourages the private sector to handle as much of the risk as possible, and only trigger federal involvement as a last resort upon private marketplace failure,” Spiro said. “We believe that it is important to have such a structure in place to protect both consumers and taxpayers living in all areas across the country.”

Finally, Spiro reiterated the Big “I” desire for the insurance industry to come to a consensus to find a solution to the catastrophe insurance availability crisis. He also praised the committee along with Reps. Klein and Mahoney, as well as Rep. Ginny Browne-Waite (R-Fla.) and Rep. Bobby Jindal (R-La.) for taking the lead, bringing forward proposals and working together to find the answer.

“The Big “I” is committed to an open dialogue with all interested parties in the public and private sectors to address these important issues that consumers face,” Spiro said. “We stand ready to assist your efforts in any way we can.”

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

On the Hill

Rusbuldt, State Associations Contact Chairman of National Governor’s Association
Letters reaffirm IIABA’s stance on key issues.

Last month, Big “I” CEO Bob Rusbuldt sent a letter to Gov. Tim Pawlenty (R-Minn.), the chairman of the National Governor’s Association (NGA), describing IIABA's position on regulatory reform and commending the NGA for its continued opposition to legislation that would create an optional federal charter (OFC) for insurance.

In addition, the Minnesota Independent Insurance Agents and Brokers (MIIAB) sent a similar letter to Gov. Pawlenty, writing that Minnesota agents feel that the creation of a federal insurance regulator would threaten the continued viability of state insurance regulation and the important consumer protections currently in place in Minnesota. The Independent Insurance Agents and Brokers of Arizona also wrote to Governor,Janet Napolitano (D-Ariz.), the outgoing chairperson of the NGA, expressing opposition to OFC proposals.

The letter from Rusbuldt expresses support for reforms that would bring more efficiency and uniformity to the state-based insurance regulatory system and opposition to the creation of an OFC. The Big “I” believes regulatory reforms should be undertaken in a way that preserves the state-based structure and utilizes the experience and expertise of state regulators.

The Rusbuldt letter read as follows:

The Honorable Tim Pawlenty
Chairman
National Governors Association
444 N. Capitol St., Suite 267
Washington, DC 20001-1512

Dear Governor Pawlenty:

On behalf of the Independent Insurance Agents and Brokers of America (IIABA) and our 300,000 members nationwide, I want to thank you and the National Governors Association for your strong support of state insurance regulation. Your unequivocal commitment to the state system and opposition to proposals calling for the creation of a federal insurance regulator are welcomed by our broad membership, by many others within the industry, and, most importantly, by insurance consumers.

For over 150 years, states have ensured the solvency of this nation’s insurers, maintained a comprehensive and effective consumer protection framework and supervised other areas of the insurance business. State regulation has been successful because governors and state officials are more responsive to consumers and more aware of the unique characteristics of individual states, and regulators today collectively respond to more than three million inquiries per year. State insurance regulation is not perfect, but it has a proven track record. The vibrant and evolving nature of the current system allows states to update insurance laws as marketplace conditions dictate, and efforts are currently underway to remedy unnecessary differences in state laws and eliminate requirements that can make it challenging for insurers and agents to serve the needs of insurance policyholders quickly and efficiently.

Despite the long success of state insurance regulation, the system is once again under attack from opponents who would like to establish an unprecedented and untested federal insurance bureaucracy. Legislation creating such an entity has once again been introduced in Congress, and the well-funded proponents of this concept are aggressively pursuing its adoption. However, as the National Governors Association has previously recognized, such proposals would undermine the state system of consumer protections and financial surveillance, create substantial consumer confusion and result in a regulatory race to the bottom. In addition, bifurcating insurance regulation between the states and the federal government would inevitably produce a loss of jobs, taxes, fees and other vital state resources needed to effectively regulate the insurance market and support other state obligations. Such proposals are unnecessary and do not serve the best interests of America’s consumers.

Establishing a federal insurance regulator would threaten the continued viability of state insurance regulation and the important consumer protections currently in place, and we thank the National Governors Association and other organizations of state officials for your continued opposition to such ideas and for your leadership in this arena. Our organization joins you in your principled opposition to these ill-conceived proposals and looks forward to working with you to preserve and improve the state system.

Sincerely,

Robert A. Rusbuldt
CEO

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

L&H Trends

No ‘Free Lunch’ for Seniors
Independent agents best qualified to serve seniors’ insurance needs.

Did you know that an estimated one-out-of-three senior sales seminars involves exaggerated claims about what certain financial products can deliver? Due to the increasing number of high-pressure or bait-and-switch tactics aimed at seniors, the Senate is conducting hearings on sales practices targeting seniors. The Senate Special Committee on Aging also is studying the current insurance and financial services sales environment.

A whole cottage industry of selling financial products to seniors has evolved. Certainly, American seniors have a unique set of issues to deal with, such as determining when to start receiving their Social Security benefits, selecting a retiree medical insurance plan---including understanding Medicare Part D, which provides a prescription drug benefit---developing a withdrawal strategy for their IRAs, company pension and 401(k) plans and other personal savings. The problem is some sales seminars encourage particular financial sales products---equity-indexed annuities, deferred annuities, long-term care and permanent life insurance---regardless of whether they are the most appropriate vehicle to meet the seniors’ needs. Of particular concern are stories involving annuity products with long surrender penalties relative to the age of the person who is purchasing the annuity.

Both states and the federal government (under the SEC) have crafted rules pertaining to “free luncheon seminars,” which really are designed to convert the attendees into sales prospects and provide information that may or may not be balanced. Accordingly, the SEC has promulgated rules for broker/dealers regarding acceptable seminar practices that independent insurance agents need to be aware of and follow. Once the Committee on Aging finishes the hearings, the SEC will post the new rules its Web site (www.sec.gov).

Because independent insurance agents can provide both personal lines and life-health products, they have a unique opportunity to provide a “holistic” approach to all of their needs. Since independent agents may have a longer established relationship with seniors, they are well positioned to serve this market versus the “seminar” specialists that target this niche. Agencies need to have a strategic plan to serve this market with Medicare supplement insurance, long-term care and immediate annuities. If they don’t, then they are passing up an opportunity to provide a valuable service and grow the agency’s revenues. It is well documented that the soon-to-be-retiring baby boomer generation will present an enormous market that has adequately prepared for their retirement needs. With the problems facing Medicare, there is little doubt that measures will be taken to shift some of the expense to higher net worth individuals and employers.

Independent insurance agencies that serve this market will have to deal with increased regulations pertaining to seniors and should be prepared to conduct periodic internal reviews of its agents who sell to seniors. Of course, since many independent insurance agencies have long and deep roots within the community, they have a big incentive to preserve the agency’s reputation as the most important component of the agency’s goodwill.

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