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Big “I” National News

In the States
NAIC Returns Focus to Agent/Broker Licensing Reform
Could meaningful progress finally be on horizon?


The National Association of Insurance Commissioners convened its Fall National Meeting in recent days in St. Louis and once again continued discussing major insurance regulatory issues. While little significant action occurred, there was much discussion about reforming the agent and broker licensing process--- perhaps leading to some reason to hope that improvements might be on the horizon.

Producer licensing requirements impose serious costs and burdens on many agencies, and the Big “I” has strongly argued that meaningful reform is essential and long overdue. The Big “I” and its members have urged the NAIC in recent months to make licensing reform a priority once again and, in response to those efforts, the regulators began to develop a work plan.

Monday, the NAIC’s Producer Licensing Working Group identified four issues that would be the focus of the committee’s reform efforts in the months to come: (1) the elimination of duplicative licensing burdens imposed on agencies, with special focus on burdensome foreign corporation registration requirements; (2) reform and perhaps elimination of the appointment process; (3) the development of an optional best practices handbook; and (4) the creation of a centralized system where producers could report address changes, administrative actions and/or criminal prosecutions to all appropriate jurisdictions.

As the Big “I” noted in an Aug. 25 letter to the NAIC, eliminating all foreign corporation registration requirements on nonresident insurance agencies and firms is the association’s top licensing objective. There is no public policy rationale for imposing these registration requirements on nonresident agencies, especially since producers must already obtain licenses from regulators in every jurisdiction they operate in and are subject to strict regulatory oversight from these regulators. The Big “I” also has pointed out imposing these unnecessary and burdensome requirements likely violates both state and federal law, and the association will continue to push aggressively for the outright elimination of these rules.

The NAIC addressed several other agent and broker-related issues in St. Louis:

• The NAIC formally approved a “model bulletin” that will be used to help state insurance departments implement a federally mandated continuing education requirement on producers who sell flood insurance. Following consultation with federal agencies, the NAIC is recommending that states impose a one-time, three-hour training requirement on affected producers and provide three hours worth of CE credit following its completion.

• In response to another Congressional mandate, an NAIC committee is recommending that producers selling long-term care insurance be required to complete eight hours of initial LTC training and four hours of additional training every two years. Final action on that proposal is expected no later than December, and implementation of the requirement will likely soon follow.

• The regulators formed a new committee charged with developing a model law to address the licensing of independent adjusters.

• The National Insurance Producer Registry, which is celebrating its 10th anniversary this year, announced that producers can now obtain nonresident licenses through NIPR’s online system in nearly 45 jurisdictions and renew such licenses in almost half of the states.

• The regulators confirmed that “letter of certification” requirements have been eliminated in every state except one (New Mexico). Producers should no longer have to obtain these outdated forms in order to secure nonresident licenses, and Big “I” members are urged to contact IIABA if states act otherwise.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations. He also serves as vice president of the National Insurance Producer Registry. Contact Bissett with producer licensing questions and concerns.

P&C Trends
P&C Insurers Expected to Fair Well in 2006Could meaningful progress finally be on horizon?
Fitch’s mid-year review says insurers will meet or exceed expectations for the year.

Halfway through 2006, the U.S. p-c insurance industry is showing favorable and improved operating performance, which will likely lead to an average or better-than-average underwriting performance for the full year, according to a recent report by Fitch Ratings.

The industry will either meet or exceed Fitch’s estimates for underwriting performance and net income for the entire year, according to Greg Dickerson, associate director at Fitch and one of the analysts responsible for the report. Approximately two-thirds of the 53 organizations in Fitch’s group reported an improvement in underwriting during the first half of the year.

“Our initial outlook for 2006 pointed to significant underwriting profits of about 98%, but our list of 53 companies did better than that…there has also been significantly improved profitability for a net basis,” Dickerson says. “It was in the low to mid 20s last year and we’re looking at $40 billion for this year… however you cannot extrapolate the results for the first half will be the same for the entire year.”

Fitch attributes the lack of large catastrophe losses in the first half of the year to the industry’s good standings; however, it also recognizes that results in the second half of 2006 are unlikely to match the year-to date results since most U.S. windstorm activity takes place in the third quarter.

The industry’s strong showing in the first half is also not expected to continue in the third and fourth quarters because of predictions that this year’s storm season will bring another year of increased hurricane activity, according to the National Oceanic and Atmospheric Administration, which predicts 13 to 16 named storms and eight to 10 hurricanes.

“They (insurers) have been lucky this year because there hasn’t been a lot of wind or catastrophe-related losses this year,” Dickerson says. “Most weather forecasters are projecting increased storm frequency over the next 10 years. These catastrophe modeling services have all built in potential storm damage, and companies are coming to the realization that they had far more exposure than they realized.”

Fitch also used a combination of GAAP earnings and 10-Q filing data from the 53 p-c insurers in its universe to gauge the market and the overall findings showed marked improvement in profitability and underwriting results. Fifty-one insurers saw an underwriting profit in the first half of the year, compared to 48 out of 53 during the same 2005 period. This can be attributed to a diminishing of unfavorable losses and the absence of any unusually large catastrophes in the first half of 2006, Dickerson says.
 
The Insurance Services Office estimates that the p-c industry has lost approximately $5.2 billion in catastrophe-related losses during the first half of the year, which is “middle of the road” when compared to other loses in the last decade, Dickerson says. A year ago, the ISO estimated that insured catastrophe losses for the first half of 2005 were roughly $3.1 billion, which was the second-lowest total in the past 10 years.

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

P&C Trends
Weighing in on Modeling, Homeowners Market
Carriers, agents discuss trends and issues during New York Times insurance roundtable.

What are the largest challenges the insurance industry faces? How has the homeowners market changed? What can the industry do to manage cycles? Independent agents and carrier CEOs discussed these topics and more during an insurance roundtable held at the New York Times’ headquarters in New York City this summer.

Designed to educate New York Times reporters on issues affecting the industry, the roundtable consisted of three carrier CEOs and six independent agents. This is part one in a three-part series highlighting some of roundtable’s key discussions:

Bob Rusbuldt, Big “I” CEO (moderator): Could you translate capacity and explain the issue of capacity from a carrier’s perspective---the challenges that carriers face with capacity, the limitations on your underwriting and the issues you’re facing with reinsurance right now?

Gary Gregg, Liberty Mutual Agency Markets president and CEO: What creates capacity in insurance is your capital base. In terms of managing the risk profile of your company, that’s something that, as a leader, you have to do from a fiduciary perspective to protect your policyholders and meet your promises. From an external standpoint, certainly the ratings agencies provide an external viewpoint on the risks you’re taking versus how much capital you have. And that’s really the issue---you have to use your capital base wisely. Obviously you try to look at the options you have and the risks associated and what the returns are. Particularly with catastrophes, there is a perception that external companies that do catastrophe modeling have dramatic increases in estimates.

For most reinsurance, companies are required to code different geographic regions and run scenarios. With the increasing cost of catastrophes, you bring those to your reinsurance markets and try to find coverages. Suddenly the perception in the past couple of years---whether it’s reality or not almost doesn’t matter--- is that we’re going to have more storms and they’re going to be more costly. So that means buying more reinsurance and the reinsurers are more concerned about what they have to charge in case you do have a catastrophe. That puts pressure on the whole marketplace, from the consumer to the insurer to the reinsurer. And of course the ratings agencies are also looking at these models. The situation hasn’t really changed (from two years ago) other than the fact that we have had some costly catastrophes, but the perception has changed dramatically. So the perception of how much capital you have to have behind homeowners in Florida or the capital we have to have standing behind a quake zone in California or whatever---it’s gone up. Whether we believe it or not is irrelevant. It’s a matter of perception and economic estimation.

Rusbuldt: Let’s take Long Island, the N.J. coast and South Florida as three examples since we have representatives around the table from those areas. Is it fair to say, as a result of the hurricanes, that the cost of reinsurance, if you were writing homeowners in those areas, is the No. 1 leading factor for not writing new business or pulling out? Is that a fair statement?

Gregg: It’s a combination of two things. One, it goes back to a point I made earlier: As an officer of an insurance company, you have a fiduciary responsibility to meet the promises you make to your policyholders. For companies that have become aware of the enormous concentration of risk they might have prior to these large catastrophic events...there are some events that could occur for some companies that would cause their insolvency. And then there is the cost of reinsurance. I don’t want to speak for every company, but for most companies---companies have been much more public since 9-11 about mapping these risks, running the models and really examining it from a solvency perspective. Then there is the reinsurance cost you referred to. In the press they’re reporting somewhere between 100% and 300%.

Alex Soto, InSource, Inc., Miami, and Big “I” president: What this translates into for those of us who are dealing with a client is that there is a lot less product in certain areas. If we were widget salesmen, there would be fewer widgets in the cupboards. So there is a dual problem---one is availability, the other is affordability. It’s a very complex issue because whenever one of the companies I represent comes into my office or sends me an e-mail that says “we are curtailing,” “we are no longer open for business” and “we are going to non-renew a number of risks,” I immediately ask them if it’s a matter of rate. If it’s a matter of rate, I tell them we will do whatever we can to help them get what they need with the insurance department. Invariably they indicate to me that no---rate is but one factor and it is putting their capital at risk and at stake, and that reinsurance is another element of it. There is a lag time of what the reinsurance is costing [carriers] and when they can pass that increase on to ultimately the consumer.

What is happening in Florida is that the whole marketplace for property is devolving. We are having a meltdown, and while it is not as severe in other areas such as Missippi, Louisiana, etc., it’s getting there. I spent the last week talking with the commissioner of insurance in Louisiana, the commissioner of insurance in Mississippi and had dinner with the governor of Alabama, and they’re all incredibly concerned and believe the problem is a lot bigger than what their state can handle.

For more on the insurance roundtable, read the feature article “All the Insurance Trends (Fit to Print)” in the September issue of Independent Agent magazine.

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

On the Hill
Big “I” Makes Case for Natural Disaster Legislation
Carriers, agents discuss trends and issues during New York Times insurance roundtable.

The Big “I” testified Wednesday before a subcommittee of the House Financial Services Committee on the crucial need for natural disaster legislation.

J. David Daniel, president of Daniel & Eustis Insurance in Baton Rouge, La., and a member of the Big “I” Executive Committee, represented the association before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. Daniel testified that there needs to be a federal role in natural disaster preparation, and that Congressional attention is necessary for several pieces of legislation that have been introduced to deal with this issue.

“Put simply, insuring against natural disasters is a national problem that requires a national solution,” Daniel testified. “Despite our longstanding position that the insurance market is best served by limited federal involvement, we believe that a federal solution is necessary to help provide capacity and fill a void that the private market cannot and will not service. However, it is important that the day-to-day regulation of insurance remain at the state level, where state insurance departments are best equipped to serve the special needs of local consumers in local markets.”

Daniel noted Big “I” support for H.R. 846, the Homeowners’ Insurance Availability Act, introduced in 2005 by Rep. Ginny Brown-Waite (R-Fla.). Her bill would allow private insurers to purchase, at auction, reinsurance contracts directly from the U.S. Treasury to cover natural disasters that are equal to, or greater than, a one-in-100-year event.

“We believe this is a strong proposal,” Daniel testified, “because it will encourage more companies to enter at-risk markets, thus increasing availability and market stability, while limiting federal involvement to only the most devastating catastrophes.”

Daniel also mentioned other pieces of pending natural-disaster legislation, including the following bills:

•  H.R. 2668, the Policyholder Disaster Protection Act, introduced by Rep. Mark Foley (R-Fla). This bill would permit insurers to create tax-free reserve funds for natural disaster claims.
•  H.R. 4836, Catastrophic Savings Account Act, introduced by Rep. Tom Feeney (R-Fla.). This bill would create tax-free, personal catastrophic savings accounts.
•  H.R. 4366, the Homeowners Insurance Protection Act of 2005, introduced by Reps. Ginny Brown-Waite (R-Fla.) and Clay Shaw (R-Fla.). This bill would make state catastrophe funds eligible for federal reinsurance.
•  H.R. 4507, the Natural Catastrophe Insurance Act of 2005, offered by Rep. Carolyn Maloney (D-N.Y.). This bill would establish a federal program to provide reinsurance for state natural disaster insurance programs.
•  H.R. 5891, the Catastrophic Risk and Insurance Commission Act, introduced by Reps. Debbie Wasserman Schultz (D-Fla.), Mike Castle (R-Del.), Patrick McHenry (R-N.C.) and Charlie Melancon (D-La.). This bill would help Congress address ways to reduce the costs of disasters by establishing a national commission to examine proposals and make recommendations to assist the federal government in preparing for and managing natural disasters.

“Our members support exploring ways to reduce the costs of disasters, such as mitigation efforts,” Daniel said. “For instance, enhancing building codes and using financial incentives to mitigate risk are among the proposals worth exploring in order to protect both consumers and taxpayers across the country.”

Daniel stressed that, despite the Gulf coast hurricanes getting most of the attention in 2005, natural disasters affect all areas of the country, which means that national solutions are required. And natural disasters affect every single taxpayer in the nation, no matter where they live.

“Our members live across the country, serving and living in a wide variety of communities—large and small—and so many of them have been impacted by natural disasters,” Daniel testified. “Certainly, the most devastating natural disasters in recent years have resulted from hurricanes, which have had the greatest impact on the homeowners’ insurance market. However, hurricanes are only one of the many catastrophic risks our nation faces. Whether it is tornadoes in the Midwest, earthquakes in California or ice storms in the Northeast, we all face some risk of natural disaster, and it often takes only one or two events in a particular area for the homeowners’ insurance market to be dramatically affected.”

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

P&C Trends
New Commission Forms to Study SOX
Will address question: Does section 404 put American businesses at a disadvantage?

The newly formed Committee on Capital Markets Regulation, a group of U.S. business, financial, investor, legal, accounting and academic leaders led by Hal Scott, Harvard Law School professor, is planning a study on how to improve the competitiveness of the U.S. public capital markets. One of its major goals will be to answer this question: Is section 404 of the 2002 Sarbanes-Oxley Act putting American businesses at a disadvantage when competing with foreign companies?

What does this mean for you, as an insurance agent and a small business owner? Interestingly enough, a movement to ease the burden of section 404 on small businesses has grown in the past few months. (See “Is Sarbanes-Oxley Working?” in the June 29 IN&V.) In May, the U.S. Securities and Exchange Commission issued a statement saying it would not excuse small companies from regulation under Sarbanes Oxley rules, however it did grant smaller companies and many foreign private issuers extra time to comply with Section 404, pushing back the compliance deadline from July 15, 2007 to Dec. 15, 2007 and until Dec. 16, 2008 for outside auditor evaluations.

Commissions such as this one can garner big attention on Capitol Hill. While the accomplishments of the 9-11 Commission, for example, are often debated, there is no doubt that the 9-11 Commission brought several issues, including effectiveness of communications between U.S. intelligence agencies, to the forefront. The 1983 Social Security Reform Commission (the Greenspan Commission) report formed the basis for big changes in the Social Security system, including an increase in the full retirement age and payroll tax increases. The 1995 report by the Kerrey-Danforth Bipartisan Commission on Entitlement and Tax Reform is still an oft-cited analysis of the country’s entitlement system, but ultimately produced no legislative changes. While political commissions often stir up controversy, their effectiveness is up for debate. Some say the Greenspan Commission is the only truly successful commission as it led to concrete changes in legislation.

This commission’s findings will likely be thrust into the political spotlight in mid-November, when their interim report is expected. Noticeably aligned with the current administration and laden with CEOs of major finance and accounting firms, the report will be greatly anticipated. Representatives from PricewaterhouseCoopers, the NYSE, Deloitte and Lehman Brothers certainly have a vested interest in the outcome of this report; however there might be more anticipation from representatives of labor organizations or shareholder groups—groups that might oppose easing regulation on capital markets. When looking at the make-up of this committee, it is easy to conclude that the commission report will recommend easing section 404 to lessen the burden of cost and time on companies traded in the U.S. 

With a heavy corporate and political composition, the commission will have to work hard to strike a fair balance. The sting of Enron, ImClone and Tyco, among others, is still being felt by investors and consumers, many of whom still wholeheartedly support strict monitoring and regulation of corporations.

The SEC is making modest incremental changes, such as changing deadlines for compliance, but some are looking for broader reform. This will factor into the commission’s debate and most likely will be revisited. This commission certainly will weigh the cost-benefits to small businesses, as well as larger ones, while debating the effect of section 404 on the U.S. public markets.

Emily Crane (emily.crane@iiaba.net) is Big “I” manager of media relations. 

  Legal Advocacy 
Judge Orders Katrina Claims Be Sent to Trial Separately

Last week, the judge in a Mississippi federal trial court ruled that different plaintiffs suing their insurer over their insurance coverage claims from Hurricane Katrina must each sue their insurer separately, not as a group. Richard “Dickie” Scruggs, a lawyer in Mississippi who represents hundreds of policyholders in Katrina-related litigation, wanted to consolidate all of his clients’ cases against Allstate Property and Casualty Insurance Company, State Farm Fire & Casualty Company and Nationwide Mutual Insurance Company. Under a consolidated trial, all of Scruggs’ clients would have had a joint trial against each insurer.

In denying Scruggs’ request, the federal court judge found that consolidation would have been tantamount to a class action. Under rules for a federal class action, the potential class must meet certain requirements. For instance, a class action can only be maintained if the basis of the lawsuit is common for all class members. In this instance, the judge found that the storm affected each plaintiff differently so consolidation was not appropriate.

The plaintiffs requested consolidated treatment, among other reasons, to avoid unnecessary costs, duplication of effort and judicial efficiency. The judge rejected these as reasons to confer “quasi class-action” status on the cases.

By denying consolidated treatment, each plaintiff will have to file his/her own complaint and each lawsuit will be conducted separately. This often costs plaintiffs significant time and expense. For instance, the filing fee for each complaint is $350. Scruggs has stated that the fees for filing the hundreds of individual cases collectively will cost his clients approximately $500,000. The plaintiffs have announced that they will seek a rehearing on the ruling or appeal it.

This is the latest in a string of favorable rulings for insurance companies in less than a month in Hurricane Katrina-related lawsuits. Last month, another Mississippi federal judge ruled that a homeowner’s Nationwide policy did not cover flood or storm surge damage. That same judge also denied class-action certification to a group of homeowners against State Farm.

It is important to note that the ruling precluding consolidation of the cases did not go to the merits of each policyholder’s claim against their insurer.

IIABA will continue to follow the remaining Hurricane Katrina coverage lawsuits and will provide updates as events warrant.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

  L&H Trends
Need a Target Audience?

"Who is my target audience?” It’s the first question any salesperson should ask. When it comes to the life insurance profession, there is a lot of competition from the thousands of companies and hundreds of thousands of agents selling life insurance. Is there enough of a target market to satisfy the distribution channel?
 
Independent insurance agents should take comfort in a new study that concludes that there is an enormous target market. The study, conducted by LIMRA International, shows that 44% of all U.S. households either don't own life insurance but believe they should, or own life insurance and believe they need more. The study also reveals that three-fourths of American households do not have a personal life insurance agent or a personal financial advisor or planner. This translates into an uninsured or underinsured marketplace of an estimated 48 million Americans.
 
You also could draw the conclusion that the Internet is not proving to be a serious threat to insurance agents as the premier distribution channel. When it comes to auto insurance sales, the direct distribution channel--- a.k.a. GEICO---has increased its presence mostly to the detriment of captive agency carriers, not the independent agent channel, which actually had a slight increase in auto insurance.
Why has the direct life insurance channel been more difficult to penetrate? There is a fundamental distinction: automobile insurance is mandated; life insurance (unless required by a lender) is not.
The issue isn’t price. With some 48 million underinsured or uninsured Americans, the reason many haven't secured life insurance directly is that, unlike auto insurance, it's easy to procrastinate on the purchase. In fact, most people can purchase significant amounts of life insurance ($250,000 to $500,000) for hundreds of dollars a year, not thousands. However, between the do-not-call lists and peoples’ hectic lives, most don't come in contact with a life insurance agent.

Independent insurance agents are well positioned to capture this market. When handling a customer’s personal lines coverages, you have an opportunity to raise the issue of adequate life insurance during an annual review. You also can offer workplace marketing of life insurance to commercial customers as a no-cost, value-added employee benefit.
The question remains: Why are so many Americans underinsured or uninsured? Perhaps some individuals with children mistakenly believe that Social Security survivor benefits will provide adequate income in the event of premature death. However, this will almost never be the case. Children will not receive benefits once they turn 18, leaving them with no income if they went on to college. Since many households are dependent on two incomes, the death of either parent would most likely result in a significant change in lifestyle for the children if there was not adequate life insurance available to replace the lost income.
Independent agents have a strategic advantage in being able to reach out to this vast market by offering a variety of insurance products. Now is the perfect time to refocus your agency on cross-selling life insurance. You'll be doing your agency's customers a service and helping out the bottom line.

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