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                                                Big “I” National News

On the Hill
Baucus Introduces Long-Awaited Health Care Reform Bill
Bill excludes public plan and preserves agent role in health insurance sales.

Yesterday, Senate Finance Committee Chairman Max Baucus (D-Mont.) released his much-anticipated health care reform legislation. The bill, titled “The America’s Healthy Future Act of 2009,” is the result of Baucus’s attempt at bipartisan negotiations to develop a compromise bill. At this time, the bill has yet to garner Republican support, but Chairman Baucus has expressed a willingness to continue an open dialogue with Finance Committee Republicans as they work on the bill next week. The Finance Committee is expected to begin discussing the bill at an executive business meeting (or mark-up) next week. At the present time, the following key provisions are in the legislation:

• Health Insurance Exchanges: States would be required to establish an exchange for the individual market and small group market in 2010. Qualified private plans as well as co-ops would be available in exchanges.

• No Public Plan.

• CO-OPs: The bill authorizes $6 billion in funding for the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of non-profit, member-run health insurance companies that serve individuals in one or more states. CO-OP grantees would compete in the reformed individual and small group insurance markets.

• Agent Marketing Regulations: The NAIC will devise an NAIC Model Regulation that is consistent with the new Federal law with regards to federal health insurance rating, issuance and marketing requirements.

• Agent Commissions: State insurance commissioners would continue to provide oversight of insurance plans with regard to consumer protections, rate reviews, solvency, reserve requirements and premium taxes and would establish rate schedules for broker commissions in the state exchanges.

• Individual Mandate: Beginning in 2013, all U.S. citizens and legal residents would be required to purchase coverage. The consequence for not maintaining insurance would be an excise tax of between $750 and $3,800 a year depending on income and family composition.

• Guaranteed Issue: Issuers would be required to offer coverage on a guaranteed issue basis and would be prohibited from excluding coverage for pre-existing health conditions and from rescinding health coverage.

• Limited Premium Variance: The bill would establish federal rating, issue, renewability, and pre-existing condition rules for the individual market.

• Employers: An employer would not be required to offer health insurance coverage. However, all employers with more than 50 employees that do not offer coverage would be required to pay a fee for each employee who receives a tax credit for health insurance through a state exchange.

• Refundable Tax Credits: The bill would provide a refundable tax credit for eligible individuals and families who purchase health insurance through the state exchanges. The tax credit would be available for individuals (single or joint filers) with incomes up to 300% of the Federal poverty level.

• Small Business Tax Credit: The bill would provide a temporary two-year tax credit for a qualified small employer (fewer than 25 employees) for contributions to purchase health insurance for its employees. 

• Cadillac Tax: Imposes an excise tax on insurers if the aggregate value of employer-sponsored health coverage for an employee exceeds $8,000 for individual coverage and $21,000 for family coverage.

• Other New Taxes: Annual fees would be levied on insurance providers, drug makers, medical device manufacturers and clinical laboratories.

• Cost: In total, the bill would cost an estimated $856 billion over 10 years.

Chairman Baucus’s bill is an important development in the health care reform debate as it presents the possibility for bipartisan action by the U.S. Senate. Though the Big “I” has concerns about aspects of the bill as introduced, such as the creation of co-ops, the association is pleased that the current language does not include a government-run insurance option and preserves the insurance agent’s role in the sale and delivery of health insurance.

John Prible (john.prible@iiaba.net) is Big “I” assistant vice president of federal government affairs.

P-C Trends
Surplus Lines Placements Involve Volatility and Risks
Now is the time to establish relationships, plan and educate.

Recent figures from A.M. Best show that surplus line premiums fell by a whopping 30% or more from 2007 to 2008. This dramatic reduction in surplus lines volume follows an even more dramatic 60% increase in surplus lines premiums from 2001 to 2002. Independent agents need to be aware of this volatility and how to adjust for it in their operations. The current ebb in placements creates an opportunity for better management when volume inevitably increases again.

Most independent agents understand the important role surplus lines play in the insurance market as a capacity “shock absorber.” However, as shown in the graph below, surplus lines’ role is a volatile one because as the overall market ebbs and flows, the surplus lines portion of the market does so even more. For example, when excess capacity was required in the hard market between 2000 and 2004, surplus lines insurers saw dramatic increases in volume. Today, the surplus lines market has responded to what Insurance News & Views cited last April as “The Softest Market Ever,” with a drop in direct written premiums of 34%.

Source: A.M. Best 2008 Special Report: U.S. Surplus Lines – Market Review and Aggregates and Averages.

Independent agents need learn the specific regulations in their states regarding the need to document the eligibility of a risk to be written in the surplus lines marketplace. The key to managing this process is having a strong relationship with the wholesalers and MGAs who serve as access portals for independent agencies. Agents should nurture those relationships now so they are in place when they are needed. Also, agents can check their state’s insurance department or stamping office’s Web site for details on regulatory compliance.

Agency managers also need to remember there is a heightened exposure to errors & omissions claims associated with surplus lines placements. In its book of E&O business, written in partnership with Big “I” state associations, the Big “I” sees a pronounced correlation between E&O loss ratios and the amount of brokered business (that is, premiums sub-produced through another agent or wholesaler’s direct insurer relationships). This is not an indictment of either the “brokering” process or the need to access coverage this way; instead, it is a warning that such placements require careful risk management.  Particularly significant is the evidence showing  surplus lines placements, as a subset of brokered placements in general, have higher dollar-loss E&O potential than E&O claims arising out of placements with directly appointed insurers.

The graph below shows that the exposure to surplus lines and the ensuing risks are not the same state to state. Note the percentage of all p-c insurance, by state, that was surplus lines in 2008. The average across all states is 5%. While all agents should exercise a certain amount of caution when accessing surplus lines, agents located in states with more placements should manage their exposure accordingly.

Source: A.M. Best 2008 Special Report: U.S. Surplus Lines – Market Review and Aggregates and Averages.

There is no better time to review agency operations, keeping in mind the general ebb in surplus lines placements. Agents should make changes now before this segment of their book increases again. 

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^® and a licensed p-c agent.

For an in-depth review of the risk management implications of executing surplus lines placements, go to www.independentagent.com/EOhappens to listen to “Avoiding E&O Pitfalls in E&S Business,” a webinar recorded earlier this year through the Big “I” Professional Liability program and Swiss Re, the parent company of Westport Insurance Company. The webinar featured a highly knowledgeable panel, including an experienced E&S broker, claims attorney and Swiss Re underwriter. 



Pulse on the P-C Market
Need for Cyber Liability Coverage on the Rise
Current legal, legislative and economic climates have heightened the appetite for coverage. 

As businesses conduct more and more of their operations online, the appetite for Internet coverage continues to grow. Independent agents are discovering the increasing frequency of data breaches; contractual requirements and recent legislation have made the cyber liability marketplace more competitive and comprehensive than ever.

The need for cyber liability coverage is not limited to large technology companies and multi-national corporations. In fact, according to Chubb’s Cybersecurity Product Manager Tracey Vispoli, more than half of companies with fewer than 1,000 employees have experienced an online data breach. Vispoli adds that Chubb’s main cyber liability clients are primarily small and middle-market businesses involved in a variety of industries.

“It’s a frequency issue as well as severity,” says Vispoli, referring to the recent general rise in cyber liability claims. “It’s costing companies more and more money to remedy a data breach situation. Over the past several years, the cost has gone from $100 per record to $202 per record.”

However, costs associated with data breaches are not the only driving force behind today’s competitive cyber liability marketplace. Nancy James, owner and principal of N.P. James Insurance in Concord, Mass. says new contract requirements are forcing many businesses to secure Internet liability coverage in the face of heightened legal activity.

“Attorneys have generated demand (for coverage) under contract,” says James. “Within the last five years, the increased activity has been noticeable and we now have more carriers offering it.”

Michael Carr, director of information technology and cyber liability at Markel Shand, agrees that contractual requirements are increasing businesses’ appetite for Internet coverage. He adds that recent expansions to federal regulations related to privacy breaches, such as the Health Insurance Portability and Accountability Act (HIPAA) and Red Flag Rules, have also heightened awareness about cyber liability and made coverages related to possible legal action more important to clients.

“Agents should be aware of how carriers in this space treat the defense of regulatory matters,”says Carr. “Some carriers will provide the full policy limit for the cost to defend the insured against those investigations. Some forms would only cover costs if there was a civil suit, and others would have a sublimit.”

Carr also dispels the commonly held belief that the majority of data breaches covered by cyber liability policies occur on public Internet space. Instead, he says most claims happen on companies’ back-office networks where their clients’ personal data is stored. Therefore, a common misunderstanding among agents and insurers is that a customer doesn’t need cyber liability coverage if the business isn’t involved in e-commerce. And, although they may seem outdated, Carr, Vispoli and James all agree that paper records also need to be taken into consideration.

“An awful lot of confidential information is still stored on paper,” says Carr. “Businesses have the same duty to protect that as electronic forms. Many but not all (coverage) forms extend to paper records.”

Insurance agencies are among the top businesses in need of cyber liability coverage; other especially vulnerable industries include health care and financial services due to the number of personal records they keep. Carr says the current economic climate has contributed to an uptick in privacy breaches and encourages independent agencies to carry cyber liability coverage, not only as necessary protection, but also to set an example for customers.

“If you handle benefits plans and life insurance, your agency is likely to have a substantial amount of cyber liability,” says Carr. “Agencies have the exposure themselves, and if they don’t address it, it’s very difficult to go to a client and encourage them to buy coverage.”

While James encourages her clients to cover their cyber liability risks, she believes, first and foremost, in effective risk management. She sits down with her clients, many of whom have been with her for more than two decades, and explains why and how to mitigate risks such as asking for credit card numbers online.

“I tell clients to put their phone number and e-mail address online for taking credit card numbers over the phone,” says James. “Manage risk yourself, separate exposures, then transfer the risk to an insurer as a last resort.”

Editor’s note: This article is second in an ongoing series examining trends in specific coverage areas. Click here for a detailed product listing of Internet liability markets. 

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.


Legal Advocacy
Navigating FTC’s Prohibition on “Robocalls” Without Consumer Consent
Informational calls not covered by ban, but existing business relationship exception ends.

One agent uses a pre-recorded telephone call to remind a customer about an appointment previously scheduled at the customer’s request. Another uses a pre-recorded call to inform a customer of the possible availability of additional coverages for a policy previously purchased by the customer. Neither agent has the written and signed consent of the existing customer to receive so-called “robocalls” from the agent. But there is a difference between the two calls.

According to the Federal Trade Commission (FTC), the first call confirming an appointment is purely informational and therefore acceptable. The second call, regarding additional coverages of interest, has a sales component, and therefore is punishable by a fine of up to $16,000 because the agent has not obtained the advance written consent of the customer to receive the call. This is the result of a recent FTC regulation that greatly restricts the use of automated calls or robocalls. Independent agents and brokers who use prerecorded automated calls need to know the new rule for this tool and how to comply.

As of Sept. 1, with limited exceptions, the new FTC rule has banned pre-recorded telemarketing calls to consumers that are made without the recipient’s advance written and signed consent. This includes pre-recorded calls to consumers even if they have not added their names to do-not-call lists or registries. The rule does not apply to “live” telemarketing calls made by people. To the extent that the rule conflicts with state telemarketing laws, agents and brokers doing business in those states must comply with the state laws (due to the McCarran-Ferguson Act provisions preserving the states’ regulation of the business of insurance). 

In order to make a pre-recorded sales call to a consumer, the rule requires that the seller, in this case an agent or broker, obtain prior written consent from the consumer that: The seller obtained after a clear and conspicuous disclosure that the purpose of the agreement is to authorize the seller to place prerecorded calls to the person; Was not directly or indirectly required as a condition of purchasing any good or service; Evidences the willingness of the person to receive prerecorded calls by, or on behalf of, the specific seller; and includes the person’s telephone number, for which consent to call is given, and the person’s signature.

Electronic or digital signatures meet the requirement that the signatures be “written,” and such signatures may be obtained by e-mail, a Web site form or by a telephone key press or voice recording. 

The rule requires the consumer’s consent be shown by an affirmative action, such as by checking a box – it should be noted that a pre-checked box providing consent would not comply with the rule. In addition, the request cannot be hidden, such as in small type, on the back of a document or buried in unrelated material.

Once obtained, there is currently no time limit or expiration period for consents. As of Dec. 1, 2008, however, robocalls must contain an opt-out mechanism to allow recipients to automatically place themselves on the seller’s do-not-call list. This opt-out mechanism applies to robocalls made to consumers who previously provided written consent to sellers to receive such calls.

Consent must be obtained on a seller-specific basis and it is not transferrable to other parties, including affiliates and marketing partners.

Purely “informational” pre-recorded calls – that is, calls that do not try to interest consumers in the purchase of goods or services – are not covered by the rule. Examples of informational calls not covered by the rule include calls updating consumers on a prior sales transaction (such as when a policy already purchased is being sent out) and reminding consumers about an appointment previously scheduled by the consumer. 

If a pre-recorded message provides information but also contains a sales component, it will be considered a “mixed message” call and is treated as a sales call subject to the rule.

The FTC states: “If a call delivers a pre-recorded message that includes any content tending to induce a consumer to purchase a good or service (whether or not the good or service is related to a prior purchase), or to alter the terms of a prior transaction, then the call is not purely informational.” Therefore, according to the FTC, such a call must comply with the rule. Examples of mixed message robocalls required to comply with the rule include pre-recorded calls that provide information about the availability of any product or service (whether or not the message provides a way to purchase it), and for previous purchases, information about additional options, coverages/upgrades, alternative terms or conditions and extended warranties.

The consent requirement of the rule does not apply to pre-recorded calls seeking charitable contributions, pre-recorded healthcare-related messages subject to the Health Insurance Portability and Accountability Act (HIPAA) and made by, or on behalf of, a covered entity or its business associate. Nor does it apply to automated messages required when “predictive dialers” (machines that automatically call consumers and then connect answered calls to live agents) are used and a live agent is not immediately available. 

In addition, the rule – like other FTC telemarketing sales rule regulations – does not apply to calls from politicians (including PAC solicitation calls), banks, federal credit unions and savings and loan associations, non-profit organizations (including 501(c)(6) organizations) making calls on their own behalf and telephone carriers, which are exempt from FTC jurisdiction.

As of Sept.1, the existing business relationship (EBR) exception that previously applied to all sales calls is no longer applicable to robocalls. Having signed written consents is now the only way sellers are allowed to place pre-recorded sales calls to consumers. Once consent is obtained, however, pre-recorded calls may be made to the consenting consumer even if that consumer’s name is on the national do-not-call registry, unless and until such consent is revoked by the consumer.

Scott Kneeland (scott.kneeland@iiaba.net) is Big “I” counsel.

For more information, log on to www.independentagent.com and select Legal Advocacy under Memoranda and FAQs and click on  “The Federal Communications Commission’s and Federal Trade Commission’s Do Not Call Rules.” For more information about HIPAA, including who is deemed a “covered entity” or “business associate,” log on to www.independentagent.com and consult the Legal Advocacy section.

FTC information on the rule and on the telemarketing sales rule in general is available here.


L-H Trends
Talking to Clients about their Financial Futures
Business owners should consider how to perpetuate their finances well before it becomes an issue.

Since the typical independent insurance agency has many closely held commercial clients without publicly owned stock, agents need to ask these clients how they would handle the premature death of one of the business owners.

There are a number of financial concerns to deal with when an owner dies, and many business owners postpone addressing all of them. First, the business will need adequate liquidity to pay the immediate will, settle any federal and estate taxes and facilitate the requirements of the will’s beneficiaries. While closely held stock can be passed down through the will, other shareholders in the corporation may be unwilling to accept the beneficiaries as co-owners of the business.
 
If the beneficiaries do not want to continue to hold the illiquid stock of a closely held corporation, they will want to sell their stock. However, there may be few willing takers to purchase the stock, especially if it is a minority or majority interest with the decedent no longer able to help perpetuate the business. Willing buyers will most likely look to buy the stock below the fair market value. This is commonly known as a "fire sale.” One logical avenue for the sale of the stock is to purchase the decedent's shares. However, this will be inefficient from an income tax standpoint. Funds that flow from a corporation to a shareholder (assuming that there are sufficient profits) will be deemed to be a dividend and will involve income taxes. This is not an efficient way to repurchase the stock.
 
The most beneficial way to allow for the orderly disposition of the decedent’s stock is to establish a funded buy-sell arrangement that first establishes an acceptable and equitable basis for determining a purchase price of the business. Using permanent life insurance to fund the buy-sell is a way to pre-fund the cost of the insurance with funds set aside from the company's earnings. If the business has employees who can manage it, having them pay the premiums can be part of a perpetuation plan to ensure the orderly transition of the business. If there are few owners, a cross purchase arrangement can be set up whereby those involved in the transaction name each other as the beneficiary of the other's policy and the proceeds of the life insurance policy are used to pay for the value of their stock in the buy-sell arrangement. This way, the surviving owner receives the decedent’s stock. 
 
With today’s large budget deficits, income and estate taxes increasing and the income tax-free nature of life insurance, proceeds will be even more important in estate planning for closely held businesses. Independent agents should take the time to have this important conversation with their clients to make sure they are properly planning. And agents should also remember to have a plan in place for their own agency.

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