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 Big "I" National News

H U R R I C A N E   K A T R I N A
Industry Predicts Post-Katrina Market,
Braces for Rita

While Hurricane Rita gathers strength in the Gulf Coast, Hurricane Katrina remains in the forefront of the insurance industry’s mind. With carriers gingerly announcing market predictions and loss estimates, Katrina’s effects on the insurance landscape change almost daily.

Fitch Ratings issued a report Monday that outlines how Katrina’s far-reaching effects "could cause Fitch to reassess the core risk profile of the property-casualty insurance industry." Sound ominous? Fitch’s outlook isn’t all doom and gloom quite yet. The company says it is keeping an eye on several factors before determining its future insurance outlook, including the updated view on catastrophe modeling reliability, resolution of flood-related losses, amount of insured losses retained by insurers and a possible pricing squeeze on insurers.

"Should Fitch ultimately conclude that there is a need to assume that a higher degree of uncertainty exists surrounding the reliability of modeled catastrophe loss assessments, such uncertainty would represent a heightened risk exposure that could put downward pressure on insurer ratings," the Fitch report says.

Industry analysts predict that—for now—personal and commercial property insurance rates for low-risk hurricane areas will not rise. According to BestWire, those areas will feel an impact in terms of higher reinsurance prices.

"We just had maybe $60 billion in capital destroyed, and insurers are going to want to replenish that," Martin Grace, a risk management and insurance professor at Georgia State University, told BestWire. "One of the ways they will do that is to ask for more reinsurance, and that’s going to cost them."

Loss estimates continue to roll in. Berkshire Hathaway Inc. estimates that its insurance and reinsurance units will incur 3% to 5% of the industry’s total losses due to Katrina. MaxRe Capital Ltd. places its losses between $60 million to $90 million. Image Group Holdings Ltd. estimates losses of about $17 million. Progressive Corp. anticipates about $119.5 million in losses.

Meanwhile, rating companies are scrutinizing several insurers in the wake of Katrina. Standard & Poor’s, which had placed 10 insurers and reinsurers under review for Katrina-related concerns, added XL Capital Group’s operating companies with AA- financial strength ratings to the list. Additionally, A.M. Best Co., which had placed at least seven companies under review, changed Olympus Reinsurance Co. Ltd.’s financial strength to B+ from A-.

While insurance companies and consumers alike struggle to deal with Katrina’s impact, several new initiatives aim to help:

· The National Flood Insurance Program announced Tuesday that is altering its claims settlement policy in an effort to speed up its response to policyholders in affected areas. According to the NFIP, it "has waived the usual requirement that the policyholder must submit a proof-of-loss and instead where the policyholder agrees, will rely on a report by the claims adjuster. The NFIP has urged insurance companies to provide advance checks of around $3,000 to policyholders who carry contents coverage."

· The Internal Revenue Service will allow Katrina victims to take hardship withdrawals from their 401(k)s for any reason between Aug. 29, 2005 and March 31, 2006.

· The House and the Senate approved a measure that would allow Katrina victims to access money in their retirement plans without the usual 10% penalty tax.

· MetLife Auto & Home will offer free "identity relief" to all of its renters, condominium or standard homeowners policyholders. The service provides policyholders with a "personal advocate" to help replace persona documents lost in the hurricane and to help reestablish financial institution relationships.

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

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  H U R R I C A N E   K A T R I N A
Mississippi AG Sues Insurance Companies for Invoking Policy Exclusions After Katrina—But Governor Prefers to Negotiate

Mississippi Attorney General Jim Hood filed suit against Mississippi Farm Bureau Insurance, State Farm Fire and Casualty Company, Allstate Property and Casualty Insurance Company, United States Automobile Association, Nationwide Mutual Insurance Company and other, as yet, unnamed defendants on Sept. 15, 2005, in the Chancery Court of First Judicial District in Hinds County, Miss.

The lawsuit is a complaint and motion for a temporary restraining order seeking a decision that carriers should not be able to "exclude coverage for hurricane loss and damage if the loss and/or damage included, directly or indirectly, loss or damage resulting from water, whether or not driven by wind." The rationale stated in the complaint for this position is that such exclusions are unconscionable, violate state public policy and, thus, are void and unenforceable, are ambiguous by conflicting with other policy terms, violate the state Consumer Protection Act by unfair and deceptive trade practices and will cause irreparable harm. The complaint alleges that despite the fact that the policies were purchased for the primary purpose of insuring against any and all hurricane damage, "Defendants are taking the position and intend to take the position in the future that these policies do not provide coverage for the damage undisputedly caused by Hurricane Katrina because of the policy exclusions which are the subject of this litigation."

The relief sought by the complaint is for a temporary restraining order and a preliminary and permanent injunction to prevent the defendants and anyone acting on their behalf from: 1) attempting to have their policyholders acknowledge that their damages are the result of water and/or flood damage from Hurricane Katrina; 2) from using any policy exclusions as grounds to deny or limit insurance coverage to residents and/or property owners of the Mississippi Gulf coast; and 3) from using such exclusions to compel or otherwise induce policyholders harmed by these events into accepting less than the full coverage provided under their policies.

After the suit was filed, Mississippi Governor Haley Barbour indicated that he would prefer to negotiate with insurance companies rather than litigate against them. The governor stated, "It’s crucial that people who enter into contracts keep their contracts. And that’s what an insurance policy is, it’s a contract." But he also indicated that he feared that a lawsuit would encourage insurers to leave Mississippi. Mississippi Insurance Commissioner George Dale agreed with the governor and asked Mississippi’s congressional delegation to obtain financial help for those without adequate insurance coverage.

The Big "I" will follow the lawsuit and provide updates as significant developments occur.

To review a copy of the complaint, go to http://na.iiaa.org/Legal/katrinamotion.pdf. and log in as a member.

For more information contact IIABA Assistant General Counsel Amy Hendricks at amy.hendricks@iiaba.net; 800-221-7917.

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  H U R R I C A N E   K A T R I N A
E&O Catastrophe Extra Expense Coverage:
30-Day Deadline Approaching

Hurricane Katrina affected the homes and businesses of many people, including Big "I" member agents who are assisting people rebuilding their lives on the front lines. Policyholders of the Big "I" Professional Liability Program offered by GE Insurance Solutions in Louisiana, Mississippi and Alabama can benefit from the catastrophe extra expense policy provision of the preferred policy form (W-1004C), underwritten by Westport Insurance Corporation.

This standard coverage provision provides the benefit of $10,000 per catastrophe and $25,000 aggregate per policy period of actual extra expenses incurred by your agency while assisting the claims processing needs of your customers for 30 days after the catastrophe. Purchasing temporary office space, generators and supplies can go a long way toward helping your agency assist clients to rebuild their lives as quickly as possible. 

If you have not taken advantage of this coverage yet and feel it will benefit your agency’s operation, please note that the coverage applies only to covered extra expenses incurred by Sept. 29 in Mississippi and Alabama, 30 days after the Property Claims Services declared Katrina a catastrophe. However, in Louisiana, according to Louisiana Department of Insurance Rule 15: “The time limit for any performance, act or transmittal shall be suspended during the term of the present State of Emergency and any subsequent State of Emergency declared thereafter, with regard to Hurricane Katrina or its aftermath.”   A $500 deductible applies. Act now by contacting your Big “I” State Association representative today if this valuable coverage can assist your agency with processing claims. For a link to your state association contact, go to www.independentagent.com/eo and click on “ Agency Contact Information .”    

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 V I E W :   P & C   T R E N D S
The Myth of the Safest City in America

I recently listened to a podcast from the online magazine Slate entitled "Where To Hide From Mother Nature." In the article, Brendan I. Koerner effectively drives home the point that rare is the place in the United States that can consider itself safe from disaster. He bases much of his analysis on the chart below, which shows presidential disaster declarations by county since 1965. By the end of the article, Koerner designates a northeastern city, Storrs, Conn., as "America’s Best Place to Avoid Death Due to Natural Disaster." A further analysis is important for independent agents.

*Source: FEMA’s National Emergency Management Information System

Agents know a good risk manager should consider possible losses beyond those that were sources of presidential disaster declarations. After all, disasters are infrequent and looking at disasters from 1965 to 2003 does not provide an adequate sample.

Koerner only needed to consider the earthquake peril to conclude that, at least in the view of the United State Geological Survey, Storrs is not safe at all. It sits in an area of the northeastern United States generally considered to be at heightened earthquake risk. In fact, history finds numerous actual quakes occurring in the state since the 1800s. Earthquakes often result in widespread fires and major power outages; some disaster planners consider earthquakes---in areas unprepared for them---the worst-case scenario.

Say you live in frame building heated by oil---do you still feel safe in Storrs. Well, what about events like the Accident at Three-Mile Island? While a man-made problem, as we saw in 1979 and then seven years later at Chernobyl, the potential for nuclear loss is not only possible but the property and economic losses can be devastating. Storrs sits just 30 miles upwind from its own potential nuclear power problem in Waterford, Conn.

And, what about the industry’s latest bugaboo, terrorism? The possible widespread exclusion of this peril may be just around the corner and will affect us all. While Storrs is 30 miles from Hartford and almost 150 miles from New York City, it may not be as isolated from terrorism risks as you might think.

Storrs is the home to the University of Connecticut. Like other land grant universities, UConn is characterized by a large student body and a variety of academic pursuits. Such institutions of higher learning bring underappreciated sources of risk because of their teaching and research endeavors and they bring a diversified population of young men and women from all over the world to their campuses.

While I’m not familiar with UConn’s specialties and activities, the seemingly innocuous public university does highlight the general under-appreciation for the potential of calamity and uninsured risk. Consider another land grant institution, the University of Wisconsin at Madison (near where I grew up). As a teenage science student, I toured the university’s own functioning nuclear power plant. That is correct, Strontium-90 and all.

Possibly nuclear material is one thing, but then consider the building that houses the reactor is only two short city blocks away from a building named "Sterling Hall." Vietnam War-era historians and Madisonians alike will recall that in 1970 this building was made famous when Karleton Armstrong nearly demolished it with a 2,000 pound ammonia nitrate bomb, killing one graduate student and wounding four in an early morning blast. He and his comrades in the New Year’s Day Gang were targeting the Army Mathematics Research Center, a Department of Defense project housed in Sterling Hall.

What is the point? I am not trying to say Storrs is unsafe nor put anxiety in the minds of anyone living near a great public university. Rather, the point is no citizen of any city is safe from major catastrophe perils, and the insurance policies we deliver to them every day exclude many of them…and possibly more of them. We need remind our customers of that reality. Perhaps more important, agents need to think about how we solve the challenges of financing catastrophe losses lest we be left with fewer real solutions for our clients and less and less to sell.

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

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P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Eight Insurance Execs Indicted for Bid Rigging, Fraud
Spitzer issues fighting words to his detractors.

As Hurricane Katrina became the focus of the insurance industry, New York Attorney General Eliot Spitzer once again made his presence felt. Last week, Spitzer, in conjunction with New York State Insurance Superintendent Howard Mills, indicted eight former Marsh, Inc. executives on bid rigging and fraud charges---and issued some fighting words aimed at his critics.

Spitzer and Mills announced last Thursday that the executives were indicted for "their roles in a massive bid rigging scheme that defrauded clients of millions of dollars." According to a statement from Spitzer’s office, the indictments charge the individuals with colluding with other executives at American International Group, Zurich American Insurance Company, ACE USA, Liberty International Insurance Company and other companies to rig bids in the excess casualty market.

"By misleading customers into believing that the customers’ interests came first, the conspirators fraudulently obtained millions of dollars in commissions and fees for Marsh and millions of dollars in premiums for the insurance companies," the statement says.

Five former Marsh employees were charged with scheme to defraud in the first degree, combination in restraint of trade and competition, and grand larceny felonies in the first, second and third degree: William Gilman, Joseph Peiser, Edward McNenney, Greg Doherty and Thomas Green.

Three additional former Marsh employees were charged with scheme to defraud in the first degree, combination in restraint of trade and competition, and grand larceny in the second degree: Kathleen Drake, William McBurnie and Edward Keane.

According to the Wall Street Journal, "at least one of the individuals is in talks with authorities about a guilty-plea agreement, according to two people close to the matter, but it wasn’t clear when or if a deal would be made."

The same day he announced the indictments, Spitzer also called out his detractors and questioned their motives. According to Reuters, Spitzer called his critics "apologists for the powerful and politically connected who commit crimes."

"No one can dispute that in the insurance industry there was massive fraud," Spitzer went on to say, citing the 17 insurance executives who have pleaded guilty to various charges, including fraud.

"There’s no argument for a bid that cheats the customer and adds to the already high cost of insurance," he said. "There will be more criminal cases against carriers who were part of this scheme."

In other Spitzer news, The Hartford Financial Services Group announced last Friday that it received a subpoena from Spitzer’s office seeking information about purchases of or exchanges into its variable annuity products. Spitzer also asked for information about the company’s reporting of workers’ compensation premiums.

Spitzer wasn’t the only attorney general in the spotlight. Last week, Massachusetts Attorney General Thomas F. Reilly threatened to sue Marsh & McLennan Cos. for allegedly cheated in a bid-rigging scam more than a dozen of the state’s businesses.

According to The Boston Globe, the AG’s office sent a letter to Marsh CEO Michael Cherkasky alleging that "Marsh also steered clients to certain insurers, rigged bids, solicited false quotes from insurers, discouraged or withheld quotes and encouraged insurers to increase the prices of their bids."

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

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L & H   T R E N D S
Katrina’s Far-Reaching Financial Impact on Taxes, Bankruptcy

As the human toll of Hurricane Katrina continues to mount, devastating thousands of families, the rebuilding effort is beginning. President Bush and Congress have approved more than $60 billion in funding from the federal government. The total financial cost could reach $200 billion---a very large number. Bush says he plans to commit adequate funds without raising taxes, resulting in an increase in the federal deficit. Given the magnitude of deficit, it will likely require the president to scale back some of his income tax goals.

What is the implication for independent agents? It will be more difficult to make the 2001 tax cuts permanent. The Economic Growth and Tax Relief Reconciliation Act of 2001 passed by less than 60 votes in the Senate, and many of the provisions will sunset in 2010, meaning that they will revert to 2001 levels.

The status of estate tax laws are of particular interest to life insurance agents and estate planners. In 2010, there will not be any federal estate tax. That means that a billionaire who passes away in 2010 would not have any federal estate tax owed by his estate. However, without an extension of the 2001 estate tax provisions, the top federal estate tax rate of 55% would apply in 2011.

The uncertainty surrounding the estate tax provisions has made planning difficult for the past several years. Given the enormity of the expenses associated with Hurricane Katrina, it is unlikely that the estate tax cuts will be made permanent. The Joint Council on Taxation calculates the projected cost of extending the estate tax provisions until just 2015 at approximately $290 billion. Consequently, the magnitude of the expense means that independent agents should discuss with clients the impact on their estate plans if the estate tax reverts to its original levels.

Independent agents who wish to perpetuate their agencies may also feel the impact. If the value of the agency, coupled with their other assets, exceeds the limits, adequate life insurance will be needed to provide liquidity.

The cost of hurricane disaster relief is not the only large government liability in the news this week. Two major airlines, Northwest and Delta, filed for bankruptcy protection. While the airlines currently are exempting their pension plans from the filing, the outcome of targeted pension plan legislation will be a factor in whether they end up being taken over by the Pension Benefit Guarantee Corporation. That could potentially add billions of unfunded liabilities on the PBCC and, ultimately, taxpayers. This is another important fiscal issue affecting companies, employees, airline customers and taxpayers.

No doubt these issues will be the source of heated debate during the next few years. Independent agents should stay apprised of the dialogue so they can help their clients deal with the outcome.

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

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L E G A L   A D V O C A C Y
ChoicePoint Seeks Court Approval for Settlement
of Class Action Lawsuit with Insurance Agents

Many insurance agents and state associations have recently received information concerning a proposed settlement by ChoicePoint of a class action lawsuit filed by and on behalf of insurance agents in Illinois state court in June 2002. On Aug. 8, 2005, the parties entered into a proposed settlement for that lawsuit. The court is required to approve the settlement before it can become final, the hearing for which is scheduled for Oct. 17, 2005. It is very common in settlements of litigation that parties agree that the defendant is not admitting any liability or wrongdoing, and ChoicePoint does not do so in this proposed settlement.

The case was filed as a class action lawsuit on behalf of all insurance agents and agencies that provided personal information regarding potential or actual insureds to ChoicePoint. The key issue in the lawsuit concerned ChoicePoint’s practice of creating and selling "lead lists" based on information from agent submissions or inquiries for CLUE or certain other underwriting information about actual or potential insureds ("inquiries") to ChoicePoint. ChoicePoint allegedly used inquiry information, including non-public personal information protected by Gramm-Leach-Bliley, to extrapolate likely expiration dates, sometimes called "shopping dates" by ChoicePoint, and append them to a marketing database of "leads" it created and maintained. ChoicePoint allegedly then sold the "leads" to insurance agents. In some instances, ChoicePoint is alleged to have sold certain leads to agents that were based on inquiries made by that agent. In effect, ChoicePoint was accused of selling the agent’s book of business either back to the agent (which the agent already owned) or to the agent’s competitors.

IIABA first became aware of this practice by ChoicePoint in late 2001. IIABA then had several discussions with ChoicePoint executives regarding this practice and met with them in early January 2002. On Jan. 14, 2002, IIABA’s general counsel received a letter from ChoicePoint agreeing to immediately discontinue the practice of creating "shopping dates" originating from agents’ submissions and to purge from its database historical "shopping dates" associated with transactions identified as originating from agent submissions.

The non-monetary obligations of the proposed settlement on ChoicePoint are that ChoicePoint will be precluded from using information obtained from agent inquiries for any purpose other than underwriting or what is allowed by Gramm-Leach- Bliley. ChoicePoint also will not be allowed to use in its marketing databases information from agent inquiries, unless agreed to by the agent. ChoicePoint also will have to purge its marketing databases of all information obtained from agent inquiries within five days of final approval of the settlement.

The monetary components of the proposed settlement include: 1) creation by ChoicePoint of a cash fund of up to $7 million for the benefit of qualifying class members (with the payments to each qualified class member calculated at $26.84 for each 1,000 submissions made between Jan. 1, 1997 and Feb. 28, 2002); 2) funding by ChoicePoint of "Redeemable Certificates of Value" with a total value up to $7 million to be issued to qualifying class members to redeem in exchange for certain prospecting services (valued for each qualifying class members at 15% of the total dollar value spent on lead lists between Jan. 1, 1997 and Feb. 28, 2002); 3) payment by ChoicePoint of $500,000 to two Illinois universities (in cy pres damages, which recognize that all qualifying class members may not be located so a payment is made to an institution considered to be serving the public good); 4) payment of up to $2,950,000 toward plaintiffs’ attorneys’ fees, costs and expenses, settlement administration costs; and 5) $10,000 to the remaining named plaintiffs.

If you received a proposed settlement notice in the mail, you should review it and your options carefully. The decision to participate or not participate in the settlement is an individual decision. You may accept the settlement if it is approved by filing the proper forms described for making a claim in the time period specified in the notice of the proposed settlement, object to the terms of the settlement by following the directions in the proposed settlement notice, or opt-out of the settlement and not be considered a part of the class or be eligible for any part of the settlement (by following the directions in the proposed settlement notice). IIABA created an Executive Summary on Class Action Notice Requirements for Settled Cases, accessible in the members-only Legal Advocacy section of www.independentagent.com under memoranda and FAQs. To access the proposed settlement agreement, click here. This link also contains important dates and forms important to potential class members.

For more information on the ChoicePoint settlement, contact Kathleen Graber, IIABA associate general counsel, at kathleen.graber@iiaba.net; 800-221-7917.

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