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Big “I” National News

Legal Advocacy
Big "I" Takes Legal Action in Zurich Case
Brief voices concerns on agent burdens, market share test.

The Big "I" filed an amicus brief today in litigation pending in federal District Court in New Jersey expressing concerns over certain terms of the proposed settlement for Zurich of its involvement in a class action lawsuit arising out of the producer compensation issue. The brief focused on the issue of disclosure, and the burden imposed on agents by the settlement agreement entered into by Zurich in March 2006 with insurance regulators mandating that agents provide insureds with the company’s compensation disclosure form.

The brief affirms that the Big "I" supports transparency in insurance transactions, and states that the company should be responsible for making its own disclosures. It also explains that agents should be able to determine how to tailor their communications with customers to the specific needs and requests of their customers. This allows them to deliver complex information about choices of coverage, price, service, breadth of coverage, claims service, carrier financial strength, compensation and whatever else is of important to the consumer, in a useful way.

"Rather than involve independent brokers and agents in the implementation of the Zurich Settlement, [Zurich] should provide their Mandatory Disclosure Form directly to their insured." This delivery method would result in allowing Zurich to consistently control the process. It also would eliminate difficult monitoring and enforcement issues—it would be more effective for the court to directly monitor and enforce compliance with Zurich than with thousands of agents and brokers who are not necessarily under the court’s jurisdiction.

The brief goes on to explain that if other carriers follow Zurich’s lead and also require agents and brokers to deliver written disclosures about compensation, consumers will be inundated with forms and end up being more confused. "This entirely frustrates the purpose behind disclosure, which is transparency to promote greater consumer understanding of the insurance transaction and its costs."

In addition to the disclosure issue, the brief also explains why the inclusion of the 65% test in the so-called Three-State Agreement between Zurich and the Attorneys General of New York, Connecticut and Illinois is potentially harmful to agents. "IIABA opposes the Three-State Agreement’s potential limitations on incentive compensation. If these limitations are put in place, it will harm consumers because it will make it more difficult for smaller-sized agents to remain in business, which will in turn decrease competition and lead to higher process….Ultimately, it is not for Attorneys general to determine whether carriers should be permitted to offer incentive compensation or how it should be disclosed to consumers."

To read the entire Big "I" amicus brief, click here, and log in with your Big "I" user name and password. Then click "IIABA/Industry Information & News" and then "IIABA Amicus Curiae Brief" to download the brief.

Why did the Big "I" decide to act on this issue now? This is the first time any court is considering a settlement with terms that burden agents as described above. The next hearing (in a complex procedural process) is scheduled for Monday, and IN&V will keep you up to date on further developments in the case.

The amicus brief is one of many proactive steps the Big "I" has taken to represent the interests of independent agents and brokers on producer compensation in the media, with regulators and with carriers. For more on the association’s comprehensive advocacy approach to this issue, look for the special section on producer compensation in the October edition of IA.

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

P&C Trends
Contradicting Disaster
Americans favor better public policy for natural disasters, but lack preparedness at home.

In the wake of last year’s Hurricane Katrina, many consumers are advocating for better public policy when it comes to mitigating the damage caused by catastrophic natural disasters, however most aren’t following suit when it comes to their own homes.

According to "Public Attitude Monitor 2006, Issue 1, Natural Disasters," a recent Insurance Research Council (IRC) report,   nine out of 10 American consumers support the adoption of better building codes in order to make new construction safer and able to withstand stronger storms. The IRC’s report is based on a survey conducted by Harris Interactive of 1,400 members in its online panel.

Out of those surveyed, 70% say they favor the adoption of laws and regulations restricting the construction of new homes in disaster-prone areas such as costal regions. Two-third (67%) of respondents also say they would support the new codes even if it meant a 6% increase in cost.

However, the study finds that only 26% of those surveyed say they are personally prepared for a natural catastrophe in their community.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute, believes many consumers do not have their priorities straight.

"It’s absolutely inconsistent," he says. "Over the past two years, the average home price in Florida has increased by 40% to 60 % and people have been more than willing to get into bidding wars to pay even more despite the fact that it’s been hit by six major hurricanes over the past two years. They will pay $50,000 to $100,000 more for the exact same home, but aren’t willing to pay a couple hundred dollars extra to insure it."

Despite last year’s record-breaking storm season, many people have not been proactive about securing the appropriate insurance. While 96% of homeowners and 46% of renters do carry homeowners or renter’s insurance, only 21% of them have flood insurance, according to the report.

"It’s amazing that more people have not bought flood insurance policies following Katrina," Hartwig says. "There was only a 10% increase in flood insurance policies after the storm, but 90% of people saw media coverage of Katrina. No ad campaign could have been more effective than what happened, yet many people will still decide not to buy it."

When asked why they don’t opt for flood or earthquake insurance, the majority of those surveyed cite cost. However, many people also were confused about whether they were in an area prone to disasters.

"People believe they don’t need it for variety reasons, but the No. 1 reason is a misconception of risk," Hartwig says. "People hear one-in-100-year [occurrence of a] flood or one-in-250- year [occurrence of an] earthquake and they interpret that as it won’t happen for 100 or 250 years. That is an incorrect interpretation. If you were to own a home for 30 years and there was a chance of a one-in-100-year flood, there would be a 30% risk of a flood."

The assumption that the government will take care of the public if a disaster does happen is another common consumer misconception. Post-Katrina, the government set a precedent, leading the uninsured to think they will be taken care of, according to Hartwig.

"There is confusion on the part of consumers because what the proposed government catastrophe plan is expected to do is create a reinsurance facility for mega disasters and do it in a way so that there is no adverse impact on tax payers," he says. "What some people believe is that this is a way for the government to subsidize certain losses and that is not what the Federal Catastrophe Plan is. Anybody who is expecting the plan to result in a free ride is wrong."

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



P&C Trends
Insights on Managing Capital and Cycles
Carriers, agents discuss trends and issues during New York Times insurance roundtable.

How will carriers continue to manage their capital in the face of a shrinking reinsurance market? Is the industry about to embark on a cash-flow underwriting cycle? 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 two in a three-part series highlighting some of roundtable’s key discussions:

Bill Mullaney, MetLife Auto & Home president and CEO: Managing your capital is one of the biggest things that anyone running an insurance company has to be worried about. You look at where you’re going to deploy your capital and the rate of return. At the same time, you have to look at the amount of risk you can take in any one area because our business is so geographically dependent.

I know that we’ve been looking for a number of years at our concentrations—it’s not so much an outgrowth of what’s happened in the past two years. I think that has heightened our focus on it. It’s been especially important given some of the changes to the modeling systems that we might incur from a loss perspective and having gotten the experience from the last two year’s storms.

The numbers that they are coming out with in the new models are significantly higher than what we had in the old models and you’re seeing that with reinsurance. You can certainly supplement that with reinsurance but it’s getting more expensive. And we’re seeing companies that up until now didn’t reinsure very much are all of a sudden deciding that they want to reinsure a much greater percentage of their risk, which is eating up the available capital and driving up the price.

Bob Rusbuldt, Big "I" CEO (moderator): It’s interesting that a lot of independent agency companies have complained about those companies not having reinsurance. But now those companies do have reinsurance and it’s sucking the air out of the market for reinsurance and has had effects we might not have contemplated.

Mullaney: And they’re buying reinsurance at a time when reinsurers are trying to manage their capital appropriately and therefore there is not as much capacity as there has been in the past. There is concern about whether we’re in a more active weather cycle. Couple that with people who haven’t bought reinsurance before wanting to buy it in pretty sizable quantities, put it together and what you get is a tremendous amount of upward pressure on the market.

Rusbuldt: We’re seeing interest rates steadily going up, and all of us remember the cash flow underwriting days where the premium dollar was chasing that almighty greater return. Is it possible that our industry might enter another cash flow underwriting cycle or does that seem unlikely with interest rates going up?

Tom Van Berkel, Main Street America president and CEO: It’s certainly possible, even with interest rates going up. Our investment yield is still pretty paltry in comparison to what it was seven or eight years ago, and I think the successful companies still realize that to be able to generate acceptable returns in the 13% to 14% range, you’re still going to have to have a combined ratio in the mid 90s, maybe even lower. We’re certainly enjoying some higher yields but it wasn’t what it was before.

Rusbuldt: The reason I ask that question is because there was recently a survey of 100 insurance executives polled by S&P to ask what they thought was the biggest single risk facing the insurance industry, and the No. 1 was "irresponsible underwriting by companies to increase market share." That is the old "cash flow underwriting," so the reason I ask that question is that your colleagues believe that is the biggest threat to the industry---chasing that almighty interest rate of return. If we get into that cycle again, the long-term effect on the industry would be disastrous.

Van Berkel: I think irresponsible underwriting is already taking place but I’m not sure those carriers are banking on investment income to supplement it. I think a lot of those carriers think they are underwriting better---different modeling techniques, etc. We’re having a really difficult time hitting our growth objectives because it is definitely getting soft out there.

To read more commentary from the roundtable, read "All the Insurance Trends Fit to Print" in the September issue of IA.

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



On the Hill
Surplus Lines Bill ‘First Step’ in Licensing Uniformity
Big "I" president testifies before Congressional subcommittee, supports H.R. 5637.

Big "I" President Alex Soto testified Tuesday before a subcommittee of the House Judiciary Committee that a recently introduced surplus lines bill is a crucial first step in uniformity in producer licensing.

Soto, who is also president of Miami-based In-Source Inc., commended H.R. 5637, the Nonadmitted and Reinsurance Reform Act of 2006, as the right approach. He thanked the bill’s sponsors, Rep. Ginny Brown-Waite (R-Fla.) and Rep. Dennis Moore (D-Kan.), and also thanked Rep. Richard Baker (R-La.), chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, for his work.

"The IIABA supports the Nonadmitted and Reinsurance Reform Act of 2006," Soto testified. "IIABA believes that this legislation is an excellent example of a pragmatic reform approach that utilizes targeted, federal tools to improve the state-based regulatory system. We are also hopeful that this approach will be used in the near future to facilitate additional reforms in the state-based system of insurance regulation."

Soto noted that the legislation singles out two areas—surplus lines regulation and reinsurance supervision—where there is general consensus for early action, and that independent insurance agents and brokers play a crucial role in surplus lines (or nonadmitted) insurance, which provides coverage for unique or hard-to-place property/casualty risks.

"IIABA believes that continued state supervision of this market is necessary to ensure that the nonadmitted marketplace continues to function as the ‘safety valve’ for the overall insurance market for hard-to-place risks," Soto said. "Nevertheless, the current state-based regulatory scheme is burdened by inefficiencies that disrupt the nonadmitted marketplace with respect to the allocation and remittance of premium taxes, licensing of nonresident surplus lines brokers, and duplicative regulation of the nonadmitted market generally."

Soto also testified that premium tax allocations vary significantly from state to state, and that the lack of a universally applicable allocation formula for multistate risks and sufficient guidance on which states’ laws apply to multistate surplus lines transactions creates confusion and conflicts. These inefficiencies and expenses ultimately impact policyholders as well as producers.

"IIABA supports the Nonadmitted and Reinsurance Reform Act of 2006 because it eliminates this confusion," Soto testified. "Under the bill, a surplus lines licensee (the broker accessing the nonadmitted market) need only remit premium taxes to the home state of the insured, and if requested, a report of the location and insured values of properties and risks by states covered under the policy being placed."

Soto also noted that the bill streamlines surplus lines regulation by making the insured’s home state the source of regulation for individual surplus lines transactions. He added that the bill’s second title would seek to reduce overlapping, multiple-state regulation of both reinsurer financial condition and credit-for-reinsurance on the balance sheets of ceding insurers. This is important to the Big "I" due to its reaffirmation of state-based regulation.

"While IIABA is less directly concerned with this title, except to the extent some of our members serve as brokers of outward reinsurance programs, we nevertheless note and applaud that this reinsurance title also seeks to retain and improve state regulation rather than create a federal regulator."

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



P&C Trends
Csiszar Resigns as PCI President, CEO

Property Casualty Insurers Association of America (PCI) President and CEO Ernie Csiszar will resign from the organization as of Sept. 30. Csiszar joined PCI in September 2004.

According to a PCI press release, Csiszar plans to pursue a variety of personal and professional interests following his tenure at PCI.

"I've been a lawyer, a college professor, an investment banker, an insurance company CEO, a regulator and a trade association executive," he says. "And I've enjoyed each phase of my career. I plan to continue to work within the financial and insurance industries. I leave PCI in the capable hands of a strong board and a talented staff."

"Ernie has been a long time leader in our industry, serving in many different capacities," says Big "I" CEO Bob Rusbuldt. "He is a friend of independent agents and brokers, and I know he will continue to be involved in the insurance industry in one capacity or another. We all wish him the best in the future."

PCI says it will immediately start searching for a new CEO. Its board of governors appointed June Holmes, PCI’s current chief operating officer, to serve as its interim CEO.



Legal Advocacy
GEICO Pulls Misleading Ads in Connecticut at Urging of Attorney General

Last week, GEICO insurance company, at the urging of Connecticut Attorney General Richard Blumenthal, agreed to pull ads that Blumenthal said were possibly false and misleading. The ad at issue is a television commercial that shows actress/musician Charo appearing with a GEICO customer who claimed that GEICO repaired his car within a few days.

Blumenthal said that the ads could give consumers the impression that GEICO was actually repairing cars directly. Under Connecticut state law, only entities with a motor vehicle repair license may repair cars. GEICO does not have such a license. GEICO is also prohibited under Connecticut state law from steering customers to preferred auto repair shops.

In a Sept. 13 letter to GEICO urging the company to stop the ads, Blumenthal said the ad could be a violation of the Connecticut Unfair Trade Practices Act. Two days later, in announcing that GEICO had agreed to stop running the ad in Connecticut, Blumenthal said "Ditching this disingenuous ad is a victory for consumers---and a better business practice for GEICO.

"This incident should send a message that higher standards in insurance industry dealings are appropriate and necessary," he continued.

The Auto Body Repair Association of Connecticut alerted Blumenthal to the ad.

This decision by GEICO only applies in Connecticut. It is unknown if the commercial will continue to appear in other markets.

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