T H U R S D A Y ,   S E P T E M B E R   2 9 ,   2 0 0 5

Rita Packs a More Manageable Punch | Industry Meets Miss. AG’s Suit with Indignation | Connecticut AG Sues Marsh for Bid-Rigging | Scoop Up Clients Others Deem Too Small | OFC-ers Try to Use Hurricane Fallout to their Advantage | SEC Postpones Sarbanes-Oxley Requirements for Smaller Companies| Big "I" National News

H U R R I C A N E   U P D A T E
Rita Packs a More Manageable Punch
Hurricane season already costs insurers $70 billion.

Having learned a lesson from Hurricane Katrina’s unflinching destructive ways, residents along Texas and Louisiana’s Gulf Coast decided not to take any changes as Hurricane Rita hovered off the coast. Evacuees clogged highways and airports, anxious to escape the same fate dealt many New Orleans residents who tried to tough Katrina out.

As Rita storm stalled at sea, the Category 5 storm lost some momentum, eventually hitting slamming into Texas at 3:30 a.m. Saturday at Category 3 strength with 120 mph winds. The hurricane did not include Houston and Galveston in its direct path, as many analysts feared it would. While avoiding the worst-case scenario, Rita still inflicted its share of damage, leveling many small towns it hit.

AIR Worldwide Corp. estimates Rita caused between $2.5 billion and $5 billion in damages, a low number for a hurricane of its size because it hit mainly sparsely populated areas in Texas and Louisiana. EQAT, Inc., places damage estimates between $3 billion and $6 billion, a far cry from the $9 billion to $18 billion range it predicted last Friday when Rita had more strength and was poised to hit larger cities. Risk Management Solutions places the number between $4 billion and $7 billion.

"We expect to see significant damage to residential and commercial properties near and to the east of Rita’s track," says Dr. Jayanta Guin, AIR Worldwide’s vice president of research and modeling. Among the cities that experienced most affected by Rita: Beaumont and Port Author, Texas and Lake Charles, La.

"Hurricane Rita is comparable to last year’s Charley in that its damage is spread across a low-population-density region of agriculture and fishing-related industries," RMS meteorologist Kyle Beatty says. "There is also notable damage to offshore platforms, refineries and by-products industries of petroleum manufacturing."

While the estimates are nothing to sneeze at, many insurance analysts let out a sigh of relief that Rita was not the worst-case scenario it threatened to be. When you combine the high-end estimates of its damages with insured losses from Hurricanes Dennis, Katrina and Ophelia, "the 2005 hurricane season already has cost insurers as much as $70 billion, representing 17.5% of the U.S. insurance industry’s statutory surplus, or approximately two full years of statutory earnings," Fitch Ratings says in a statement.

Fitch also says that the storm most likely won’t cause any insurer insolvencies, but that it will "represent a material loss" to the industry and will strain insurers’ already-stretched claims-adjusting resources.

The companies with the largest combined personal/commercial property market share in Texas and Louisiana are:

State Farm Mutual Group 20.7%

Allstate Insurance Co. Group 11.7%

Farmers Insurance Group 7.6%

St. Paul Travelers Companies 7.6%

United Services Automobile Assoc. Group 4.4%

Combined Federal Insurance Co. & Affiliates 3.1%

Nationwide Group 2.7%

Zurich Insurance Co. Group 2.7%

Continental Casualty Group 2.6%

Vesta Fire Insurance Corporation 2.4%

As the industry starts to clean up after Rita, it continues to deal with Katrina. Mississippi Insurance Commissioner George Dale tells the Jackson, Miss. Clarion-Ledger that Katrina has resulted in more than 400,000 insurance claims in Mississippi, Alabama and Louisiana thus far.

According to a new Standard & Poor’s report, Katrina may be the most expensive event in insurance industry history. "Even the low side of loss estimates (about $35 billion) place it at almost twice the cost of the Sept. 11, 2001, attacks and more than Hurricane Andrew with insured losses (inflation-adjusted) of about $22 billion and the 2004 hurricane season with combined losses of $22.7 billion," S&P credit analyst Thomas Upton says.

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

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 V I E W :   P & C   T R E N D S
Industry Meets Miss. AG’s Suit with Indignation

Is Mississippi Attorney General James Hood simply doing his job of protecting Mississippi citizens by pursuing insurers with the legal doctrines of adhesion, proximate cause and/or concurrent causation? Or did this elected attorney general take his job description too far?

Hood filed suit against State Farm, Allstate, Nationwide and others on Sept. 15 seeking to void flood exclusions by arguing they are essentially bad for the common good. Perhaps longtime Hood associate---and tobacco and asbestos litigator---Richard Scruggs described the potential strategy best when he said, "I’d rather see an insurance company go broke than the tens of thousands of my friends and neighbors in Mississippi, Alabama and Louisiana go bankrupt."

The industry’s reaction is reminiscent of the 1980s when it watched in disbelief as California policyholders and their lawyers successfully used previously liability-only precedent to find coverage for flash floods and then landslides in their property policies. The policyholders argued that if multiple causes of a loss are present and some are excluded while others are not…you guessed it…the coverage is provided based on a non-excluded peril. Along with help from a long-time insurer nemesis, the principle of adhesion, this gave birth the doctrine of concurrent causation, effectively replacing the narrower requirement that causes of loss be a covered proximate cause of the loss.

The industry fought back in the California legislature and battled all the way to the California Supreme Court, resulting in industry-wide changes to standard property insurance policies. Eliminated from all our working insurance vocabularies was the concept of anything called "all risk," replaced by the less dangerous "special perils." Moreover, with those "special perils" forms came additional language now found on virtually every property insurance contract:

ISO Causes of Loss-Special form (HO 00 03 04)

We do not insure for loss caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

List of excluded perils including ordinance or law, earthquakes, volcanoes, landslides, flood, war, intentional loss and others.

While it should come as no surprise to industry watchers that people will try to find coverage in policies where there might be none, judging from the reactions, it was a big surprise that a state AG would lead the charge. The insurance industry now is seeing itself approached by policyholders getting coverage defined in two ways: concurrent causation when it suits plaintiffs with landslides and earthquakes and now reverting back to a doctrine of proximate cause when it does not (hurricanes).

Lending insights into the level of indignation insurers feel toward this approach is Bob Hartwig, chief economist of the Insurance Information Institute. "Any sort of move in this direction is an affront to the Constitution and sets a horrendous precedent," he says. "You cannot have a capitalist economy where contracts are ignored."

Indeed, in reading the Mississippi AG’s complaint and motion for temporary restraining order, you too may wonder where the AG is heading. Insurers acting to enforce legal contracts approved by the Mississippi insurance commissioner are now a "violation of public policy," "ambiguous" and "unconscionable?" Surely, others join Hartwig in wondering whether the AG has stepped over the Constitution’s Fifth Amendment against taking private property for public use without just compensation. Political scientists also, no doubt, will ponder if, as outlined by Karl Marx and Frederick Engles, we are simply watching a predictable result of more direct democracy. Perhaps state government officials are aiming to quickly please the voters who elected them.

Will Hood purloin one for the proletariat? Is this a blow to capitalism and our Constitution? It is hard to say but worthy of watching as no doubt the insurance industry is already planning its reaction. As this unfolds, we will keep watch and, of course, your Big "I" Technical Affairs Committee will be engaged as policy form changes inevitably are made by ISO and other standard setters.

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
Connecticut AG Sues Marsh for Bid-Rigging

Connecticut Attorney General Richard Blumenthal amended a previously filed complaint on Sept. 21 against Marsh & McLennan Companies, Inc., Marsh & McLennan, Inc. and Marsh USA Risk Services, Inc. d/b/a Marsh USA, Inc. (collectively "Marsh") alleging violations of the Connecticut antitrust laws, the Connecticut Unfair Trade Practices Act and breach of contract stemming from Marsh’s use and alleged abuse of Placement Service Agreements.

By way of background, Big "I" members no doubt recall that Marsh was the subject of a lawsuit filed Oct. 14, 2004, by New York Attorney General Eliot Spitzer involving PSAs. That lawsuit was settled in January 2005 with Marsh agreeing to pay $850 million in damages to certain policyholders in addition to agreeing not to accept contingent commissions.

The initial complaint filed on Jan. 21, 2005, by Connecticut Attorney General Blumenthal against Marsh alleged unfair trade practices in regard to an alleged undisclosed payment by ACE Financial Solutions, Inc. to Marsh for the placement of business involving the Connecticut Department of Administrative Services. To view an IIABA-prepared summary of that complaint, go to the Legal Advocacy page of www.independentagent.com.

The amendment to the complaint adds antitrust violations and alleges bid-rigging and steering by Marsh on insurance contracts purchased by Connecticut consumers, in addition to recasting the action against Marsh for the ACE/DAS transaction as a breach of contract action. Although the original complaint named ACE as a defendant, the amended complaint names only Marsh because ACE settled the allegations against it with the state of Connecticut for $40,000, according to a Sept. 22 press release from Blumenthal’s office.

The amended complaint alleges Marsh engaged in similar behavior and activity as was covered in Spitzer’s lawsuit against the firm, namely bid-rigging and steering insurance contracts to insurance companies purportedly paying Marsh undisclosed "kickbacks." The Connecticut amended complaint, like the New York litigation, alleges that Marsh sought fraudulent bids as "B-quotes" to artificially inflate the premiums paid to the preferred, and ultimately bid-winning, insurer. The amended Connecticut complaint also charges that the Marsh created the appearance of an open and competitive marketplace when it already had determined the successful bidder based upon the amount of commission generated from PSAs.

An important difference between the Connecticut amended complaint and the New York lawsuit and settlement is that the Connecticut case is seeking remedies only for Connecticut citizens. The examples used as the factual basis for the Connecticut amended complaint are limited to Connecticut companies, whereas Spitzer’s complaint referenced Marsh transactions in states other than New York.

While no insurance companies were named as defendants in the Connecticut amended complaint, several insurance companies were mentioned as having been involved in alleged improper activity, including AIG, Chubb, St. Paul Travelers and Zurich North America.

According to the Hartford Courant, the impetus for the amended Connecticut complaint stems from the fact that not all of Marsh’s Connecticut clients applied for fee reimbursements from New York’s settlement, and moreover, Blumenthal believes that the New York settlement failed to adequately compensate those that did apply. The Hartford Courant reported that Blumenthal found that less than half of Marsh’s Connecticut policyholders applied to the New York settlement fund. The press release issued by Blumenthal’s office lists many companies, non-profits and state and local governments and agencies that were working with Marsh and may be potential claimants to a settlement or judgment in this lawsuit.

To access a copy of the amended Connecticut complaint, go to the Legal Advocacy page of www.independentagent.com under "What’s New," "Producer Compensation: Legal and Business Issues."

For more information on the Connecticut amended complaint, contact IIABA’s associate general counsel, Kathleen Graber at kathleen.graber@iiaba.net; 800-221-7917.

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L & H   T R E N D S
Scoop Up Clients Others Deem Too Small

Morgan Stanley is pushing accounts with less than $100,000 to use call centers rather than talk directly with their advisors, according to this week’s Wall Street Journal. It’s not the only one---Merrill Lynch reportedly implemented a similar strategy years ago. There is nothing wrong with knowing the types and sizes of businesses needed to be profitable, but if this is a trend, it points to independent agents’ advantage of offering holistic products and services.

When investment brokerage houses look at the single client relationship’s potential revenue, they are limited to life-health commissions and investment management fees. However, a fully integrated independent agency can look to a variety of products revenues including auto, homeowners, umbrella liability policies, commercial coverages and other types of coverage.

Additionally, most agencies are located within a reasonable proximity of their customers, making it easier to serve them. Another advantage that independent agencies have over their competition is the opportunity to do worksite marketing at their commercial accounts. Worksite marketing affords agents the opportunity to provide insurance products to the employees of their accounts.

Today, fewer people actually meet with an insurance professional. With the Do-Not-Call law in effect, insurance agents no longer phone non-customers, and direct mail solicitations often go unheeded given the volume of junk mail. But the need for providers to ensure their families will be taken care of in the event of their disability or death is more important than ever. As major investment brokers raise the level of their target market, independent agents are well positioned to serve that marketplace. Captive agency companies such as State Farm and Nationwide consider financial services sales a key strategy to fuel growth, and so should you.

Many independent agencies’ Web sites list a bevy of financial services. But do agencies devote adequate agency resources to growing l-h books in a meaningful way? To achieve real growth, review compensation strategies, customer service support, technology and trained personnel on a periodic basis. Most independent agencies have a separate l-h producer who generates business through his or her contacts; that also invites account opportunities for the agency’s p-c producers. Build l-h goals and requisite incentives for p-c producers to encourage meeting the agency’s total production goals.

Fill the void that many financial companies created by targeting more affluent clients. Consumers respond favorably to having a choice in their other purchasing habits, and an insurance agent offering a variety of products is a sound solution to their needs. Make sure your agency is part of the equation by focusing on l-h and other financial services.

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

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O N   T H E   H I L L
OFC-ers Try to Use Hurricane
Fallout to their Advantage

Capitol Hill is feeling the fallout from the Gulf Coast hurricanes as some groups use the afternmath to support a number of dubious legislative solutions.

News items in recent days reported a renewed push for an optional federal charter (OFC) with the hurricane fallout used as justification.

A Sept. 19 article in the Life & Health/Financial Services edition of National Underwriter says that a Republican Louisiana state legislator had made a case for OFC on the grounds that state catastrophe funds and private solutions may not be enough to encourage insurers to write business in her area. The article notes her opinion that OFC "could make it possible for companies to more easily write businesses in many states, diversify their risks, and thus, be more willing to write business in states like Louisiana."

The legislator’s statement is only one of the more recent events in a ramped-up effort to advance OFC proposals at all levels. OFC supporters worked hard to bring a bill to the Senate floor since federal regulation is getting no traction in the House of Representatives. In the House, Financial Services Committee Chairman Mike Oxley (R-Ohio) remains adamantly opposed to federal regulation and committed to the State Modernization and Regulatory Transparency (SMART) Act supported by the Big "I" and the overwhelming majority of independent insurance agents and brokers. So the Senate is the locus of action on OFC, where Sens. John Sununu (R-N.H.) and Tim Johnson (D-S.Dak.) are expected to introduce a federal regulation bill.

The Big "I" government affairs team will work hard to educate federal legislators on this issue and will continue efforts to move the SMART Act forward in the current Congress.

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

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O N   T H E   H I L L
SEC Postpones Sarbanes-Oxley
Requirements for Smaller Companies

On Sept. 21, 2005, the SEC extended the compliance date for internal control reporting required by Section 404 of the Sarbanes-Oxley Act (SOX) for publicly traded companies with less than $75 million in market capitalization until the company’s first fiscal year ending on or after July 15, 2007.

SOX, passed in the wake of the Enron, WorldCom and Tyco scandals, put into effect financial checks and balances which, among other things, require public companies and their auditors to report on the effectiveness the company’s internal controls. Section 404 of SOX requires that publicly traded companies’ annual reports contain an internal control report to: "1) State the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and 2) Contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting." In addition, each public accounting firm that prepares an audit report for a covered publicly traded company "shall attest to, and report on, the assessment made by the management" of the company. According to SEC Chairman Christopher Cox, the requirements of Section 404 "have posed the single biggest challenge to companies under the [SOX] and have imposed the greatest costs."

This is the second time the SEC has extended the deadline for smaller public companies. The extension provides the opportunity for the SEC to consider input from an advisory committee it created in 2004 to examine the impact of Section 404 on smaller publicly traded companies.

IIABA’s Federal Government Affairs Department, with input from the Office of the General Counsel, lobbied the SEC on this issue to grant the extension. We will continue to monitor and weigh in on significant developments relative to this issue as they arise.

To see a copy of the Final Rule extending the compliance dates and detailing the proposed amendments, log in as a member to www.independentagent.com, go to the Legal Advocacy page and select "Sarbanes Oxley" under "What’s New."

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

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