T H U R S D A Y ,  O C T O B E R   4 ,  2 0 0 7 

Big “I” National News

P&C Trends

A Pulse on P-C: Personal Lines
Taking the temperature of personal lines.

The property-casualty industry as a whole is performing well in 2007 with the industry’s net income after taxes up 10.7% to $32.6 billion in the first half of the year, according to a recent report by ISO, and personal lines are likely to follow suit baring any major events in the fourth quarter.

Last year, net written premiums for personal lines faired well, totaling $216.3 billion at year end, according to the Insurance Information Institute (III), and this year is shaping up to provide similar results.

In 2006, net written premiums totaled $447.9 billion with the top two lines, auto and homeowners, generating $160.45 billion and $55.82 billion, respectively. Those lines are expected to turn in profitable results again in 2007, according to III President Bob Hartwig.

“You have the weakening pricing environment for auto insurance and that accounts for one-third of all industry premiums… the results are very good right now and are likely to remain that way,” he says. “The same with homeowners---with a lack of catastrophe losses, the industry is turning in profits for the first time in years.”

Roy Donaldson, Select Division manager for Fitts Agency, Inc. in Tuscaloosa, Ala., handles personal lines and small commercial lines for the agency, which represents approximately 25,000 insureds. The agency writes approximately $36 million in business every year, $6 million of which is in personal lines. According to Donaldson, personal lines are doing very well compared to their commercial counterparts.

“Personal lines…has had little attention over the last few years, but this year is getting attention,” Donaldson says. “Growth is expected, but may be slow in the beginning…pricing is somewhat soft in commercial lines; personal lines has responded with more aggressive production with less concentration on price decreases.”

While personal lines are poised to be profitable in 2007, the industry isn’t in the clear just yet. With two months left in hurricane season, the potential for an upset is still present. Since 1954, 10 hurricanes have hit the United States during the fourth quarter according to ISO, and personal lines claims are typically the most affected by storms. Last year, insurers paid an estimated $8.8 billion to cover catastrophes, which generated 2,272,000 claims for damage to personal and commercial properties and vehicles, according to ISO’s Property Claims Services and personal lines claims accounted for 58% of the total.

Editor’s note: This is the second installment of a three-part series examining the state of the p-c industry. Next week, IN&V will look at how commercial lines are fairing in 2007. Click here to read the first installment, “Pulse on P-C: By the Numbers.”

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

In the States

ChoicePoint Sued for Misusing Insurance Agent Information
Class-action lawsuit renews questions about prominent data company.

A class-action lawsuit recently filed in a Los Angeles federal district court alleges that ChoicePoint, a national data provider and an increasingly important player in the insurance industry, is misappropriating information provided by insurance agents and selling it to potential competitors. The lawsuit was filed on Sept. 19 by two California insurance agents and asserts several different legal theories. 

ChoicePoint has faced similar allegations concerning its use of agent-provided data in the past. The company has been dogged by ongoing complaints that it created and sold “lead lists” based on information obtained from agent submissions and inquiries, and critics have complained that ChoicePoint then sold this information as “leads” to other agents.  In a January 2002 letter to IIABA, the company agreed to immediately halt the practice of creating “shopping dates” developed from agent submissions and to purge its databases of all such information, but questions about ChoicePoint’s practices have persisted.

In June 2002, for example, a group of insurance agents sued ChoicePoint in Illinois state court, claiming that the company received confidential information provided by agents in connection with the underwriting of a policy and used that data to create prospecting lists that were later sold to the agents’ competitors. Although ChoicePoint denied any wrongdoing, it entered into a sizable financial settlement that also required the company to agree not to use information obtained through agent inquiries for any purpose other than underwriting the policy in question. More recently, a highly publicized security breach at ChoicePoint resulted in large fines and settlements with the Federal Trade Commission and more than 40 state attorneys general. 

The allegations made in the newest California case are similar to assertions that have been made against ChoicePoint in the past. Once again, the agents in this latest case allege that they provided ChoicePoint with confidential, proprietary and trade secret information --- including policy expiration and renewal data and other client-specific information --- and that the company later sold it to other parties, including competitors of the agents. In addition to seeking a variety of financial remedies, the plaintiffs have also requested court orders prohibiting the further misappropriation of agent information and mandating the return of all trade secret information previously provided. ChoicePoint has denied the allegations made in the initial court filings. 

A copy of the Sept. 19 compliant can be obtained by clicking here.

Wesley Bissett (wes.bissett@iiaba.net) is Big “I” senior counsel, government affairs and state relations. 

Producer Compensation Issue Update

Victory for Insurance Brokers, Carriers
New Jersey court judge dismisses claims of racketeering.

On Sept. 28, a New Jersey federal court judge handed an important victory to insurance brokers and carriers in the consolidated federal litigation in New Jersey arising from allegations of bid-rigging and steering. The victory was a dismissal of all claims of racketeering, without a possibility of refiling them. Racketeering is simply a series of unlawful activities by a structured group of companies or individuals designed to make a profit for the group.

The New Jersey federal court case is a class-action brought by policyholders in the wake of the investigation into claims of bid-rigging and steering by former New York Attorney General Eliot Spitzer. The plaintiffs alleged that carriers engaged in racketeering and violations of the antitrust laws. More specifically, the defendants were alleged to have suppressed and eliminated competition in the insurance industry through joint action which used contingent commission to facilitate kickbacks and bid-rigging to steer clients to purchase insurance from preferred insurers and to obtain fictitious quotes to guarantee certain insurers would “win” the bidding competition.

The antitrust claims were dismissed by the court earlier this year. But the allegations of racketeering were still pending until last Friday when they, too, were dismissed. The court determined that there were no facts to support the contention that each carrier was aware that it was part of a jointly executed conspiracy for the benefit of the group. The court concluded that: “Rather, it appears that insurer-defendants . . . were seeking to benefit themselves only and neither intended nor created any interdependencies amongst themselves.” Likewise, the court found that the broker-defendants made “unilateral ad hoc decisions based, effectively, on each broker-defendant’s conclusions as to which particular [incentive] among the many offered by insurer-defendants would be preferable to the broker-defendant in each particular situation.”

The court also noted the “logic” in defendants’ explanation that “first look” and “last look” arrangements actually promote competition between insurer-defendants, and thus are inconsistent with plaintiffs’ argument that the carriers worked toward achieving the type of a “common goal” required for racketeering. The court concluded instead that the factual claims by plaintiffs were merely a number of unrelated transactions and did not show there was any racketeering.

With the antitrust claims having been dismissed earlier this year, and the racketeering claims dismissed as of Friday, very little is left of the plaintiffs’ complaint. The court whittled more away from the lawsuit by deciding that it had no jurisdiction over the state law claims, so the rest of the complaint involving the commercial property-casualty insurance carriers and brokers also was dismissed. What remains are federal law questions involving ERISA for certain defendants named in a related employee benefits complaint.

Under the court’s ruling, the plaintiffs cannot amend their complaint to try to revive the racketeering or federal antitrust claims. They can try to amend their complaint to show how the court may still have jurisdiction over the state law claims, but it is uncertain if they will try to do so or to appeal this decision to the federal court of appeals.

After the decision was released, Marsh McLennan said, “We are very pleased that the federal court has dismissed, with prejudice, all of the federal antitrust and [racketeering] claims asserted against Marsh and other industry participants. This decision represents a major step forward for Marsh.”

The decision was a positive development for the industry. By putting to bed some claims of very serious misconduct by the insurance industry, it served as another in a series of markers demonstrating that the industry has been unfairly tarred and feathered. It is unfortunate that unsupported claims of illegal conduct can so easily be made and become front-page news, and the dismissal of them as baseless gets little attention. The collateral damage to the industry from the many headline grabbing allegations that have proven to be untrue is still to be measured as we undertake the important work of restoring the industry’s reputation and enhancing the public perception of the insurance industry.

For more information about producer compensation issues and to view the decision, log in as a member to www.independentagent.com, go to “Legal Advocacy” and select “IIABA/Industry Information and News” or contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

On the Hill

House Committee Reviews Regulatory Reform
Florida agent testifies on need for change.

The Big “I” testified yesterday before a hearing of the House Committee on Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises on insurance regulatory reform.

Alex Soto, CPCU, ARM, president of Miami-based InSource, Inc. and Big “I” immediate past chair of the board, testified on the importance of insurance regulatory reform. On behalf of the Big “I,” he thanked Chairman Paul Kanjorski (D-Pa.) and Ranking Member Deborah Pryce (R-Ohio) for holding a hearing on this important issue.

Soto expressed the Big “I” support for the state system of insurance regulation, but acknowledged there are inefficiencies in today’s regulation of insurance. He stated that the system needs to be modernized and that reform should be accomplished through targeted federal legislation.

“As we have for over 100 years, IIABA supports state regulation of insurance---for all participants and for all activities in the marketplace---and we oppose federal regulation, optional or otherwise,” Soto said. “Yet despite this historic and longstanding support of state regulation, we do not believe the state system can effectively address its problems on its own.”

Soto outlined IIABA’s ideas on how federal legislative action could reform the state regulatory system and how two overarching principles should guide such efforts. First, Congress should attempt to fix only those components of the state system that are broken. Second, no action should be taken that in any way jeopardizes the protection of the insurance consumer, which is the fundamental objective of insurance regulation and of paramount importance to the Big “I” and its members.

“Rather than employ a one-size-fits-all regulatory approach, a variety of legislative tools could be employed on an issue-by-issue basis to take into account the realities of today’s marketplace,” Soto said. “This can be accomplished through enactment of a number of bills dealing with particular aspects of insurance regulation starting with those areas in most need of reform where bipartisan consensus can be established.”

Soto pointed out that such targeted legislation has already passed the House of Representatives, referring to H.R. 1065, the Nonadmitted and Reinsurance Reform Act of 2007, introduced by Reps. Dennis Moore (D-Kan.) and Ginny Brown-Waite (R-Fla). He stated that this model, federal legislation modernizing state regulation, can be used to reform other aspects of the insurance market. Soto specifically mentioned that problems independent agents and brokers face in the licensing process could be addressed through targeted federal legislation.

“The current licensing system is cumbersome, confusing, burdensome and time-consuming, and it hinders the ability of agents and brokers to responsively address the needs of insurance purchasers,” he said. “Targeted federal legislation that would ensure a completely reciprocal and/or uniform licensing process for agents would provide a more competitive insurance market and improve the state-based system of insurance.”

Finally, Soto reiterated the strong Big “I” opposition to optional federal charter proposals. He stated that creating an optional federal regulator is at odds with one of the primary goals of insurance regulation, which is consumer protection.

“Currently, when my customers are having difficulties with claims or policies, it is very easy for me to contact a local official within the state insurance department to remedy any problems,” Soto said. “If insurance regulation is shifted to the federal government, I would not be as effective in protecting my consumers. I have serious reservations that a federal bureaucrat will be as responsive to a consumer’s needs as a local regulator.”

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

L&H Trends

IRS Postpones Deferred Compensation Plan Document Compliance 
Plan delayed for another year.

Every advisor who deals in the qualified retirement plan market---401(k) plans, defined benefit pension plans and ESOPs---is aware of the requirement to maintain the plan document in accordance with the IRS and DOL’s rules. Since Congress changes laws fairly regularly, there is almost a bi-annual amending and/or restating of the plan document. However, the requirements for compensation plans’ provisions and document filings with the IRS have never been as complicated as retirement plans. As a result, many agents who sell life insurance policies that are used as a vehicle to fund deferred compensation plans need to be aware of the new regulations.

But everything changed when the IRS began requiring all plans subject to the provisions of IRC 409(a) be amended for compliance. In April, the IRS issued final 409A regulations, which provided guidance on the requirements for deferral elections and payment timing of deferred compensation arrangements under section 409A. As a result, affected plans and related arrangements were required to comply with the final regulations by Dec. 31. Now IRS Notice 2007-78 extends the document compliance deadline for another year and provides additional limited transition relief, but does not extend the Jan. 1, 2008, effective date of the final regulations. This means sponsors of deferred compensation plans have an additional year to get their plan documents in compliance, but the election/deferral forms must be completed prior to Jan. 1, 2008.

Notice 2007-78 also announces that the IRS anticipates issuing guidance containing a limited voluntary compliance program that will permit corrections of certain unintentional operational violations of section 409A. The final regulations were in response to legislation Congress enacted in 2004 to address concerns involving reported abuses of nonqualified deferred compensation plans. Agents should make sure that their clients have had their agreements reviewed by legal counsel and the insurance company that provides the life insurance policy. If changes are required to the deferred compensation plan, the compensation committee of the board of directors typically must discuss remedies. Since these groups meet infrequently, agents should make sure that their clients are positioned to have changes made prior to the compliance deadline.

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