T H U R S D A Y ,   O C T O B E R   6 ,   2 0 0 5

 Big "I" National News

V I E W :   H U R R I C A N E   U P D A T E
Katrina Losses Could Exceed
10% of Industry Surplus
Individual insurer impact uncertain.

All the insurers and reinsurers’ press releases on estimated Hurricane Katrina losses provided the perfect opportunity to rip open the box on my desk containing the new A.M. Best’s "2005 Aggregates & Averages." The annual arrival of this 600-plus page books is always a welcomed event because, unlike its better-known cousins the "Key Rating Guide," Aggregates & Averages provides useful industry figures like average commissions by type of coverage, company expense ratios, premiums by state, etc.

I wondered if insured losses from Katrina do reach $60 billion, what will the impact be on the overall industry surplus or cushion that protects individual insurers from unexpectedly high losses in any one year. As you can see from the chart below, the total U.S. property-casualty policyholder surplus is just over $400 billion.

° Source: A.M. Best’s "Aggregates and Averages"

* As reported by Business Insurance

The columns to the right of the "U.S. P-C Surplus" is the range of industry loss estimates from RMS and EQECAT, the two main catastrophe/risk modeling firms, as well as the best estimate of insured losses recently released by the Insurance Services Offices. For comparison purposes, the previous largest insured catastrophe, Hurricane Andrew, is provided in 2005 dollars. As you can see, depending on the loss estimate and how much of the losses are insured by U.S. domiciled insurers, potentially 10% of industry surplus could be used to absorb Hurricane Katrina losses.

The column to the farthest right needs some further explanation. The figure "insurer reports" is the total of all figures released by individual insurers for pre-tax losses expected to arise from Hurricane Katrina. It includes loss estimates from big reinsurers Lloyds, AIG, Swiss Re and Berkshire but also anyone else that issued a press release printed in Business Insurance. As you can see, if losses end up being $35 billion or higher, there may be another $20 billion to $40 billion still to be claimed by individual insurers.

Where does this leave the industry? At this point, it is very hard to say for sure. The difference between the losses estimated and announced by individual insurers so far, however, and the potential $20 to $40 billion additional losses to come, tells me there are many more companies that still need to reconcile their loss exposure to Katrina. The outcome of that calculation remains to be seen.

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

H U R R I C A N E   U P D A T E
Katrina Now Ranks No.1 Costliest Natural Disaster

To no one’s surprise, Hurricanes Katrina now officially accounts for the costliest natural disaster in U.S. insurance industry history. Having already surpassed Hurricane Andrew’s mark, the industry is holding its breath as the initial numbers continue to climb upward.

On Tuesday, the Insurance Services Office announced that insured losses associated with Hurricane Katrina total $34.4 billion to date. 1992’s Hurricane Andrew, previously the most costly natural disaster, caused an inflation-adjusted $20.8 billion in damages. And that official number is expected to increase. According to AIR Worldwide, flooding and storm surges caused an estimated $44 billion worth of property damage in Louisiana, Mississippi, Alabama and Florida.

"Even now, more than a month after Katrina first made landfall, no one can claim a definitive understanding of all the ramifications, which are not just financial and economic but also political and social," says a new S&P report compiled from an analyst conference call on the matter.

The domestic personal and commercial lines sectors will be affected by the hurricanes, but S&P believes they still have stable outlooks. The reinsurance sector, however, now garners a negative outlook.

Of the 88 insurance and reinsurance entities S&P covers, its says only 13 "might bear a disproportionately large share of estimated losses" and their ratings are now on CreditWatch with negative implications.

On the commercial lines side, "these storm losses could…harden prices, which have been softening at a double-digit rate for the past few years," the report says. "We don’t know yet, however, if rate increases will be restricted to catastrophe-exposed coastal areas or if they will be general in nature."

For personal lines, the report says the two hurricanes are forcing the industry to deal with an unprecedented and complicated range of claims. "Although industry capital seems, for now, to absorb current estimates of the combined losses, the increasing frequency and violence of large-scale events, coupled with the increase in population along America’s coasts, means huge catastrophe losses in personal lines could be more likely going forward."

With forecasters predicting increasingly aggressive weather patterns in the years ahead, S&P foresees the insurance availability and affordability of homeowners insurance shrinking.

The reinsurance sector will feel the hurricanes’ sting the most. "Katrina, a very sizable event, will cause a significant number of catastrophe reinsurers to lose earnings for a year or more," the report says. "A loss of this scale should undoubtedly lead to improved prices. In January 2006, we expect sizable rate increases for property catastrophe reinsurance and retro programs."

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

L & H   T R E N D S
Change the ‘Charge It’ Cultural Attitude

Can you explain how America has twice as many people as Japan, but 23 times as much credit card debt---more than $800 billion? Much of the reason is cultural attitudes towards debt. America is exceedingly comfortable with debt, particularly consumer debt, whereas Japan is not.

It wasn’t always this way. Americans born prior to World War II remember Great Depression and one of its root causes---widespread speculation about the stock market and the use of borrowing, a.k.a. leveraging, to ride on the stock market boom. Hence, two generations ago, consumer spending attitudes dictated that is was more prudent to save before purchasing an appliance or other labor-saving device.

Today, in addition to large mortgages and burgeoning college loans, Americans have gigantic consumer debt. From a financial planning perspective, while it is acceptable to borrow to invest in a business or a home (within reason), large consumer debts run up on higher interest rate credit cards threatens the borrower’s long-term health.

Too many consumers confuse wealth and liquidity, i.e. appreciation in the value of their home. Their personal balance sheet appears healthy in comparing assets and liabilities, but they have leveraged their one meaningful asset, their home, by taking out home equity loans on that appreciation. A downturn in the market caused by rising interest rates can punch a devastating hole in that strategy. Recent college graduates---who don’t have equity in a home but have plenty of school loans---may never be able to take advantage of home ownership in the hottest housing markets.

What is the lesson for independent agents? When helping clients plan for college savings and retirement, stress the importance of discretionary income. Credit card debt chokes off the ability of many consumers to be able to save for meaningful goals, resulting in inadequate resources to meet the obligations. How many customers have told you that they cannot purchase appropriate amounts of life and disability insurance because they need to pay bills?

Help customers prioritize their needs by having adequate levels of insurance, driving more reasonably priced automobiles and enjoying a lifestyle that they can afford. This ensures customers have the resources to meet their future needs. The "Greatest Generation" of Americans returning to the United States after World War II did not expect 2,500 square foot homes, expensive cars and the need to purchase the latest gadgets. Rather, they looked for an opportunity to work and take advantage of the freedoms this country provides. They had beaten a foe in Japan, which eventually became a solid ally of this country that is now sitting on $680 billion of U.S. Treasuries. It isn’t just consumers who have a problem controlling their spending---they follow the example of their government.

The more agents can help customers configure their finances, the better they will be able to rehabilitate their financial situations.

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

C A R R I E R   N E W S
Progressive Returns to New Jersey After 22 Years
New Jersey drivers have new choices for auto insurance

In a well-publicized media event that many observers would not have predicted three years ago, Progressive, the nation’s third largest auto insurer (and the largest auto writer among independent agents), announced this week that it will enter the New Jersey marketplace. New Jersey consumers will now have access to Drive Insurance from Progressive and Progressive Direct.

Progressive stayed away from the Garden State for 22 years, due in large part to the dysfunctional regulatory environment that prevailed and resulted in some of the highest auto insurance prices in the country. Things changed in June 2003, when the state finally enacted a series of overdue reforms that began to move New Jersey away from a command-and-control system that prevented companies from pricing policies effectively, mandated that insurers provide refunds when "excess profits" were earned, and forced high-risk drivers to subsidize low-risk consumers. Before the 2003 reforms, the excessive regulatory environment had created a crisis situation, and insurers were beginning to leave the state en masse. State policymakers finally took notice and responded, and the impact is already being felt.

"Our efforts to create an environment where companies compete for drivers and consumers have real choice are paying off," says Acting Governor Richard J. Codey. "We couldn’t be happier that two companies of this caliber are choosing to do business in New Jersey."

The results of the New Jersey reforms speak for themselves and mirror the results seen in other states that have previously adopted similar reform laws. Progressive is the fifth new insurer to enter the state since 2003, following such prominent players as GEICO and Mercury Indemnity. Numerous others—including State Farm, Liberty Mutual, Allstate, and AIG—have reversed plans to leave the state or have increased their presence in the market. In short, competition has returned to the state, and New Jersey consumers are the beneficiaries.

"For too long New Jersey drivers had to sit back and watch while insurance companies offered their products and services to people in other states but not to people here," notes Donald Bryan, acting commissioner, New Jersey Department of Banking and Insurance. "I think we see today that those days are long gone. The fact that companies want to do business here means more choice and more potential savings for New Jersey drivers." Bryan estimates that the 2003 reforms and resulting increase in competition have already saved insurance purchasers more than $410 million.

According to Progressive officials, approximately 100 independent agencies are already authorized to sell Drive Insurance. "Independent agents throughout the country sell Drive Insurance more often than any other brand, and we’re so glad we can now invite agents to offer it to their New Jersey customers," says Mike Esposito, New Jersey product manager, Drive Insurance from Progressive.

Industry observers hope New Jersey’s positive experience with regulatory reform and the elimination of onerous rate oversight will be replicated in those states where competition continues to be suppressed by unnecessary and counterproductive government intervention.

Wes Bissett (wes.bissett@iiaba.net) is Big "I" senior vice president of government affairs and state relations.

A G E N C Y   M A N A G E M E N T
Make a Commitment to Your Agency

Why are Best Practices agencies successful? In a word: commitment.

This series of IN&V articles has explored how effective agency leaders are visionaries for change in their agencies. Their participatory management styles allow them to create growth in the agencies bottom line, as well as to accomplish their business goals by effectively leading their associates in a participatory-style conducive to success. In this final installment, we find that success could hinge on one simple word: commitment. Among the key commitments they make:

Commitment to change. One category is changes in work process, in what they do and how they do it, in their jobs and how their jobs are supported, in work flows and automation, etc. The second category is changes in relationships with people, with each other as well as with customers and suppliers. In short, they have to be willing to abandon old, comfortable ways of thinking and of doing their jobs and relating to others, and seek new and improved ways. They had to commit to making personal changes.

Commitment to expand the focus from "me" to "we." Perhaps the most critical personal change is to realize that what is best for you personally is linked to what is best for the team. Individual excellence and star performance are evident in leading agencies. But so is a strong commitment to the team, and to helping teammates produce star performance.

Commitment to shared objectives. Associates and their leaders define objectives for their agency and teams. One set of objectives is the vision for what the agency will become as it strengthens and improves. Their visions include objectives for new standards of customer satisfaction, for quality and for efficient work processes. A second set of objectives is the shared values, the behaviors that everyone in the agency strives to demonstrate. Additional objectives can include short-term business goals and goals for improvement projects.

Commitment to improve communications skills. Achieving shared objectives through teamwork requires improved communications skills. It requires the ability to discuss problems, issues and expectations openly, objectively and with candor. It also requires the ability to listen actively to others, to understand and respect their observations and opinions. Finally, effective teamwork requires understanding and meeting others’ needs for feedback. These are skills that can be learned, given a commitment to do so.

Commitment to new and higher performance standards. Agencies are focusing on new, higher standards for customer service and for quality. "World-class customer satisfaction" is one objective of some leading agencies. "Total quality; the first time, every time" is another.

These agencies also set higher standards for individual and team productivity, for the efficiency and effectiveness that associates demonstrate in their jobs. They examine everything they do in an attempt to simplify and streamline tasks and processes.

Why are leaders and associates committing to continuously reaching for higher standards in customer satisfaction, quality and productivity? Because customers and the competitive marketplace demand it. These agencies do not want their standards to fall behind those of competing agencies.

Commitment to learning. Changing expectations for performance demand an increasing commitment to learning. Employees must master new work processes and new automation. Associates must be up-to-date in insurance and risk management products and services. In addition, commercial customers are demanding a greater understanding of their industry and business. And the staff must develop skills to support teamwork and team problem solving. In short, leading agencies know that continuous learning must become ingrained in their culture and all employees must commit to continuously developing their professional and interpersonal skills.

Commitment to the journey. The lessons from leading BP agencies can be both good news and bad news. The bad news is that change is unavoidable; that everyone must be open to replacing familiar ways of thinking, of behaving and of doing their jobs in new ways. This can feel like setting out on a journey into the unknown, with all of the anxieties and concerns that can accompany such journeys.

But there is good news. The journey is not without pathways to follow. And, while none of these agencies would report that the journey is easy, neither would they say it is impossible. They would report that the journey takes time, patience and perseverance. It also takes employees who are committed to being all that they can be, both individually and as a team.

Perhaps the best news is the enthusiasm in the BP agencies. Yes, they are working hard. But they are proud of how smart they are working and of the results they achieve. They are proud of the improvements they and their teammates identify. They are proud to be on a team that is committed to being the best. And they take pleasure in providing world-class service and value to their customers. Finally, they are proud of themselves for having created a vision for change, for having changed, for having learned new ways of thinking, of behaving and of doing their jobs.

If you would like to know more about the innovative concepts that the Best Practices program can offer your agency, visit www.independentagent .com and click on the Best Practices link.

Madelyn Flannagan (madelyn.flannnagan@iiaba.net) is Big "I" vice president of education and research. This article is the final in a series covering Best Practices agencies’ management strategies