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Big “I” National News

P&C Trends

A Pulse on P-C: Commercial Lines
Commercial market in stormy state.

For Gretchen Hopp-Doyle, commercial lines are a crucial component of her book of business. The president of Baker-Hopp & Associates, an agency serving 5,000 insureds in the Detroit-metropolitan area, Hopp-Doyle estimates commercial lines make up 65% of the agency’s book. However, over the course of the last year, the agency has experienced some rough weather when it comes to commercial lines --- what many agents, including Hopp-Doyle, have come to refer to as a “perfect storm.”

Rates have begun to soften by 10% to 30% from previous years, there has been a reduction in all lines and the appetite for risk with many super-regional carriers is expanding to create a volatile combination for agents like Hopp-Doyle.

“What makes the situation a ‘prefect storm’ is a lagging economy in Michigan,” she says. “The struggles of the automotive manufacturers ---GM, Ford and Chrysler --- have a direct and significant impact on personal lines customers as well as commercial clients --- automotive suppliers, construction and even retail business. As a result, we are returning a lot of premium at audit, seeing businesses closing and being bought out by larger industry players. In addition, exposures are reduced and coverages are being declined to reduce expense even further.”

While not every insurer is dealing with the same day-to-day issues as Baker-Hopp & Associates, the agency is not alone in its struggle with slumping commercial lines. Agents in nearly every region across the country are seeing similar results.

Commercial p-c rates fell an average 15% last month in comparison to rates from past years, according to the Dallas-based insurance exchange MarketScout. Prices have dropped across the board in every line, but the 17% decline in commercial property represents the sharpest decline. And commercial lines have continued to erode throughout the third quarter of 2007, according to RIMS Benchmark Survey.

Ark Assurance Group, Inc. in Tyler, Texas, writes about $5 million in commerical business, according to Criss Sudduth, president of the agency, and recently the agency felt the decline in commercial property first-hand when a pricing crunch put Sudduth in a bind.

“Commercial lines has a pricing issue,” he says. “We had a chance to quote a property account that had a renewal premium of $12,495 with their current carrier. (For) our five carriers that want this type of risk, quotes ranged between $13,000 all the way up to $64,000. They obtained a quote from another agent with a carrier that offering coverage at $7,900. We went back and got one of ours to come down to $7,700 and throw in some additional coverage. The client won, but as an industry we lost.”

Another Michigan agent, Harry Wiberg, owner of Bonek Agency, Inc. in Suttons Bay, Mich., says the agency writes $4.4 million in commercial lines, but he’s seen them decline by 10% in the last year. He credits an extremely competitive market with the drop.

“Pricing on medium and large accounts has deteriorated to levels that won't ultimately support losses,” he says. “Results from companies in Michigan indicate earnings are dropping off.”

Insurance Information Institute President Bob Hartwig agrees with independent agents. According to Hartwig, the two key issues facing commercial lines are the soft pricing environment and regulatory matters.

“The typical commercial renewal is down 12% in second quarter of this year. There is a lot of aggressive competition between insurers and it’s likely to remain that way this year and remainder of next year,” Hartwig says. “The other issue is TRIA and getting it extended by the end of the year.”

The passage of TRIA before its expiration is crucial to the health of not only commercial lines, but the entire insurance industry, because without it the insurers will be forced into a difficult situation come December, according to Hartwig.

“In a practical matter, policies will be issued with pop-up endorsement toward the end of the year saying that if the act is not passed, terrorism will be excluded from the policy. You will see wide-spread exclusions of terrorism,” he says.

Editor’s note: This is the third installment of a series examining the state of the p-c industry. Next week, IN&V will look at how the industry is expected to fare for the remainder of 2007. Click here to read the first installment, “Pulse on P-C: By the Numbers” and click here to read the second installment, “Pulse on P-C: Personal Lines.”

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

Legal Advocacy

Big “I” Board Adopts Policy on Certificates of Insurance, Evidences of Insurance
Tackling issues regarding form selection, content, preparation, maintenance and fraud.

Certificates of insurance and evidences of insurance (collectively referred to as “certificates”) have created significant challenges in the insurance industry for a number of years. The reasons for this may vary widely but the bottom line is the same: certificates raise serious issues affecting agents/brokers, carriers, insureds and third parties. And, whether the need for a certificate is generated by a contract between an insured and another party requiring the insured to have and maintain a particular amount and type of insurance for a specified time or arises from a third party seeking to confirm some interest in an insurance policy of a named insured, there are a number of issues that commonly arise that the industry can and should address. These issues include form selection, content; preparation, maintenance and notice; and misrepresentation or fraud.

The Big “I” board of directors tackled this important topic at its Sept. 29 meeting and adopted a policy statement on certificates of insurance and evidences of insurance. In that policy statement, IIABA advocates for constructive dialogue by agents, carriers and others affected by or influencing the issues so that solutions are aligned to the responsibilities of each, and urges all affected insurance industry participants to take proactive steps to address these issues with pragmatic business practices.

On certificates form selection, the issue concerns undue pressure exerted on those preparing certificates to use forms that are improper for the requests made (such as seeking confirmation of coverage that is not available or in place) or that have been withdrawn or replaced. The policy statement asserts that the industry should only support the use of certificates that are approved by carriers for policies they issue and that comply with applicable contractual and legal/regulatory requirements. It also urges that approved certificates forms be reviewed and updated regularly to remain responsive to changing business needs.

On certificates form content, requests are frequently made for deletions, additions or other changes to the forms used, including customization of certificates to meet the specific or unique needs or desires of an insured or other party. The policy statement calls on the industry to implement business practices that support enforcement of laws/regulations prohibiting modification, alteration or amendment of certificates or underlying insurance coverages except to the extent permitted by law and approved by the carrier issuing the policy. It also asks the industry to support the use of uniform language on any forms used to respond to policyholders’ needs about insurance coverages in place so that the requirements of underlying policies with respect to notification on cancellation, nonrenewal and/or material changes in risk are not altered. Also, in addition to carriers being responsive to requests for customized certificates when and as needed, consistent with applicable legal requirements, the Policy Statement recommends that regulators should be clear in their communications with the industry and public about the legal requirements for certificates and penalties for failing to adhere to those requirements.

As to the preparation, maintenance and notices, when it is a largely manual process, it is quite time consuming and thus quite costly, particularly for agents and brokers with a significant number of insureds who have construction policies in force. The policy statement calls on the industry to support the development of automated online tools to provide appropriate parties with policy information in a timely and accurate way. This could obviate the need for certificates to be prepared, so there would be no certificates to maintain or notice to be provided. And, it could be done in a way that would enhance responsiveness to policyholder needs in real-time, while providing safeguards against the use of withdrawn or replaced certificates, as well as improper modification, alteration or amendment of certificates without required approvals from insurers and/or regulators. The result would be improved workflows and customer service; enhanced accuracy; cessation of withdrawn or replaced forms; elimination of requests for modifications, alterations or amendments that are not approved by insurers and regulators; elimination of requests for modifications, alterations or amendments that are not aligned with coverage in place; and reduced costs of meeting certificates requests; enabling agents and brokers to remain focused on sales and service, to the benefit of carriers and customers.

On misrepresentation or fraud, when insureds cannot obtain the desired certificates, some have prepared their own form or revised a form provided to them. This kind of activity often involves misrepresentation and/or fraud and is illegal. The policy statement urges the enforcement of all laws/regulations prohibiting misrepresentation and/or fraud in connection with the preparation, dissemination and/or use of certificates or other information concerning insurance policies. It also suggests that information on the importance of accuracy with respect to representations concerning insurance policies be made available to industry participants and those seeking certificates through articles, position papers, Best Practices information and other materials.

IIABA will be reaching out to industry participants to engage in an exchange of ideas on this important issue in an effort to seek solutions that enhance efficiency and effectiveness for all involved, and we will update members on progress made.  

IIABA encourages members to use the resources it has recently developed about certificates, including the background paper, “Certificates of Insurance: Issues and Answers,” published on the Big “I Virtual University in January 2007, and “A Practical Guide to Agency E&O Risk Management,” created for the Big “I” Professional Liability Program. Those materials describe the issues and offers practical guidance on how to minimize E&O risks associated with certificates. In addition, the Big “I” Professional Liability Program and its endorsed E&O carrier, Swiss Re, are sponsoring two free, 45-minute teleconferences discussing the E&O issues relating to certificates of insurance. The dates for the calls are Oct. 23 at 1 p.m. and Oct. 25 at 3 p.m., Eastern Standard Time. As a value-added risk management service, all IIABA agency personnel are welcome and encouraged to join the teleconference. To register for the call, click here.

A copy of the IIABA policy statement on certificates of insurance and evidences of insurance is available in the members-only Legal Advocacy section of www.independentagent.com under IIABA/Industry Information & News, in the section on IIABA board policies.

For further information, contact Debra Perkins, IIABA executive vice president and general counsel, at debra.perkins@iiaba.net or Bill Wilson, director of IIABA’s Virtual University, at bill.wilson@iiaba.net; 800-221-7917.

Producer Compensation Issue Update

Willis Does About Face on Fees
Company to begin requesting commissions for its services to carriers.

Willis took a strong stand opposing the payment of contingent commissions after the investigation on producer compensation revealed improper activities by some brokers, stating that they were “inconsistent with the principle of client advocacy and should be abolished throughout the industry.” Now, Willis will begin requesting commissions for the services it provides to insurance carriers, according to press reports about comments by Willis International chairman, Sarah Turvill.

In its 2005 settlement with New York, Willis agreed to accept no fees except “a specific fee to be paid by the client; a specific percentage commission on premium to be paid by the insurer set at the time of purchase, renewal, placement or servicing of the insurance policy; or a combination of both.” In August this year, Willis negotiated changes to that settlement agreement to allow it to accept additional compensation from insurers for services it performs.

Now, Sarah Trrvill commented that Willis “adds value” and should be paid for its service to carriers, but added that Willis would not accept such commissions if the buyer was not comfortable with the arrangement. Shortly after Turvill made her statement at the Oct. 3 Federation of European Risk Management Associations’ Forum in Geneva, Willis Group Holdings confirmed it will seek a 2.5% commission from carriers in some instances, and that buyers would be clearly informed of the charges from the outset.

This change of position represents an about face for Willis, which as recently as earlier this year, dismissed the idea of accepting carrier commissions and called them unacceptable. In a statement made in April 2007, Joe Plumeri, chairman and CEO of Willis Group Holdings said: “As currently designed, the proposals do not afford a conflict-free environment for the client and we are not going to take them.” In March 2007, Willis stated “we believe that [supplemental compensation] arrangements must be devoid of conflicts, fully transparent to our clients and must not erode the fundamental client-broker relationship.”

The press reports on Willis’ reversed position state that Turvill indicated that clients would be informed of the commission, and could refuse to grant permission for the broker to accept such fees.

“We [will] approach the insurer and say we would like more money, how about it,” Turvill said at the panel discussion. She also said the commissions Willis will seek are not contingent commissions or supplemental commissions. Some risk managers present at the forum expressed their concerns about potential conflicts of interest that Willis’ new commissions may create and feared that the 2.5% rate would be passed on to them as increased premiums.

So it appears the 2.5% commission to be sought from carriers is the next step in the process of Willis’ efforts to “replace the lost revenue from contingents by delivering creative solutions and bringing real value to clients,” which was its view in April 2005. The recent amendment to Willis’s 2005 settlement agreement with the New York attorney general allows Willis to accept “a specific fee for service(s) to be paid by the insurer set at the time of purchase, renewal, placement or servicing of the insurance policy; or a combination of fee and commission.” No one knows what is next, but the changes in Willis’ position to date and the revision of its settlement agreement with New York are indications that producer compensation issues will continue to evolve with changes in market conditions.

For more information about producer compensation issues, 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.

Producer Compensation Issue Update

Connecticut Sues Guy Carpenter
Suit alleges antitrust conspiracy, millions in undisclosed contingent compensation.

Connecticut Attorney General Richard Blumenthal filed a lawsuit last week against Guy Carpenter & Company, the second-largest reinsurance broker and a subsidiary of Marsh & McLennan, and Excess Reinsurance Company, which is partially owned by Guy Carpenter. The 107-page complaint includes numerous allegations of misconduct by Guy Carpenter, enabling it to collect $80 million in fees and millions more in undisclosed contingent compensation. 

Primary insurers and brokers have been on the receiving end of antitrust complaints and allegations of misconduct for self-gain for nearly three years. This complaint could signal a shift in focus by state attorneys general to the reinsurance market.

In summary, the complaint details a series of conspiracies alleged to have occurred over a 50-year period through which Guy Carpenter is purported to have fixed prices and terms on reinsurance contracts; misled insurance carriers about serving as both an underwriter and agent on reinsurance; foreclosed and eliminated competition; allocated markets and failed to disclose information about its true role in reinsurance transactions.

The lawsuit involves reinsurance managed by Guy Carpenter through reinsurance facilities, whereby participating reinsurance companies received exclusive access to Guy Carpenter’s “substantial” book of business. Some of the facilities at issue have been in existence in some form for more than 50 years. According to the complaint, facilities operated by Guy Carpenter and its predecessor Balis & Company exclusively determined which of its insurance company clients would be placed into particular facilities instead of being bid on the open market, resulting in no competition on prices or terms for a significant portion of reinsurance business. The complaint also alleged that when a reinsurance company refused to “play ball” by the terms set by Guy Carpenter, the reinsurer was banned from participating in the facilities. Guy Carpenter is accused of structuring the facilities to create “additional sources of revenue for Guy Carpenter” such as “higher fees and other forms of compensation that it would not have otherwise received,” rather than doing what was in the best interests of its clients.

The complaint outlined a number of anti-competitive effects the Guy Carpenter facilities were accused of causing. Specifically, Guy Carpenter is accused of price fixing by facilitating agreements by reinsurers to set prices in advance at levels above what would be the case in a competitive market. All with knowledge of the reinsurers that their competitors were doing the same things --- creating a margin disproportionately larger than occurs in the rest of the industry. In turn, it is alleged that the lack of competition on individual terms by reinsurers reduced the variety of reinsurance services and innovative new products available in the industry. 

The broker also is accused of fixing the maximum amount of reinsurance available through the facilities, thereby limiting output in the marketplace. Further, the complaint claimed Guy Carpenter excluded reinsurers from participation in the facilities if they did not agree to the broker’s terms. Conversely, the complaint alleged certain facilities were only available under illegal, tying arrangements to existing clients and prospects for new business that intended to place more business through the broker. This significantly affected commerce and increased profits for Guy Carpenter.

Guy Carpenter also is accused of placing business in its facilities rather than seeking competition in the open market, regardless of the best interest of its clients. It is also alleged that by excluding many reinsurers from participating in the facilities, those reinsurers did not have access to a substantial book of business, and choice for clients purchasing reinsurance through Guy Carpenter was reduced. In short, the complaint claims that “Guy Carpenter decides which reinsurers will participate in each of the facilities. Guy Carpenter allocates markets among its favored reinsurers, allowing access to certain reinsurers while at the same time precluding access to those reinsurers that do not participate in its schemes.”

By participating in these alleged activities, the complaint maintained that Guy Carpenter breached its fiduciary duty to its clients and engaged in anti-competitive behavior that harmed competition, consumers and the economy of Connecticut.

The allegations against Excess Re are based on the fact that Guy Carpenter managed Excess Re and even placed business with Excess Re when it violated Guy Carpenter’s internal policy, allegedly because Guy Carpenter received additional fees for that business.

The complaint seeks that Guy Carpenter: 1) enjoined from corrupt, unfair and anti-competitive acts; unfair and unreasonable restraint of trade or commerce; and unfair and deceptive acts and practices; 2) ordered to pay damages allowed by state law; 3) ordered to pay civil penalties of $250,000 per violation for each breach of the state antitrust law; 4) ordered to pay civil penalties of $5,000 for each breach of state unfair trade practices laws; and 5) ordered to disgorge all revenue, profits and gains form unfair and deceptive practices. It also asks that Excess Re: 1) submit to an accounting of fees paid to Guy Carpenter; 2) pay civil penalties of $5,000 for each breach of state unfair trade practices laws; 3) be ordered to disgorge all revenue, profits and gains from unfair and deceptive practices; 4) be determined to have engaged in unfair and unreasonable restraint of trade in violation of state antitrust law; and unfair and deceptive cats and practices; and 5) be ordered to pay damages allowed by state law; pay civil penalties of $250,000 per violation for each breach of the state antitrust law.

After the complaint was filed, the Connecticut attorney general’s office issued a press release describing Guy Carpenter “as a ringleader in choreographing the reinsurance market to fix prices, stifle competitors and collect excessive profits at the expense of an entire industry.”

“My antitrust investigation has revealed an industry plagued by pervasive anticompetitive and anti-consumer practices. Guy Carpenter’s schemes were enabled by a shifting coterie of more than 20 co-conspirators --- reinsurers willing to play Guy Carpenter’s game of deceit and damage consumers,” Blumenthal says.

Guy Carpenter issued its own press release stating: “The Connecticut attorney general’s complaint is based on a fundamental misunderstanding of reinsurance facilities that have been in operation for the benefit of small- and mid-sized clients for as long as 50 years. As many of our clients have confirmed during this investigation, these facilities result in improved availability and terms of reinsurance and ultimately benefit insurance buyers. Simply put, there is no basis for the attorney general’s lawsuit and we intend to defend ourselves vigorously.”

For more information about producer compensation issues, 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; katleen.graber@iiaba.net.

L&H Trends

VIEW: Fuel for Thought
Is your agency a gas station or a service station?

On a trip to bring my son home from college for his fall break, I pulled into a gas station. As usual, I pulled out my credit card, inserted it in the pump, sighed at the price of gas and began to fill up. As I did so, I nostalgically reflected on the fact that this wasn’t the way it used to be when I was growing up. No, I belong to the generation that actually used to sit in the car and have an attendant (could have been the owner) come out and fill up the tank, clean the windshield and even check the oil.

As I thought about the way it was, I realized the evolution of gas stations holds an important metaphor for independent insurance agents. At first glance, this might seem like a stretch, but a careful review of the evolution, or perhaps devolution, of gas stations is indeed relevant. During the ’50s and ’60s, gas stations weren’t really gas stations. They were called service stations and were typically locally owned by a mechanic owner. In those days, most service stations did car repairs because there was less diagnostic equipment involved and repairs were based on the skill and knowledge of the mechanic.

In fact, when I started driving my father instructed me to develop a relationship with a local service station owner so that when my car needed repairs I knew the integrity of the individual and that our relationship would result in honest, timely car repairs. My dad also told me that even if the gas was a penny or two more per gallon it was worth it in the long run to have a relationship with the service station. In those days, there seemed to be more competition based on service. In fact, Gulf service stations actually had a large clock with legs (that served as the arms of the clock) that completely rotated every 10 seconds to indicate the station’s commitment to having someone wait on you within 10 seconds.

During the 1970s, a revolutionary concept was introduced: “self-service” and “full service.” If you got out of the car and pumped your own gas, it was a couple of cents cheaper than full service where an attendant would still come out and do it.

Fast forwarding to the 1990s and today, and the service station model evolved to a gas station where all people pumped their own gas and the consumer didn’t even have to go inside to pay --- unless they wanted to wolf down a candy bar and soda. Today, consumers assume gas is a commodity, and convenience and price are sole determining factors. That’s fine if you've developed your business model to fit that mindset. But, the question is: Is your agency’s business model a service station or gas station?

Clearly, direct writers such as GEICO and USAA would like consumers to believe insurance is a commodity, like gasoline. However, forward-thinking agencies understand that they are a marketing and service center and leverage technology and develop norms for their employees that create a brand consumers want and need, just like a service station.

Just as cars inevitably need repairs, consumers need advice in assistance in dealing with life’s curveballs and the never-ending changes. Agencies that develop a relationship with their customers build loyalty because insurance and financial services are complicated, and one size does not fit all. Consumers value choice, customization and advocacy, but agents need to spend the time, money and resources to promote their agencies so that consumers understand that insurance isn’t about a 10-minute online experience. Agents need to efficiently use technology to allow customers to handle routine tasks when they want to, but while always letting customers know that the agency is ready to meet with them to discuss their needs. That is the advantage that a “full service” independent insurance agent has over the “self-service” direct writers.

Take a moment to reflect on your agency’s service model. And, as much as things change, superior service will never go out of style.

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