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                                                Big “I” National News

P-C Trends
Customers Satisfied with Value of Homeowners Policies
Improvement in pricing drives overall satisfaction to highest level in five years.

Costs may be on the on the rise in many other sectors, but homeowners insurance customers are generally pleased with the value of their policies, according to a recent study from J.D. Power & Associates. Agents can increase customers’ satisfaction by making them aware of any discounts they are receiving and by cross-selling multiple policies with a single carrier.

The 2009 Homeowners Insurance Satisfaction Study shows that customer satisfaction with homeowners insurance is the highest in five years. The increase is largely due to improvements in price, policy offerings and the billing and payments process – in particular, satisfaction with price has increased by 46 points on a 1,000 point scale since 2008.

According to Jeremy Bowler, senior director of the insurance practice at J.D. Power, price satisfaction often hinges on whether customers received discounts on their policies. The majority of home insureds surveyed reported qualifying for one or more discounts, while 10% were unsure whether they qualified. Bowler says addressing this uncertainty can quickly result in a happy customer.

“Uncertainty in the mind of the customer is an opportunity,” says Bowler.  “For customers who don’t know whether they get a discount, satisfaction is much lower than those who know.”

Discounts are often hidden in the policy’s fine print, but Debbie Roché, a personal lines CSR at The Kinney Agency in Albuquerque, N.M., makes sure to walk her customers through the policy completely so they are well aware of the bargains they’re getting.

“Price has become more of an issue in the past year,” Roché says. “Customers would like a breakdown of what discounts they’re getting as part of the policy review process.”

Bowler says cross-selling multiple policies is a major source of discounts for customers and is becoming an increasingly popular way to increase customer loyalty. The study shows that customer satisfaction increases with each policy purchased, and customers holding four or more policies with a single insurer report a satisfaction increase of more than 170 points on a 1,000-point scale.

“The value (of cross-selling) for the insurer and for the agent is quite profound,” says Bowler. “(It) has a huge effect in terms of retention.”

Mari Frost, personal lines manager at Jackson Park Agency Corp. in Allen, Mich., says cross-selling has always been a big part of doing business at her agency, but the discounts offered by purchasing multiple policies are not always easy to spot or market to insureds. She says that because of the rating on the policy, discounts are unlikely to come off the base premium, so she takes customers through all of their policies line by line to explain the savings. In addition to selling the value of the policy, Frost sells the value of her agency, appealing to frugal customers who want to know exactly what they’re getting for the money.

Company reputation and word-of-mouth feedback about claims handling also play into overall customer satisfaction; Roché says that if a particular carrier has come through for a friend or neighbor, her customers tend to be more pleased with their coverage even if they have never filed a claim themselves. According to J.D. Power’s study, agent-based homeowners carriers Erie Insurance, The Hartford and Liberty Mutual performed particularly well overall, earning 813, 789 and 762 points, respectively, on a 1000-point scale. The carriers were rated on the overall claims experience, contacting the insurer, policy offerings, billing and payment and pricing. Direct writer Amica Mutual received J.D. Power’s top award for customer satisfaction with a homeowners carrier for the eighth consecutive year.

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.

P-C Trends
P-C Contingent Commissions Make News
What will happen to incentives and loss ratios as big brokers seek to eliminate contingencies bans? 

On Sept.19, the Wall Street Journal reported that mega-brokers Aon Corp., Marsh & McLennan Cos. and Willis Group Holdings are seeking reinstated contingent commissions that were lost in the wake of the Elliot Spitzer investigation. This report comes on the heels of the fourth largest broker, Arthur J. Gallagher, winning the right to end its ban on contingents. The WSJ estimates that all of these events will result in about $350 million in contingent commissions per year for the four largest brokers. How does that figure relate to the total contingencies paid in the property-casualty industry?

Recently, A.M. Best published Aggregates & Averages, its compendium of p-c industry data for 2008. That data includes aggregated contingent payments made by insurers to both mega-brokers and independent agents. The chart below shows there was a dramatic increase in contingents paid to agents and brokers starting around 2001. Contingency payments increased from about $2 billion annually and .65% (65 basis points) of written premium to a high in 2006 of more than $4.5 billion and more than 1% of written premiums. In addition, the run up of contingents was met near its zenith by Spitzer‘s investigation and subsequent suit against Marsh McLennan. After Spitzer’s suit, first Gallagher and then Aon, Marsh and Willis together eschewed contingent commissions, resulting in a drop in both total dollars and the percentage of contingents that is almost as steep as the run-up (see the years 2006 through 2008).


 
Because A.J. Gallagher was the first to move away from contingents, it is perhaps telling that in mid-summer of 2009, after several years of meeting with the Illinois insurance regulators, the company announced it had amended its settlement agreement surrounding contingency fees to again accept them. The agreement with the state Attorney General and Illinois Department of Insurance was announced in late July. Then came the WSJ’s report that Aon, Marsh and Willis are again pining for the receipt of contingent commissions. Where will the green line of contingents fall for 2009 and going forward into 2010 and 2011?

It is difficult to predict, but there is no doubt that the big brokers’ decision to again accept contingents will have an impact on the total amount of contingencies that are paid out. It is likely, however, that it will have less of an impact on the overall numbers than it did earlier in the decade.  With the attention paid to contingents by groups like the Risk & Insurance Management Society and others, it may not be as easy for the big brokers to obtain and keep these payments. The WSJ article cited predictions that total contingents to the “big four” will be less than $500 million in 2011, which stands in stark contrast to the $845 million in contingents collected by Marsh alone in 2003.

Another impact on total contingent commissions paid out is industry loss ratios, which will be examined more closely in next week’s Insurance News & Views.  Contingent commissions reward intermediaries for providing insurers with books of business that have better-than-average loss ratios. The payments provide incentives for “field underwriting” and encourage risk management. When the big brokers abandoned contingent commissions, it negatively affected the total contingents paid from 2006 onward. The industry’s loss ratio also became worse. Charting the two figures together can provide valuable insights.

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^® and a licensed p-c agent.

On the Hill
Big “I” Fights Efforts to Repeal Provisions of McCarran-Ferguson Act
New bill aims to repeal long-standing provisions for health insurance and medical professional liability insurance.

Recently, the Big “I” joined forces with other associations representing all the segments of the property-casualty insurance industry, from primary insurers to agents, brokers, and reinsurers, to express opposition to H.R. 3596 and S. 1681, identical bills introduced in the House and Senate as the “Health Insurance Industry Antitrust Enforcement Act of 2009.” The effort includes a joint letter to the chairman and ranking member of the House Judiciary Committee with specific points and criticisms regarding the bill, which would repeal long-standing provisions of the McCarran-Ferguson Act regarding health and medical malpractice insurance (more appropriately called medical professional liability insurance) issuers.

This week, the House Judiciary Subcommittee on Courts and Competition Policy held a hearing on H.R. 3596 that was comprised of one panel and was only attended by Chairman Henry Johnson (D-Ga.), Ranking Member Howard Coble (R-N.C.) and Rep. Diane DeGette (D-Colo.). The four witnesses represented the American Academy of Actuaries, California Orthopaedic  Association, American Bar Association and the Center for American Progress.

James Hurley, who represented the American Academy of Actuaries at the hearing, was the only witness on the panel in favor of keeping the antitrust exemption. H.R. 3596 was introduced by Judiciary Committee Chairman John Conyers (D-Mich.) a few weeks ago to “ensure that health insurance issuers and medical malpractice insurance issuers cannot engage in price fixing, bid rigging, or market allocations to the detriment of competition and consumers.”

The Senate Judiciary Committee held a similar hearing yesterday. During that hearing, Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Senators Charles Schumer (D-N.Y.) and Senate Majority Whip Dick Durbin (D-Ill.) said they will attempt to offer the legislation as a floor amendment to the Senate health care reform. Senate Majority Leader Harry Reid (D-Nev.) testified in support of the legislation and indicated he would support adding this legislation to the health care reform bill. 

The joint industry letter pointed out that this legislation “would bring no consumer benefit while causing enormous marketplace disruption that might have the perverse effect of discouraging new marketplace entrants.” The group also said that H.R. 3596 and S. 1681 “would be ironic indeed if the primary purpose of the federal antitrust laws, – promoting competition – was undercut through enactment of either bill.” 

Click here to read the full letter.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.

On the Hill
Senate Finance Committee Passes Health Care Reform Bill
Senate inches closer to floor debate.

On Tuesday, after months of bipartisan negotiations, the Senate Finance Committee reported its bill out of committee in a 14-9 vote. Sen. Olympia Snowe (R-Maine) joined all committee Democrats in supporting the bill while the remaining committee Republicans voted against the bill. Snowe’s affirmative vote marks the first time a Republican has supported a Democratic health care reform bill in committee. Her vote also gives Finance Committee Chairman Max Baucus (D-Mont.) a significant boost as negotiations progress with Senator Chris Dodd (D-Conn.) and Majority Leader Harry Reid (D-Nev.) over the contents of the yet-to-be-merged Senate bill. Senator Dodd is representing the HELP Committee, which reported its bill out of committee on a party line vote in mid-July.

Key sticking points in fusing the two Senate bills include whether or not to include a public option or a variation thereof, the scope of an employer mandate, the penalty level for the individual mandate and new taxes on Cadillac plans as well as the health insurance industry. Negotiations are expected to ensue for the next several days in hopes of having the merged bill on the Senate floor in late October.

With the Finance Committee’s proceedings concluded, all five congressional committees with jurisdiction over health care reform have now reported legislation out of their respective committees. The House Democratic Leadership is also continuing to work on its  bill with the goal of having it on the House floor by late October or early November.

Joe Wall (joe.wall@iiaba.net) is Big “I” senior director of government relations.


L-H Trends
Paying for Deficits
Help prepare clients for rising taxes.

Lately, the burgeoning federal deficit has prompted a lot of discussion. When the economy ran into severe problems in 2008, the Federal Reserve System, the U.S. Department of the Treasury and the federal government intervened in the face of potential cataclysmic consequences. Whether this intervention was warranted is still being debated, and the financial consequences of the spending will be felt for years due to the massive deficit spending that resulted from the stimulus legislation. However, massive federal deficits are looming regardless of the recent economic trauma.
 
In the private sector, organizations that provide a monthly benefit through defined benefit pension plans are required to fund their plan according to prescribed methods allowed by the Internal Revenue Service. Social Security is very similar to a defined benefit pension in that it provides a monthly benefit.  It also includes a cost of living adjustment (COLA) based on increases on the consumer price index  (CPI). Even though employers and employees contribute to Social Security, there is one major difference between the two plans: funding. Social Security benefits represent a promise to pay because the benefits are not currently funded.  In fact a trust fund was created in 1983 to ensure that the monies would be there to provide for the benefit payments of future retirees. Yet, even after more than 25 years of payroll tax increases, representing some $2.5 trillion in contributions, no actual funding has been set aside. Instead, the debt consists of IOUs from the federal government for future generations to pay.

Much like an individual who applies for more credit cards and needs a credit limit increase, the federal government is amassing huge debt obligations that are coming due. While most people consider this problem a long way off, the reality is that the problem will have a financial impact in 2010. The Congressional Budget Office (CBO) is projecting that Social Security will pay out more in benefits than it collects in taxes in 2010 and 2011, a phenomenon not seen for more than 25 years. This means that for the next two years, the current pay-as-you-go surplus that the federal government receives from payroll taxes will actually be a deficit of approximately $10 billion. This spike in Social Security benefit payments is attributable to the anemic state of the economy, which has led more people than usual to apply for Social Security payments.
 
So how will the government fund these burgeoning deficits? The answer is by raising taxes—but who will be affected and how much taxes will go up remains open to debate. While income taxes will increase in 2011, there are number of measures also being contemplated to close the deficit. One proposal to pay for health care reform under Sen. Max Baucus’s (D-Mont.) plan in the Senate is a $2,500 annual cap on flexible spending account contributions. This would be detrimental to people who incur anticipated uncovered health expenses, such as orthodontia. A different tax proposal involves limiting the level of tax deduction to the current tax rate of 35%. In other words, should income tax rates increase from 35% to 39.6%, charitable contributions will be deductible at the 35% rate instead of the 39.6% rate. Aside from the complexity of the calculation, charities are concerned that the measures could limit the deductibility of charitable contributions.

Independent insurance agents should become aware of these proposals and the remaining avenues available to customers for lowering their tax bills. 

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