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Big “I” National News

P&C Trends

A Pulse on P-C: Looking Ahead
Industry experts, agents weigh in with projections for remainder of 2007.

Is the market surging toward another year of record-breaking profits in 2007 or poised for an upset at year’s end? Will rates continue to plummet or rebound? What’s in store for the final quarter of 2007?

While the p-c industry is currently reporting excellent results across the board and will likely ride a wave of profitability into 2008, rates are falling in almost every line of business, which means potential problems in the future.

“Insurance and reinsurance executives may be basking in the glow of profitability today, and many analysts predict --- barring major catastrophes --- 2007 will be an excellent year for the industry, but dark clouds are on the horizon,” says David Bradford in an Advisen briefing. “Rates are falling in almost every line business. Advisen’s ADVx™ composite premium change index shows that commercial insurance pricing, though buoyed by sharply higher windstorm and earthquake premiums, has given up nearly 40% of the gains achieved in the 2001-2003 hard market. All indicators point to not only a continuation, but to an acceleration of competition. The questions now are how far and how fast rates will fall, and how much damage will be done to balance sheets before the soft phase of the insurance pricing cycle bottoms out.”

The answer to that question may depend, in part, on how the rest of hurricane season plays out. The tail-end of season, which officially ends Nov. 30, is expected to produce only four named storms, two of which are expected to become hurricanes, according to Colorado State University forecasters. The industry saw its worst year for catastrophe losses in 2005 with $61.9 billion followed by a relatively low $9.2 billion in 2006. This year, catastrophe losses are estimated to reached $4 billion when all is said and done, according to the Insurance Information Institute. However, as the industry is still holding its breath for that $100 billion year, agents still remain optimistic for 2007.

“I believe we will survive (the year) without a major weather event and hopefully see some new willingness to write near the coast,” says Roy Donaldson, Select Division manager for Fitts Agency, Inc., in Tuscaloosa Ala. “The few carriers in the arena have been making a ton of money since there have been no storms to speak of."

Bradford also believes the industry has potential to finish ahead this year, barring a major storm, but is a bit more wary of what the future holds.

“If there are no mega-catastrophes, the most likely scenario is that falling rate levels will begin producing underwriting losses --- probably sometime in 2008 --- and eventually many produce operating losses if underwriting losses overtake investment gains,” he says in his briefing. “Once underwriting and investment activities no longer are fueling rapid growth in risk capital, a series of normal-to-high years of catastrophe losses may wipe out enough surplus to reverse the market. In absence of severe catastrophes, however, the market could plunge sharply in the short run, and then languish in a deep pricing trough for years to come.”

Still there are those who are more pragmatic about the remainder of the year.

“I don’t think anything needs to happen to make it (this year) worse,” says Michael Murray, ISO assistant vice president for financial analysis. “Anyone who has been following financial markets knows they have become volatile...if the economy should become substantially weaker, it would clearly take a toll on insurers’ balance sheets. To the extent that history is any guide, one would expect pricing competition to continue to escalate and that would take a bite out insurers’ profitability.”

Editor’s note: This is the final installment of a series examining the state of the p-c industry. Click here to read the first installment, “Pulse on P-C: By the Numbers,”  click hereto read the second installment, “Pulse on P-C: Personal Lines,” and click here to read the third installment, “Pulse on P-C: Commercial Lines.” Want IN&V to delve further into another topic? Send ideas, comments or feedback to michelle.payne@iiaba.net.

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

VIEW: P&C Trends

The Numbers are In
Analyzing A.M. Best’s 2007 Aggregates and Averages.

This story is not about gravel, concrete or typical of tare weights dump trucks --- it’s about the 2007 Best’s Aggregates and Averages. Every year, the A.M. Best Company of Olwick, N.J., takes the data from nearly 2,500 p-c insurance companies filed with state insurance departments and compiles it into an industry resource. In the coming weeks, IN&V will be looking at the treasure trove of information that comes with this compendium of comprehensions. It’s the height of geek-hood to get excited about a book of numbers, but the look at 2006’s industry trends and developments provide some very interesting insights for agents.

The volumes are broken into sections that lend themselves to some perspective building. For example, from information comparing industry segments, watch for coming insights on expense ratios of agency companies versus direct writers or return on equity of the same over the past five years. From the consolidated annual statement for the industry, IN&V will take a look at the average contingency payment after the Spitzer-Marsh developments of late 2004 were more fully integrated in 2006 operations. From data on industry segments, what have the loss ratios been on workers’ compensation and medical malpractice for the past 10 years and which companies have achieved the lowest loss ratios?

It’s amazing that insurance premiums track so consistently with our national gross domestic product, but take a look at the variation since 2001. Introductory risk management courses teach that premiums should correlate with risk, and wouldn’t one assume that risk of loss increases with basic economic activity? Basically that is the case, but premiums seem to be out of proportion with the economy in 2001-2005 based on p-c industry net written premium (that is, after reinsurance) as compared to the United States Gross Domestic Product (GDP)*. Of course, everyone is wondering what the figures for 2007 will bring.



*GDP: Source Bureau of Economic Analysis, www.bea.gov. GDP can be defined as the total market value of all final goods and services produced within the United States, by calendar year.

As a members-only, e-publication, IN&V has a unique opportunity to investigate and look at what agents want to see. If you have question on the industry and the numbers or would like IN&V to delve further into a particular subject, contact Paul Buse at paul.buse@iiaba.

Editor’s note: This is the first installment in a series that will examine A.M. Best’s 2007 Aggregates and Averages. Over the next few weeks, IN&V will provide an in-depth analysis of the data and how it relates to independent agents.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM.

Legal Advocacy

Caterpillar Sues Aon
Mega-broker is in the hot seat again.

Caterpillar Inc. sued Aon Corporation, Aon Risk Services, Inc. of Illinois and Aon Re Global, Inc. in federal court in Illinois for violations of federal and state antitrust laws, deceptive business practices, breach of fiduciary duty, fraud, breach of contract, conspiracy and unjust enrichment arising out of Aon’s role as the insurance broker of Caterpillar.

The factual allegations in the complaint are of the same nature as those made against Aon and other brokers arising out of the investigations by the attorneys general of a number of states, such as New York, Connecticut and Illinois. Specifically, the complaint sets out allegations that Aon violated its duties and promises to Caterpillar by:

• Conspiring with carriers to unlawfully restrain trade by orchestrating inflated and rigged bids for commercial insurance;
• Steering insurance business to carriers that benefited Aon the most financially and that deprived Caterpillar of true open competition;
• Illegally tying the placement of Caterpillar business to carriers placing reinsurance through Aon for its own financial gain;
• engaging in unfair and deceptive business practices that deprived Caterpillar of Aon’s promised loyalty and objective advice;
• Entering into undisclosed agreements for contingent commissions to obtain payments from insurers and reinsurers in exchange for increasing the volume, profitability and/or retention of policies it placed with them;
• Breaching its fiduciary duty by engaging in self-serving conduct to the detriment of Caterpillar; and
• Breaching various terms of services contracts with Caterpillar, such as failing to recommend cost-effective insurance programs, inaccurately reporting fees received for insurance placements; and concealing conflicts of interest.

The complaint also alleges that due to the investigations related to the conduct of some brokers, it requested that Aon disclose to Caterpillar certain documents related to Aon’s representation of Caterpillar, but states that Aon has not complied with the request.

Caterpillar seeks treble damages for claims where it is allowed by law, punitive damages, forfeiture of compensation paid by Caterpillar to Aon, a permanent injunction requiring Aon to refrain from committing the alleged actions going forward, attorneys’ fees, prejudgment interest and any other relief the court sees fit to provide. It expressly seeks a jury trail to determine the outcome of the allegations, rather than a trial conducted solely by a judge.

For a copy of the complaint or 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. 

On the Hill

Banking Committee Approves Insurance Legislation
Terrorism backstop, flood reform bills imperative to independent agents and consumers.

The Senate Banking Committee passed the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007 and the Flood Insurance Reform and Modernization Act (FIRM) of 2007. The TRIPRA bill would extend the current federal terrorism insurance backstop, which is set to expire at the end of this year, for an additional seven years. In addition, it would modify the definition of terrorism to include domestic acts of terror and would require ongoing reports to Congress from the President's Working Group on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events.

“With the terrorism backstop set to expire, this significant step toward extending it on a long-term basis comes at a critical time,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We applaud the committee for taking action and hope this crucial legislation will gain full Senate approval as soon as possible.”

“Getting this important legislation passed before the end of the year is a priority for our members and we are grateful to the committee for advancing it a step closer,” says Jason Spence, Big “I” assistant vice president for federal government affairs.

The FIRM Act, introduced by Chairman Chris Dodd (D-Conn.) Ranking Member Richard Shelby (R-Ala.), would help modernize and reform the National Flood Insurance Program (NFIP). It reauthorizes the program through 2013 and contains a provision that forgives the Federal Emergency Management Agency’s (FEMA) $20 billion debt to the U.S. Treasury, both of which the Big “I” strongly supports.

“The Big ‘I’ applauds Chairman Dodd and Ranking Member Shelby for advancing this legislation in the Senate to help reform the flood program, making it more effective for serving consumers,” Symington says. “We also thank them for reauthorizing it through 2013 and adding the key provision of forgiving FEMA’s debt, which are both essential to the future of the National Flood Insurance Program.”

The legislation does not contain two key, Big “I”-backed provisions that increase maximum coverage limits and include optional coverages such as optional business interruption coverage and additional living expenses. These have been top priorities for independent insurance agents, brokers and their customers. An increase in coverage limits would allow consumers to better insure against losses due to flooding. An inclusion of additional living expenses and business interruption would help consumers, both residential and commercial, who are hurt by flooding to overcome the uncertainty often experienced immediately after these events.

“Both an increase in the maximum coverage limits and an inclusion of optional coverages would better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause,” says John Prible, Big “I” assistant vice president for federal government affairs. “We hope that the Senate will consider including these provisions as the legislation moves forward.”

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

L&H Trends

Is the Government About to Write a Check It Can’t Cash?
Reach out to baby boomers expecting Social Security to provide benefits.

Imagine for a moment that you are the treasurer of a large club with a giant membership base. You’ve collected dues from the members for years, but instead of setting the funds aside, you have been using the money to offset the club’s expenses. This leads to understateding the amount of the club’s actual annual spending. Further, the club’s financial statements do not footnote the promised benefits’ present value liability amount. And there are 51 state clubs and thousands of local clubs that also provide retirement benefits and sometimes retiree medical insurance benefits --- although these clubs have a footnote on their financial statements indicating the estimated liability of the retirement benefits that they owe their members.

Figured out the metaphor?

Kathleen Casey, born Jan. 1, 1946, will be the first baby boomer to turn 62 in three months. Behind her in line are 84 million others boomers, and almost every one of them is counting on receiving their benefits, either Social Security, Medicare or Medicaid.

This giant problem confronting the country represents a collision between the demographics of an aging population and the the idea of the government providing benefits without the actual funds set aside. Up to now, the surplus (Social Security payroll taxes in excess of benefit payments) has greatly masked the reality of the cost. When the social security system was set up, there were 42 people working for every one who was getting benefits. In 2030, when the baby boomers are drawing their checks, the ratio will fall to two to one.

And these calculations are based on mortality assumptions that could change. The great news reported this week that cancer survivor rates are increasing represents the hope of everyone who has been impacted by the disease and represents the hard work of thousands of medical professionals. At the same time, life actuaries will point out that important advances such as this will result in longer lifetimes and put more stress on the Social Security system.

So, the bottom line is that benefits will have to postponed, modified, fully taxed and/or reduced in order to meet the obligation without putting a millstone around the neck of the next working generation. With this in mind, is your agency positioned to assist your customers with saving for retirement? And, with the baby boomers reaching early retirement age, is your agency prepared to assist them with developing a game plan for them to systematically receive a payment for the rest of their lives, i.e. a lifetime annuity? Long-term care insurance (LTCi), Medicare supplements, permanent life insurance and immediate annuities represent the avenues that retirees will need and will be a source of revenue to your agency.

Don’t procrastinate…there are 84 million people waiting in line.

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