Big “I” National News

In the States
Nation’s Top Court to Examine Credit Scoring
Insurers hope Supreme Court will overturn Ninth Circuit’s sweeping decision.

In any given year, only a few dozen cases ever make it to the Supreme Court’s docket, and very few of those have a major impact on the state-regulated insurance industry. However, in the coming months, the nation’s highest court will hear a case that has sweeping repercussions for the industry. Billions of dollars and the continued viability of some of the country’s leading insurers could be at stake.

The case to be heard involves insurance companies’ use of consumer credit reports and the obligations that insurers using such information have to consumers under the federal Fair Credit Reporting Act (FCRA). The FCRA requires insurers to alert consumers when they take an “adverse action” based on information contained in credit reports. These are the typically pro forma notices that provide an affected consumer with the name and contact information of the reporting agency that provided the report to the insurer, a statement explaining the consumer’s right to obtain a free copy of the report, and a description of how the consumer can dispute the report’s accuracy.

The FCRA was not entirely precise in specifying exactly when insurers should provide such notices, and some in the industry believed the notices were only required when a person’s credit information has an adverse or unfavorable impact on the insurance rates or terms that otherwise would have been provided. The U.S. Court of Appeals for the Ninth Circuit recently issued a decision that went a step further and determined that the notices are also required whenever more favorable credit information would improve the rates or terms of a policy. In essence, the Ninth Circuit said an adverse action notice must be provided to a person who does not receive the insurer’s lowest possible premium because of a less-than-perfect credit history, even when the credit information is better than average and results in a considerably lower premium.

The most troubling feature of the Ninth Circuit opinion---and the issue that will be most hotly contested when the Supreme Court hears the case---is the lower court’s finding that the insurers involved in these instances “willfully” violated the law. Under the FCRA, insurers who incorrectly adhere to the adverse action requirements or negligently violate the law are liable for actual damages incurred by consumers. However, if “willful” noncompliance is found to exist, insurers can be liable to each consumer for damages between $100 and $1,000 (plus punitive damages).

The Ninth Circuit---a court best known by many for ruling that elements of the Pledge of Allegiance are unconstitutional---found that insurers who relied in good faith on interpretations of the law that were later determined to be unreasonable, implausible, creative or untenable could be deemed to have committed willful violations. The circuit court even found willful violations when insurers were diligently attempting to comply and following the plausible (but perhaps incorrect) interpretations of the law provided by attorneys and even district court judges in previous opinions.

The FCRA’s penalties for willful violations were intended to be harsh and applicable in rare instances, yet the Ninth Circuit’s distorted perspective of these provisions carry significant consequences. If the Ninth Circuit is correct in its findings about when adverse action notices must be issued (and many observers believe that portion of the initial opinion is accurate), then it is possible that the nation’s personal lines insurers have committed millions of technical and inconsequential violations. With potential liability of $100 to $1000 per consumer, the costs could quickly escalate into the billions of dollars and threaten the solvency of some insurers.

Each of the major insurer trade organizations filed briefs earlier this summer urging the court to accept the case and overturn the decision, but they are not the only ones following this case. Other groups, including the U.S. Chamber of Commerce, the Business Roundtable and the free market-oriented FreedomWorks Foundation, all have weighed in against the Ninth’s Circuit’s expansive opinion.

Besides having strong, substantive arguments on its side, the insurer community has at least one other reason to be hopeful. The author of the Ninth Circuit opinion is Stephen Reinhardt, perhaps the most liberal judge on that court and one of the most overturned appeals judges in history of American jurisprudence. The insurance industry is hoping that Judge Reinhardt’s latest opus meets a similar fate.

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



P&C Trends
Industry Due for a Shake-Up
A.M. Best’s ‘2006 Annual Earthquake Study’ warns of major quake.

Last Sunday, an earthquake registering 6.6 on the Richter Scale shook Hawaii. The “Big Island” was lucky and only sustained relatively minor damage, but that may not be the case with future tremblers. According to a recent report, the property-casualty industry is long overdue for a major earthquake.

A.M. Best recently released its “2006 Annual Earthquake Study,” which provides a historical perspective on earthquakes, the insurance industry and an examination of the abilities of the industry and public to absorb losses from such disasters.

The Loma Prieta earthquake, which occurred in California in October 1989, registered a 6.9 magnitude and was the last major quake to hit the continental United States; however, it was only an eighth the size of the 1906 quake that devastated San Francisco. Another catastrophic event is imminent, according to John Williams and Carole Ann King, co-authors of the study and members of A.M. Best’s analytical services group.

Great “cataclysmic ruptures” are considered overdue for the Los Angeles end of the San Andreas Fault and the Cascadia Subduction Zone. Yet California is not the only region susceptible to a shake-up---cities including Chicago and Philadelphia are also prime locations for earthquakes, according to Williams.

“If you go back over the last century, there isn’t a state or Canadian province that hasn’t had some sort of earthquake occurrence,” he says “The modelers can tell you that an earthquake will happen ever so many hundreds of years. For example, in the Cascadia Reduction zone, an earthquake seems to occur every 100 to 200 years, and it’s been 300 years since one.”

The study predicts that if an earthquake of 7.6 magnitude or higher were to occur in San Francisco, the insured loss would be more than $100 billion. A disaster anywhere would cause financial stress on insurers with concentrations of earthquake, fire and automobile, putting at serious risk insurers with vulnerable Best’s Ratings (“B” or below) and some of those not rated.

A major earthquake also would have a serious impact on the economy due to the relatively low take-up rates on earthquake insurance. An earthquake has the potential to cause more damage than a more fully insured catastrophe of equivalent insured loss because of the greater uninsured loss that would have to be absorbed by those with adequate insurance.

“One of the biggest issues that came out in the study is that there is a tremendous level of underinsurance when it comes to earthquakes, particularly with homeowners across the country,” Williams says. “About 10% to 15% of homeowners have insurance that covers earthquakes, which means most are not covered specifically for earthquakes. If a quake occurred, it would be similar to happened with Hurricane Katrina…people won’t want the insurance until a major disaster occurs.”

For more information or to view the study, click here.

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



P&C Trends
Insurance Industry Leads in Litigation
Study finds insurance industry has the most lawsuits filed annually.

The average American insurance company faces approximately 1,700 lawsuits on everything from product liability to coverage disputes each year, making the insurance industry the leader in litigation, according to Fulbright & Jaworski’s “U.S. Litigation Trends” survey.

The international law firm’s third annual survey of corporate litigation trends includes data from 422 in-house law departments that were polled on their top litigation concerns and attitudes. The survey found that the average caseload for most industries is 305 cases per year, but the insurance industry had five times the tally posted by the next three highest sectors: energy (364 cases), retail (333) and financial services (300). And there is little relief in sight for the industry, as more than half of the insurance companies reported taking on 50 or more new suits in the last year, and 25% expect their caseload to increase next year.

Aside from policyholder disputes (cited by 69% of participants), 38% of insurance companies’ general counsels reported that both class action and regulatory proceeding were their biggest concerns, followed by contracts (31%), personal injury (23%) and labor/employment (15%) issues. And while the majority of cases filed are in U.S. courts, the number of international disputes is also on the rise with more than one-third of companies reporting 20% of their dockets originate in foreign venues.

Being the leader in litigation isn’t costing just costing the industry valuable time. The survey found that the typical insurer reporting in the study spent an average of $36 million on litigation in the past year, and 17% report having more than 50 lawsuits pending with at least $20 million at stake. In comparison, only 6% of energy companies reported more than 50 lawsuits in the $20 million range.

The price tags of these lawsuits are something agents and brokers need to be conscious of, according to Bob Hartwig, senior vice president and chief economist at the Insurance Information Institute. While agents and brokers are not directly impacted when a company goes to court, they need to be cognizant of litigations trends because they impact the kinds of policies companies offer, as well as premiums.

“Changes in the tort environment have a direct bearing on price, availability and terms and conditions offered to clients,” Hartwig says. “They have to be aware of these rates because they can explain why an insurer might not want to write a certain kind of risk…and part of good customer service is explaining why things are happening.”

Fulbright & Jaworski’s survey includes several topics including the most prevalent types of lawsuits that businesses face and new legal burdens affecting their budgets. For more information, click here.

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



P&C Trends
Dryden Mutual Insurance Co. Joins Trusted Choice^®

Dryden Mutual Insurance Company, based in Dryden, N.Y., is the newest independent agency system insurance company to join the Trusted Choice® brand movement.

Trusted Choice®, launched in 2001 by the Big “I” and several independent agency companies, highlights the benefits independent agencies and brokerage firms offer consumers—choice of companies, customization of policies and advocacy support.

“Dryden Mutual Insurance Company is extremely dedicated to our distribution force—independent agents,” says Robert B. Baxter, CEO and general manager of Dryden Mutual Insurance Company. “There is no better way to strengthen our relationship with agents then by partnering with Trusted Choice®. The growing brand movement is very important to the future of the independent agency system, and therefore to our future as well.”

“We are pleased to welcome Dryden Mutual Insurance Company into Trusted Choice®,” says Trusted Choice® Executive Director Dave Evans. “Like all Trusted Choice® companies, Dryden Mutual recognizes the importance of brand excellence to consumers, and has fully committed themselves to the movement.”

“We eagerly look forward to working with Dryden Mutual to carry the Trusted Choice® message to their consumers as well as to their agency partners,” says Big “I” CEO Robert A. Rusbuldt. “The company has a long and well-established history in the independent agency system and is a valuable partner to its agencies. It is committed to growing the awareness of the Trusted Choice® brand among consumers, the agency community and the entire insurance industry.”

Founded in 1860, Dryden Mutual has been and remains committed to meeting the insurance needs of consumers in the state of New York. All of Dryden Mutual’s insurance products are distributed exclusively in New York through local, licensed independent agents. For more information, click here.

Emily Crane (emily.crane@iiaba.net) is Big “I” manager of media relations.



L&H Trends
Customers Make the Best Advocates

Selling insurance is one of the most competitive industries around. Consumers have several options for purchasing insurance, so agency principals should periodically review their market strategy to ensure that their agencies are executing it.

Anyone familiar with marketing has probably heard of the four P’s: product, placement, price and promotion. The four P’s are used to create a perceived value and to generate a positive consumer response. No matter what it is, always consider the four P’s when marketing a product or service.

These days, the four P’s might not be enough. Many companies are taking marketing to the next step by trying to transform as many of their customers as possible into “advocates” for their products and services. This is a smart approach because research consistently shows that word-of-mouth promotion is a powerful and persuasive tool.

How can an agency increase its profile by word of mouth? You want all of your current customers telling their friends and family about the value your agency offers because this generates new business. To turn customers into advocates for your agency, you just have to add two more P’s: people and performance.

People (employees) have a profound effect on customer loyalty. Their knowledge about your product, friendliness and approachability, motivation and dedication to serving customers are all tied to your agency’s ability to forge a lasting, profitable relationship with your customers.

Performance is the total customer experience as impacted by product, price, place, promotion and people. While each of these activities are important on their own, it is how they combine in harmony that matters most to consumers. It’s the best way to turn your customers into your advocates---and increase your profits along the way.

To implement this strategy, have the employees meet informally and identify the strengths and weaknesses in the agency. Ask employees how to improve on operating weaknesses so the agency’s customers will consistently receive the same service level regardless of who they deal with in the agency. This is the essential quality of building a brand. Advertising creates awareness, but having a brand is about having consistent service standards that customers will come to appreciate, which will build referrals.

Of course, the Trusted Choice® brand is designed to provide agencies with tools that can harness the essential qualities of branding while allowing for the agency to have its unique style. And by having thousands of agencies across the country with this focus, consumer recognition of the efforts will increase. Now is the perfect to review your agency’s practice.

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