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Big “I” National News

P&C Trends

The More the Merrier
Study reveals homeowners more satisfied when subscribing to multiple polices.

Homeowners insurance policyholders who bundle other policies with an insurer are more likely to be satisfied than those who only have a homeowners policy, according to the J.D. Power and Associates 2007 Homeowners Insurance Study^SM.

The study polled more than 100,000 households to identify customers of the 24 largest national insurers. J.D Power found 70% of homeowners insurance policyholders have additional policies with their insurer and as the number of policies with the insurer increases, so does the customer satisfaction. Customers who hold only one policy with their insurer had an average satisfaction score of 640 on a 1,000-point scale, which is 175 points lower than customers who hold five or more products.

“Policyholders can enjoy many benefits through bundling multiple insurance products under a single provider, such as convenience in billing processes and multiple-policy discounts,” says Jeremy Bowler, senior director of the insurance practice at J.D. Power and Associates. “In addition to higher satisfaction levels, customers who bundle products with their homeowners insurance carrier also tend to be more loyal and renew each policy at a higher rate than customers who purchase each policy from a separate provider. Offering bundled packages and effectively communicating their availability to policyholders can greatly impact the financial bottom line for providers.”

Bundling policies not only increases customer satisfaction, but it also is more profitable for agents. According to the study, the average customer pays approximately $800 annually for a homeowner’s policy, which equals a six-month auto premium for a two-car household— meaning auto insurance represents a significantly more annual premium to an insurer and larger commissions for agencies. Retention rates also increase when polices are bundled.

“While auto retention rates industry-wide have been fairly steady at approximately 89%, the retention rate is approximately 93% among bundled policyholders,” the study says. “Compared to the retention rates for customers who buy only auto insurance from their insurer, bundled policy retention rates are on average 9% higher. Bundling polices has an even larger positive impact on the retention of homeowners policyholder.”

In addition to gauging customer satisfaction based on the number of policies, the study also ranks the top homeowners insurance providers and, for the sixth consecutive year, Amica came out on top. Followed the company in the ranks are Erie, Cincinnati, State Farm, COUNTRY, Auto Club of Southern California, American Family, Nationwide, Auto Club Group and Liberty Mutual, respectively.

Additional key findings of the study include:

• Twenty-nine percent of homeowners insurance policyholders say they don’t know what kind of replacement coverage they have, and these customers tend to be less satisfied with their insurer.

• Most homeowners (59%) say they have informed their homeowners insurance provider about major home improvements that would affect coverage amounts.

• The most popular bundling option among multiple-policy holders is the combination of homeowners and auto insurance.

• While one in five policyholders indicate they have shopped for a new homeowners insurer within the last year, only 12% say they switched carriers between 2006 and 2007.

• Customers who report that their insurance company has re-evaluated the replacement cost of their home within the past year are considerably more satisfied than customers whose home replacement cost has not been examined since they initially purchased their homeowners insurance policy.

• Nearly one-fourth of all homeowners insurance policyholders indicate they have contacted their insurer regarding a billing statement issue. Of these policyholders, the majority report they were dissatisfied with the experience. In addition, more than one-fourth of policyholders indicate they have never received an adequate explanation of their bill, despite needing one.

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

VIEW: P&C Trends

Medical Malpractice: Lessons for a Soft Market
Analysis of A.M. Best’s 2007 Aggregates and Averages.

Medical malpractice is interesting in its own right as it makes up about 2% of the entire p-c industry’s premiums and 1% of agent/broker commissions in a line of business that regularly generates newspaper headlines, according to A.M. Best’s 2007 Aggregates and Averages. Beyond that, however, this industry segment provides a Petri dish-like environment where causes-and-effects can be studied and projected onto other homogeneous lines of business like our own insurance agency E&O program.

So what might an independent agent conclude from looking retrospectively at the med-mal industry? Take a look at the chart below.



*Source: A.M. Best Company: 2007 Aggregates & Averages

First, an industry segment’s financial health is more about premiums than anything else. Industry health cannot ignore the need for adequate pricing and, as we all know, premiums can change dramatically as competitive conditions vary from hard to soft markets. Just look at the impact on pricing when the largest writer in this industry segment at the time (St. Paul, later acquired by Travelers) announced in December 2001 that it was leaving the market. With that announcement, 750 hospitals, 42,000 physician and 73,000 other health care professionals were out looking for replacement coverage. No empirical evidence is readily available, but one would suspect these accounts then found replacement coverage at higher prices resulting in the increase in total premiums from approximately $6 billion to the more than $11 billion written in 2006. Loss ratios have fallen since and talk of the medical malpractice crises has waned.

Second, an industry segment cannot ignore good old-fashioned risk management. In researching this article, IN&V found a wealth of information on favorable impact of successful tort reform initiatives on insurer interest in and prices of medical malpractice (see American Tort Reform Association). Most recently, Aon’s study in conjunction with American Society of Healthcare Risk Management sites a leveling of claim frequency in hospitals and a 3% drop in severity, and they correlate the results to better loss prevention via patient safety initiatives and awareness. As students of the risk management process, you probably recognize two of the three pillars of non-insurance risk management in loss reduction and loss prevention (with exposure avoidance being the third unavailable option if one is a healthcare provider).

Finally, the graph illustrates the announced bankruptcy of Frontier Insurance Group, a well-known writer of med-mal coverage in the 1990s. A paper published on the medical malpractice crises by big industry thinkers at Wharton (insurance) and Yale (public health) cites evidence that Frontier and nine others went bankrupt after showing evidence of “excessive price-cutting” in the preceding soft market. The conclusions and observations are precisely written in the paper, so we will not try and replicate it here but rather just observe that it seems wise we remain wary of insurer growth in the face of a soft market. With Frontier as an example, one would be wise to take caution in dealing with an insurer that grows from the 16th largest writer of medical malpractice to the eighth largest while doubling premiums from $73 to $142 million—all during the same three years that industry premiums were nearly flat.

Related Links and Sources:

1. The New York Times article: “St. Paul Cos. Exits Medical Malpractice Insurance,” click here.

2. American Tort Reform Association, click here.

3. Insurance Information Institute: “Issue Update” on medical malpractice, click here.

4. Times Herald-Record article on Frontier Insurance Bankruptcy, click here.

5. Wharton/Yale Medical Malpractice “Crises,” click here.

Editor’s note: This is the second 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.




EXCLUSIVE: Carrier News

A Different Approach
RLI launches new branding, underwriter recruiting program.

RLI is rolling out a new branding and underwriter recruiting campaign that will, for the first time, unify all its business units under one business model. The campaign features the tagline “Different Works” and includes a new set of advertisements by artist Joel Nakamura. The new two-pronged initiative will not change the culture of the company, but rather reposition it for growth, according to Aaron Jacoby, RLI vice president of corporate development, who spoke with IN&V about the campaign.

IN&V: What made you decide to launch the new campaign now?

Jacoby: The market has become a bit more challenging for insurance companies…we needed to reassess our brand and what’s important, so we took this opportunity to step back and talk with a lot of people inside and outside of RLI.

IN&V: What does the new branding campaign include?

Jacoby: In terms of the message itself --- it’s trying to define who RLI is not only to agents and brokers, but also in regards to underwriters who deliver product to agents and brokers…and we think that’s a particular area where RLI has always differentiated itself from others.

IN&V: What do you hope this campaign achieves?

Jacoby: Building a message with all the people who we do business with…what’s different with this campaign is that it’s designed to attract the kind of people to RLI that others want to do business with. We want to continue to attract talent to RLI, so in some ways it’s like a recruiting campaign. Sure, we’ve got financial strength ratings, but underwriters are what differentiates one insurance company from another.

IN&V: How does your approach to underwriting differ from others?

Jacoby: The reasons we are different is because we tend to have entrepreneurial culture at RLI underwriters in field really run their own business. We’ve given them the freedom to; we’re not a home-office kind of company.

IN&V: How will this campaign affect independent agents?

Jacoby: Really it’s meant to highlight how RLI is different in terms of services we offer...we have found that agents and brokers recognize the difference that having a quality underwriters makes.

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




L&H Trends

Social Security Hits Milestone
Wage base passes the $100,000 threshold for 2008.

The Social Security Administration reached a milestone this week when it announced the 2008 benefit adjustments. Officially titled “Old Age, Survivors and Disability Income” (OASDI), most people refer to the program simply as “Social Security.” The amount of wages now considered for purposes of payroll taxes is $102,000 for 2008, but note that there isn’t a cap on the amount for Medicare contributions. So individuals pay 6.2% for Social Security, up to $102,000, and 1.45% for Medicare on all earnings. Since many independent insurance agency principals are smaller-sized businesses, the combined tax on the agency owner is 15.30%.

For 2008, the increase in monthly benefit payments was 2.3%. However, the increase in the actual wage base was approximately 4.6%, so the wage base amount (taxes collected) increases at twice the rate of the cost-of-living adjustment. This means that, over time, the payroll tax increase will go up significantly. Some politicians in Congress would like to eliminate the Social Security cap entirely so the full amount of wages is subject to taxes. Yet, the maximum amount of the monthly benefits paid is “front loaded,”  i.e. lower-paid individuals received a proportionately higher amount than middle and upper earners, which makes sense. Of course, the value of Medicare is not salary sensitive yet there is no cap on the wage base.

The problem is that there is actually no cash in the Social Security trust fund to pay for future benefits. In fact, the Social Security Web site states:

“The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.”

In reality, the Social Security trust fund consists of billions of dollars in IOUs being passed on to the next generation. It is interesting to note that the president who enacted Social Security, Franklin D. Roosevelt, wanted to provide a safety net for older Americans. The president said on the Aug. 14, 1935, signing of the Social Security Act: “It will act as a protection to future administrations against the necessity of going deeply into debt to furnish relief to the needy.”

One of the prime motivations for FDR to enact Social Security legislation was in fact to avoid the very situation that we are now in. People can debate the scope of program, benefits, taxes, etc., but it is difficult to ignore that the originator’s desire was to have a program that would provide benefits that would be actually funded and not left to be a burden to future taxpayers.

What is the lesson for independent insurance agents? Help communicate to clients the benefits that Social Security brings, but also discuss ways to help minimize the payroll tax burden and establish of retirement plans, health savings accounts and other vehicles that customers can fund today so they have some confidence tomorrow.

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




Forms & Substance

Is Sewage a Pollutant?
Even if the definition fits, exclusion may not apply.

A contractor accidentally caused a sewer line to collapse, resulting in a backup into a nearby home. The CGL insurer denied the claim, citing the pollution exclusion. Is sewage a ”pollutant“ under the CGL? Does the pollution exclusion apply?

An agent sent the following inquiry to the Big “I” Virtual University faculty:

"My insured contractor, digging in the street to lay underground utility lines, bumped a sewer line, causing it to collapse. After the insured closed the trench, the sewer line backed up into a nearby home causing a small amount of damage. The insurance company is denying the claim under the pollution exclusion where it says: ‘At or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste.’ Do you agree?”

If the exclusion applies, about all your insured—and every other excavation, plumbing, utility, landscaping, etc. contractor in America—can do is buy pollution liability coverage. It appears that the adjuster is familiar with the pollution exclusion because the “waste” portion of the exclusion is the only possible part of it that could conceivably apply to this claim.

At issue is whether or not sewage is a “pollutant,” and specifically a “waste.” Also pertinent is, even if sewage is a “pollutant” and “waste,” does the loss constitute a pollution event with regard to the damage done. Court interpretations vary.

Critical to the validity of the denial of this claim is the specific exclusion cited above. Absent that, there would definitely be coverage even if sewage was a “pollutant” (but not a “waste”)...the general pollution exclusion doesn’t apply to completed operations nor to on-going operations away from premises unless the insured brings the pollutant onto those premises. That certainly wasn’t the case here, so that leaves the “waste” component of the exclusion.

Court interpretations seem to vary, depending on the jurisdiction, with some courts finding that damage caused by sewage (either first-party or third-party claims) is excluded by pollution exclusions, while others finding that it’s not. However, even some courts that have found that sewage may be a “pollutant” have found that some claims arising out of sewage damage don't constitute “pollution.”

The following courts have upheld pollution exclusions involving sewage:

* Hydrodynamics, Inc. v. Auto-Owners Ins. Co., No. 193389 (Mich. Ct. App. July 11, 1997)

* Royal Ins. Co. v Bithell, 868 F Supp 878 (Ed Mich 1993)

* East Quincy Services Dist. v Continental Ins. Co., 864 F Supp 976 (ED Cal 1994)

* City of Salina, Kan. v Maryland Cas Co., 856 F Sup 1467 (D Kan 1994)

The following courts have found that the exclusion(s) do not apply:

* Cedarhurst v. Hanover Ins. Co., 89 N.Y.2d 293, 675 N.E.2d 822, 653 N.Y.S.2d 68 (N.Y. Ct. App., 1996)

* Guenther v. City of Onalaska, 223 Wis. 2d 206; 588 N.W.2d 375; (Wisc. Ct. App., 1998)

* Minerva Enterprises, Inc.. v. Bituminous Casualty Corp., 312 Ark. 128; 851 S.W.2d 403; (Ark. Supreme Court, 1993)

* United States Fidelity and Guaranty Company v. Jewel Armstrong, et al., 479 So. 2d 1164; (AL Supreme Court, 1985)

Whether there's coverage may largely depend on the court having jurisdiction.

For a more detailed analysis of some of these cases and our opinions, click here.

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University.