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Big “I” National News

Legal Advocacy

IIABA Files Reply Brief in Zurich Settlement Case

IIABA filed a reply brief last Friday to the oppositions to the amicus curiae (friend of the court) brief it filed last month in New Jersey federal court. The lawsuit at issue is a class action involving producer compensation and disclosure. IN&V reported on those oppositions in its Sept. 28, 2006 issue.

The Big “I” amicus brief addressed the burden on agents and brokers created by the Zurich Settlement entered into in March 2006, which requires that agents and brokers provide customers with the company’s Mandatory Disclosure Form. Opposition to the Big “I” brief was filed by Zurich, the plaintiffs in the litigation, and the attorneys general who signed the Multistate Agreement. The opposition argued that the Big “I” amicus brief was filed prematurely, but did not question the credentials of the Big “I” to advise the court on the significant impact that the Zurich Settlement will have on brokers and agents.

Some of the key points in the Big “I” reply brief include:

• The Big “I” provides the court with important information about the negative consequences consumers as well as insurance agents and brokers will experience if the court approves the proposed part of the Zurich Settlement mandating use by agents and brokers of the company’s Mandatory Disclosure Form.

• Mandating that agents and brokers use Zurich’s Mandatory Disclosure Form will inhibit communication agents and brokers have with customers and cause increased customer confusion about incentive compensation.

• The attorneys general opposing the Big “I” amicus represented to the court in August 2006 that they intend to seek court approval of the Zurich settlement, which includes the requirement that brokers and agents provide customers with the Zurich’s Mandatory Disclosure Form. If it was timely then for them to intervene in the lawsuit for that purpose, the Big “I” request to appear as amicus is timely now.

• Contrary to the suggestions in the opposition filed to the Big “I” amicus, IIABA does not oppose “pre-binding disclosure” of incentive compensation; rather IIABA opposes the proposed requirement that agents and brokers provide their customers with Zurich’s Mandatory Disclosure Form.

• The Big “I” had no opportunity to raise concerns about the Mandatory Disclosure Form before the Zurich Settlement requiring it was executed.

• By filing its objections to the Mandatory Disclosure Form now, the Big “I” is giving Zurich, the attorneys general and the plaintiffs time to revise the Mandatory Disclosure Form voluntarily, before the final fairness hearing when it will be before the court.

• Zurich represented to the Court that compensation disclosure was something that state insurance regulators and multi-state attorneys general “required Zurich to undertake” so the court’s order should reflect what Zurich acknowledged---that the obligation to deliver the Mandatory Disclosure Form to consumers belongs to Zurich, not insurance agents and brokers.

The reply brief and other filings in the lawsuit of interest to agents and brokers are posted on the members-only Legal Advocacy section of www.independentagent.com.

The Office of the General Counsel will continue to keep you updated on any significant rulings related to this issue, additional actions the Big “I” takes in this litigation, and further developments on the producer compensation issue.

Debra Perkins (debra.perkins@iiaba.net) is Big “I” executive vice president and general counsel.

P&C Trends
Insurance’s Role in Accelerating Katrina Recovery
Discussion, report stress need for confidence in rebuilding Gulf Coast region.

The Financial Services Roundtable’s Blue Ribbon Commission on Mega-Catastrophes sponsored a panel discussion on accelerating the Katrina recovery yesterday in Washington, D.C. The event was held in order to facilitate discussion on the interim report, which includes 24 recommendations that will accelerate the Gulf Coast’s recovery from Hurricane Katrina.

James Richardson, an alumni professor of economics at Louisiana State University, presented the study to the public during the discussion and emphasized that confidence is key when it comes to restoring Alabama, Louisiana and Mississippi to their original, pre-Katrina state.

“In the end, when people return to the area and when businesses are back up and running---that is when we can say the recovery has been successful,” Richardson says. 

Confidence within the insurance industry is also a necessary component in the region’s recovery---but that will require the government to reassure insurers they will be protected in the event of another mega-catastrophe, according to panelist Bob Hartwig, senior vice president and chief economist at the Insurance Information Institute.

“Fundamentally, what determines the success of the economy is going to be confidence by inhabitants and businesses in the economy, but it is confidence that is lacking in these areas,” Hartwig says. “On the part of the insurance industry, confidence is important to us because we need the confidence that the government is going to insure our contracts…if that is absent then there is a complete loss of confidence.”

The industry reacted quickly following last year’s storm season and, as of July, nearly 95% of all homeowners’ claims for damages caused by the storm in Louisiana and Mississippi had been resolved, according to the III. However, not everyone has been satisfied; some Mississippi policyholders have sued insurers for failing to pay for flood or storm surge damage that was excluded from standard homeowners’ policies and was instead insured through the Federal Flood Insurance Program. These judicial proceedings are hindering the recovery process, according to the report.

“…Our view is that resolution of these disputes needs to be completed as quickly as possible,” the report says. “Already, mediation has been successful in resolving many disputed claims. State judges should continue to use mediation to the maximum possible extent, and also explore other methods for expediting claims resolutions, including mandatory, non- binding mediation.”

The report also recommends resolving the paradox of an increase cost and decrease in availability of insurance in private markets for the Gulf Coast’s residential and commercial customers. According to the III, homeowner’s losses in Louisiana from Katrina equaled 25 years of insurance premiums collected in the state. In Mississippi, the damages equaled 17 years of premiums collected. The report recommends a series of policy measures at the state level including state regulatory policies that permit actuarially sound premiums and methodologies to reduce concentration and diversity risks. It also recommends federal measures such as enhancing the viability of the catastrophe bond market, changing the federal tax law to permit catastrophe reserves to be tax-deductible expenses and adopting a federal reinsurance backstop program.

Hartwig agrees with the report’s demand for better policy measures and thinks improvements need to be made to promote more capital not only in states affected by Katrina, but throughout the coastal region. He also advocates for stricter rules when it comes to issuing building permits in coastal cities.
 
“We have a situation where local authority are the decision makers and allow property to be built in areas, but bear little of the consequences,” Hartwig says.

Financial Services’ report “Accelerating the Katrina Recovery” is a follow up to an earlier study, “What’s Needed for Post-Katrina Recovery,” and will be part of a larger study on mega-catastrophes to be released this April.

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

P&C Trends
The Danger Zone
Cities on new list of top hurricane-vulnerable areas continue to face coverage difficulties. 

Paradises such as the Outer Banks in North Carolina and the Florida Keys, Miami and Saint Petersburg in Florida all rank high on the dream destination lists of tourists who seek a warm, seaside area. However, they also score high on a list nobody wants to be a part of: the 10 most hurricane-vulnerable areas in the U.S. mainland.

The list, compiled by Stephen Leatherman, director of the International Hurricane Research Center in Miami, was based on 12 criteria including: vulnerability of the area to hurricanes, levee/dike failure rate, storm surge and freshwater flooding potential and socioeconomic factors such as population, evacuation route accessibility and emergency response times.

The rankings are as follows:

1. New Orleans, La.
2. Lake Okeechobee, Fla.
3. Florida Keys
4. Coastal Mississippi
5. Miami/Ft. Lauderdale, Fla.
6. Galveston/Houston, Texas
7. Cape Hatteras, N.C.
8. Eastern Long Island, N.Y.
9. Wilmington, N.C.
10. Tampa/St. Petersburg, Fla.

Taking all 12 factors into consideration, New Orleans ranked No. 1 on the list because the below-sea-level city is susceptible to the largest storm surges as demonstrated last year when hurricane Katrina flooded 80% of “The Big Easy.” Leatherman warns that coastal Mississippi and Louisiana are still in for more catastrophic hurricanes.

“Katrina was not a fluke; it’s going to happen again,” he says.

Due to the high vulnerability in the areas on Leatherman’s list, many insurers are finding it difficult to write policies in the area, according to Ben Beazley, CEO and managing director of Chartwell Independent Insurance Brokers, LLC, in California.

"You could probably make this a top 50 list including cities from Long Island, N.Y. to Beaumont, Texas,” Beazley says. “It is very hard to place insurance in these places at the moment. It’s nearly impossible to get coverage unless you have it from a state pool.”

The market for insurance in these areas is also a lot tougher, especially along the Gulf Coast where many insurers “packed up and left” after the past two storm seasons.

“In the last two years, the losses were so great and they shouldn’t have been unexpected, but they were,” Beazley says. “(Using the RMS modeling system)…now you are getting a model that says you shouldn’t be writing in this area, and even if you think you can write it, you cannot write as much of it because of your reinsurance.”

Beazley encourages agent in these areas to make sure their valuation is accurate.

“Nowadays when it comes to placing a catastrophe account, if we don’t agree with you, we’re going to place our own valuation,” he says. “Most insurance companies today will tie back indemnity they will pay to the schedule of values. So be very cautious of the valuation.”

Leatherman has been studying hurricanes for 37 years and has lived in many of the areas on the list.

“I know all of these areas like the back of my hand,” he says. “The purpose of the list is not to scare people but to reveal some things people can do to improve the situation and to make people more aware of their surroundings.”

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

P&C Trends
Sales Forces to Be Reckoned With
Selling Power magazine ranks top 500 largest sales forces.

The 500 top companies in America depend on 17.7 million salespeople to achieve their revenue goals, making sales people an invaluable asset to every company---and nowhere is their value more obvious than in the insurance industry, according to a recent assessment.

Each year, Selling Power magazine does an annual assessment of America’s Largest Selling Forces, ranking companies according to the number of salespeople they employ. This year’s list includes the top 50 insurance companies whose salespeople are making an impact on the industry.

Rounding out the list of the top five largest insurance sales force are: Hartford Financial Services Group, Inc. (100,000 sales people), AFLAC (56,000), Torchmark (49,000), One America Financial Partners (48,442) and Jefferson-Pilot/Lincoln Financial (46,000). Other companies with high rankings include: Progressive (30,000), St. Paul Travelers (11,000) and Safeco (8,500).

According to Paul Buse, president of Big “I” Advantage (the Big “I” for-profit subsidiary), the companies boasting high sales forces are among the most successful in the industry because they have a component crucial to the insurance business: talented sales people.

“Sales in insurance are critical to success in all lines,” Buse says. “Without a solid sales aspect, no insurer or agency will thrive as there will not be the requisite growth needed to keep the best talent. To make the ‘you need the best talent to thrive’ point, you must realize insurance is, at its core, just people and financial capital. So, not having the best people will doom either an insurer or an agency.”

According to the study, the total number of salespeople employed by all 500 companies is 17,696,470, which represents a 1% increase of 229,952 from last year. The increase is one of the smallest in recent year and is a result of an increase in the direct-selling category. However, the top 50 insurance companies showed a total sales force of 692,802 with an average sales volume per salesperson of $984,978. This represents a 14 % increase in productivity over last year even though the number of salespeople has remained the same since 2005.

“The 14% growth figure is dramatic,” Buse says. “No doubt much of this comes from the hardening insurance market due to a cyclical hardening that had started around 1990, but was then exacerbated by 9-11 and then the hurricanes and fear of catastrophes in general. I’m surprised; the 14% seems high. I would expect the data would be softened by the life insurance and benefits sales components.”
 
The list also includes the top 200 companies in manufacturing, the top 200 companies in the service industry, the 30 largest direct-selling companies and top 20 automotive-dealer organizations. For more information, visit www.sellingpower.com.

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

On the Hill
Taylor Proposals Sound Alarm Bells for Industry
Consumers, agents stand to lose if recommendations are implemented.

Representatives from a Democratic Congressional group have put forth a number of recommendations that are raising eyebrows in the insurance industry.

Reps. Gene Taylor (D-Miss.) and Charlie Melancon (D-La.) issued recommendations in their positions as chairman and vice-chairman, respectively, of the House Democratic Caucus Hurricane Katrina Task Force. The suggestions include ending the McCarran-Ferguson antitrust exemption for property insurance, requiring homeowners insurance to cover all perils—including flood damage—and establishing stronger federal oversight of property insurance practices.

“We are very troubled by a number of these recommendations,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Repeal of the McCarran-Ferguson Act and federal regulation of the property insurance market run contrary to everything we believe is best for the marketplace and for consumers, and we will be working diligently to make our case that these points, even if well-intentioned, are misguided.”

On the first point, the Big “I” believes strongly that repealing the McCarran-Ferguson exemption would disproportionately harm small insurers, reduce competition in the market, and provide fewer choices to consumers.

“Consumers are better served when they have a wide variety of choices,” Symington says. “Anything that would create additional regulatory burdens for small and medium-sized companies ultimately leads to fewer competitors in the market, which is bad for consumers, not to mention our members.”

And, of course, the last point is extremely troubling, because it goes beyond even the “optional” federal charter suggestions being put forth now by supporters of federal regulation.
 
“We have said all along that the current state-based system needs reform, greater uniformity and reciprocity and more efficiency, but federal regulation is not the way to get it done,” Symington says. “Regulation at the state level is closer to consumers and better able to assess their needs than a new federal bureaucracy in Washington, D.C., could ever do, and possible federal regulation of property insurance with its many local issues would deprive consumers of a tremendous store of institutional knowledge and expertise.”

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/government relations.

L&H Trends
Ins and Outs of Beneficiary Designations

Most people don’t pay a lot of attention to their life insurance or retirement plan’s beneficiary designations. Singles generally name a family member such as a mother or father as the primary beneficiary and then name a sibling as a contingent beneficiary. Married insureds (or retirement plan participants) typically name their spouse as the primary beneficiary and their children as contingent beneficiaries. Sounds simple, right?

Not quite. Most people fail to update their beneficiary designations as events in their personal lives change; others fail to understand that naming minor children as beneficiaries will create problems in the event of their deaths. This also applies to an employer’s group term life insurance benefits.

Turning to the basics, a big advantage of life insurance contracts and 401(k) plan accounts is that the proceeds are immediately paid to the named beneficiaries. This means that the proceeds will not be subject to probate unless the deceased’s estate is named as the beneficiary, saving time and expense. However, it can be a two-edged sword if the deceased person’s beneficiary designation was outdated. For example, if an individual named his sister the beneficiary of his 401(k) plan balance and then failed to update the beneficiary designation after he got married, the proceeds will be payable to the sister and not the spouse.

Another common problem is a divorced person wanting to name his/her minor children as the primary beneficiaries. Depending on the state of residence, minor children cannot directly receive the proceeds of a life insurance policy, annuity or retirement plan if they are named beneficiaries. To remedy this, name a guardian to receive the proceeds for the child’s benefit, or set up a trust for the child that will be named as beneficiary. Upon the insured’s death, the trustee will become the legal owner of the proceeds and since the child will be the trust’s beneficiary, they will receive the trust’s proceeds. Examples of the beneficiary designation in this case include: “Trustees of the John Smith Trust Agreement dated 01/01/00,” “Trustee of the John Smith Irrevocable Trust dated 01/01/00” or “John Smith for the benefit of Jane Smith and John Smith.”

More issues can arise if several children are named as beneficiaries and some of them have children. In the event one of the adult offspring predeceases the insured parent, the insured must decide how such grandchildren will share in the proceeds with their other living children, with the question being whether everything will be divided equally or whether the grandchildren will split what would have been their parent’s share.

The issue can be solved by understanding the methods of distributing property to family members and heirs: per stirpes (“branches of the family”) and per capita (“by heads”). For example, say there are three adult children and one of the three dies having two children of their own. Under a per stirpes distribution, the two children of the deceased parent will each receive one-half of their deceased parent’s one-third share of the proceeds. Under a per capita distribution, the two children of the deceased parent will receive one-quarter of the proceeds along with the two adult children who would also receive one-quarter shares each. The same problem regarding having minor children named as per capita beneficiaries would remain if they are minor and legal guardians had not been named and/or a trust had not been set up.

It’s important for independent agents to raise this issue with their customers during annual reviews. Remember to consult a customer’s attorney when it comes to estate planning, especially if it involves trusts documents. And, independent agents are well advised to review their own beneficiary designations.

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