..:: Insurance News & Views ::..

H U R R I C A N E U P D A T E
Latest Storm Adds to Unprecedented Season
Observers say aftermath could lead to rating downgrades.

Hurricane Wilma became the eighth storm to hit Florida in the past 15 months, dealing a potentially crippling blow to the state’s insurers, still reeling from 2004’s healthy dose of hurricanes.

The Category 3 hurricane slammed into Florida during Monday’s early hours, hitting just south of Naples with winds reaching 125 mph. It pummeled through Florida at a breakneck pace, weakening slightly to a Category 2 as it bore down on areas that contain 60% of the state’s population.

"The largest driver of losses will be the concentration of properties on Florida’s east coast between West Palm Beach and Miami. AIR estimates that there is more than $500 billion of insured properties in Miami-Dade and Broward counties alone," says Dr. Jayanta Guin, AIR Worldwide vice president of research and modeling. "Based on Wilma’s large size—hurricane force winds extend about 90 miles from the center—we expect to see widespread, though less severe, damage on the east coast."

AIR places damage estimates between $6 billion and $9 billion, while EQECAT estimates between $4 billion and $8 billion.

What does that mean for the insurance industry? Well, it’s not good news. According to A.M. Best, Wilma’s claims, coupled with the avalanche of claims from hurricanes Katrina and Rita before it, could be a breeding ground for problems. In fact, "a number of companies’ claims operations may be stressed, leading to greater risk of error, bad faith claims and undetected fraud," says a company statement.

Additionally, A.M. Best says that the effects of all three hurricanes could lead to "increased likelihood of rating downgrades or negative revisions to insurers rating outlooks."

For insurers with large exposure in the Gulf region, 2005 is going to hurt. "If we look at Wilma’s direct financial impact, which is heaped on what has already been a costly year for insurers in the Gulf region, it’s going to be a shock to their capital," says Robert Klein, an associate professor and director of Georgia State University’s risk management and insurance department. "That has an immediate effect because it hits their bottom lines. Inherently, that’s capital that, unless it was excess, will have an impact on their need to raise rates."

The need to raise rates can become a political problem because the market most likely will not embrace a large rate increase. "Agents are going to be in the middle of that unfortunate tension," Klein says.

Commercial insurance premiums can expect a hit, according to the latest RIMS Benchmark Survey. While most renewals already have secured pricing, risk managers reported that property program renewals not-yet processed were encountering up to 20% rate increases in the wake of the hurricanes.

Thanks to a profitable market, renewal rates had been tending downward prior to the hurricanes, according to RIMS. "But the devastation of Katrina and Rita is only now beginning to translate into higher renewal prices. The whole picture could change dramatically in the coming quarters," says Karen Beier of the RIMS board of directors, membership and chapter services portfolio.

"Risk managers who saw their renewal prices drop said they felt lucky, because those who experienced the hurricane effect are now explaining to their management why renewal premiums just went through the roof," says David Bradford, editor in chief of the Advisen, which manages the survey. "The real question is whether Katrina and Rita will have a lasting effect and strengthen the market for a time—potentially in all lines of business, not just property—or whether this is a short-term blip in what has proven to be a pretty resolute soft market."

Most thought the 2004 hurricane season was one for the record books, but it turns out that 2005 is giving it a run for its money. Last weekend, this year’s season became the most active in 150 years of storm tracking with its 22nd named tropical cyclone Alpha.

P & C T R E N D S
Insurance Industry Image Tarnished Post-Hurricane
Public rates post-Katrina carrier response lower than charities and non profits.

Thumbs up for organizations like the Red Cross and thumbs down for the insurance industry—that’s the public sentiment about post-Katrina relief efforts, according to a recent poll. According to a study just released by Ipsos, a global survey-based market research company, nearly all respondents approve of the job charities and non profits are doing. In stark contrast, only 18% of respondents approve of the job the insurance industry is doing.

The nationwide study of more than 1,000 adults revealed 43% of Americans disapprove of the job being done by insurance carriers and 39% are currently undecided. "The results for the insurance industry are troubling," says Thomas Miller, regional senior vice president and managing director of Ipsos Public Affairs in the United States. "The insurance industry rates below all levels of government (national, state and local) and aid organizations in its response to the hurricane. Tensions among the key players—the federal, state and local governments, their disaster and relief agencies, the insurance industry and hundreds of thousands of policyholders—seem unavoidable."

Interestingly, the study also found that only two thirds of survey respondents had homeowners or renters insurance, and a mere 8% had flood insurance policies. Further, less than half (47%) of respondents with a household income of less than $25,000 have their home insured, compared with 80% of Americans with a household income of $50,000 or more.

O N T H E H I L L
Tax Reform Heading into 2006
Possible proposals include eliminating itemization and AMT repeal.

Since President Bush took office in January 2001, his administration has pushed an aggressive economic agenda centered around reducing taxes on individuals and businesses. During his final three years in office, the president not only will focus on making these tax cuts permanent, but also on a complete overhaul of the Internal Revenue Code, aimed at tax simplification and fairness. While the upcoming weeks will reveal in greater depth some of the changes that may be proposed, which reforms will be pursued—and their potential impact on Americana and Main Street businesses—remain unclear.

At the crux of any administration proposal to Congress will likely be several principles examined by the President’s Advisory Panel on Federal Tax Reform. A January 2005 Executive Order created this nine-member panel, chaired by former Senators Connie Mack (R-Fla.) and John Breaux (D-La.), to assist in reforming the Internal Revenue Code and to make recommendations to the Treasury Department not later than Nov. 1, 2005. The only requirements placed on the tax commission were to consider revenue neutral policy options that would reduce costs and the administrative burdens of compliance, and encourage economic growth and job creation, while recognizing the importance of homeownership, charity and savings to American society.

Last week, the advisory panel revealed the initial details of its final report due out later this month, including its interest in two alternative approaches. One approach would reduce tax rates and eliminate itemization and some deductions. A second plan’s details are not fully available, but it would move toward a consumption tax. Given the revenue-neutral nature of the commission’s recommendations, some provisions must boost revenue and may be unwelcome to the general public, such as controversial proposals expected to end deductions for state and local taxes and to limit deductions on mortgages and employer health care. In turn, U.S. taxpayers and businesses would more favorably greet other proposals to restructure existing tax rates, eliminate taxes on dividends to corporate shareholders, reduce taxes on capital gains and replace today’s uneven depreciation schedules with unlimited expensing of assets. Another selling point, yet an expensive recommendation, could be the repeal of the alternative minimum tax (AMT), which continues to affect an increasing number of individuals and businesses since the Bush tax cuts 2001 and 2003.

Ultimately, despite a Republican administration and a Congress with a preference for lower taxes, it remains unclear how much traction these proposals will receive in the remainder of the 109th Congress due, in part, to the recent natural disasters and looming budget deficits, not to mention what is already expected to be a divisive midterm election year in 2006. However, it is clear that the issue of tax reform will be a hotly debated topic in the upcoming months, and there are certain to be winners and losers in every plan detail.

O N T H E H I L L
Amendment Defunding Controversial
Crop Insurance Plan Included in AG Bill

The Big "I" this week won an important victory with the introduction of an amendment defunding Premium Reduction Plans (PRPs) in the agriculture appropriations conference report.

The Kingston-Boyd provision would go into effect July 1, 2006, the start of the 2007 reinsurance year. The provision will not interfere with the 2006 reinsurance year, which ends June 30, 2006, thus guaranteeing that no farmers will have to worry about previously purchased coverage.

The Big "I" has sought the defunding of this program because of various issues with PRPs that are contrary to the best interest of consumers. The U.S. Department of Agriculture’s Risk Management Agency (RMA) published an interim rule allowing providers to give rebates to their customers, a provision at odds with the laws of 48 states, an unprecedented departure from longstanding Federal Crop Insurance Program (FCIP) regulations prohibiting rebating.

"If rebating is allowed under Premium Reduction Plans, insurance providers would be forced to focus on cutting corners rather than providing quality service and better risk-management products for farmers," says Norm Nielsen, Big "I" Crop Insurance Taskforce chairman and president of Associated Insurance Counselors Inc. in Preston, Iowa. "This fundamental shift away from service-based competition for the crop insurance business of farmers, unheard of in the Federal Crop Insurance Program, would force insurance providers into a race to the bottom, cutting back on service for America’s farmers. That is why lawmakers in 48 states have enacted laws against the practice of rebating. Their wisdom should be respected."

In addition to the inherent problem of cutting service, there is also the problem that the PRP rebating scheme offers rebates to farmers in some states but not in others. The existing FCIP does not allow discrimination in favor of farmers in one state over farmers in another state, but the PRP scheme would violate that principle.

"The PRP proposal is a dangerous shell game under which farmers in some states stand to be short-changed in order to pay rebates elsewhere," says Patrick O’Brien, Big "I" director of federal government affairs. "This opportunity for discrimination must not be allowed. We are very pleased that the Kingston-Boyd amendment has been included in the final agriculture spending package, and we look forward to its enactment as part of the government’s fiscal year 2006 budget."

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.

T E C H U P D A T E
Do Carriers Put Their Best Cyber-Foot Forward?
Survey shows insurance industry lags in online customer service advances.

The insurance industry is a consumer-driven, customer-service oriented industry. As an industry dependent on word of mouth and client satisfaction, it is vitally important that agents show consumer how valuable they are. Yet, according to a new study, the insurance industry is not putting its best foot forward when it comes to making good impressions online and in person.

The Customer Respect Group’s recently published "Fourth Quarter 2005 Online Customer Respect Study of Insurance Firms" shows that the insurance industry remains the only industry sector evaluated with no Web site reaching the standard of Excellent. The overall industry rating slipped slightly from the last report, contrasting with the trend of slow but steady improvements being made in most industries.

"The insurance industry seems stuck in a dilemma of whether to, or how to improve customer-friendly policies," says Terry Golesworthy, president of The Customer Respect Group. "The industry has made the least progress of all major customer-focused industries. Moreover, companies continue to share information with third parties at a far higher rate. Our strong recommendation is that to avoid customer defections, insurers pay stronger attention to these issues."

The insurance industry fell behind other industry sectors in many key areas. According to the survey, the industry failed to respond to 26% of e-mail inquiries compared to an "ignore rate" of 16% for financial services. While the quality of the responses improved slightly, the response speed decreased, resulting in just 16% of e-mails responded to in a helpful manner and within 24 hours. The health care plans ignored more than half of the e-mail inquiries.

Insurance Web sites also lack privacy. Only 13% of companies provide privacy policies with a good structure that allows easy access to key information. This is nine percentage points below the 2004 average figure. Also, 34% of insurance companies share data with business partners or third parties without explicit permission from customers, compared to 24% of all companies in 2004. This may be higher still as 11% of companies have unclear data-sharing policies. During the past four reports, there was a steady decline in insurance companies’ policy clarity. The trend in other industries is toward greater transparency.

The most consistent company is Progressive, which topped the list for the past three reports. Also worth noting are TIAA_CREF and Kaiser, both of which maintained good ratings over time. American International Group recorded the most improved rating in the study. Property-casualty had the best sector average with a Customer Respect Index of 6.2, followed by l-h with 5.9 and Health Care Plans with a disappointing 5.4.

1. The Progressive Corporation 7.8

2. American International Group 7.5

3. Kaiser Permanente 7.4

4. TIAA-CREF 7.2

5. Safeco Corporation 7.1

6. Liberty Mutual Insurance Group 7.0

7. New York Life Insurance 7.0

8. The First American Corporation 6.9

9. LandAmerica Financial Group 6.8

10. Thrivent Financial for Lutherans 6.8

To compile the study, the Customer Respect Group interviewed a sample of the adult Internet population and analyzed and categorized more than 2,000 corporate Web sites across a spectrum of industries to identify the attributes measuring the online customer experience. The survey assigns a Customer Respect Index (CRI™) rating for each company, which is a qualitative and quantitative in-depth analysis and independent measure of a customer’s experience when interacting online. The report analyzed 47 health care, l-h and p-c insurer Web sites to obtain a sample of the insurance industry.