T H U R S D A Y ,   N O V E M B E R   2  ,   2 0 0 6

Big “I” National News

P&C Trends

Combating Identity Theft
As policyholder interest in identity theft protection grows, carriers offer more coverages.

Anyone who has ever lost their wallet or, worse yet, had it stolen, knows the panic that sets in at the thought of a complete stranger having access to personal information such as home address, Social Security number and bank/credit cards. Now imagine someone having all that information and more without the help of a misplaced wallet. It’s possible and unfortunately very common as identity theft remains the No. 1 reason people contact the Federal Trade Commission.

Every minute approximately 13 people in the U.S. have their identity stolen, according to the Identity Theft Resource Center, and there is a growing concern among policyholders to protect themselves from becoming part of that statistic. Identity theft insurance is second only to auto insurance in the list of products homeowners say they would like their insurance provider to offer, according to report by J.D. Power and Associates.

The report, based on responses from 9,045 U.S. homeowners insurance policyholders, has been conducted annually since 2001, however this is the first year participants cited identity theft insurance as something they would like their provider to offer in addition to their homeowners insurance. 

“We asked policyholders which products would they would like their homeowners insurer to offer and the No. 1 mention was auto insurance (55%), the second most was ID theft, followed by valuable possession coverage,” says Jeremy Bowlers, senior director of the insurance practice at J.D. Power and Associates. 

Many insurers have responded to the demand for identity theft protection by offering a variety of coverages for homeowners, renters and small business owners.

St. Paul Travelers marketed the first identity theft coverage in 1999, an add-on to its homeowner and renter’s policies called Identity Fraud Expense Coverage Endorsement. Today, Traveler’s identity theft coverage costs residential customers $25 a year and offers customers a total recovery solution.

“We pair identity fraud expense reimbursement coverage that has a $25,000 limit with identity theft resolution services,” says Laura Bradshaw, director of corporate communications at Travelers.

According to Bradshaw, the demand for ID theft protection has dramatically increased in the last couple years with sales in 2005 double what they were in 2004, and sales in 2006 expected to be at least double what they were in 2006.

“Identity theft has been called the fastest growing crime in the country. Becoming a victim is a frightening, frustrating experience. Not only will Travelers pay for expenses associated with clearing up a victim’s credit, but more importantly, they will have the support of a dedicated case manager who will work closely with them to fix their credit and resolve the problem,” says Bradshaw.

While Travelers was the pioneer in ID theft coverage for homeowners and renters, The Hartford has found a niche in providing ID theft coverage for small business owners.

Introduced last summer, Hartford’s identity recovery coverage is offered to anyone who purchases either of the company’s two business-owner policies. The insurance is automatically included in the insurer’s Spectrum and Spectrum Xpand small business policies and the product covers sole proprietors, partners of business owners and those who own 20% or more of the business. The coverage offers identity theft reimbursement protection for up to $15,000 in legal expenses, fees association with re-filling loan applications, purchasing credit reports and paying for postage, phone bills and shipping fees and other out-of-pocket expenses.

Other carriers also offering ID theft protection insurance include: American International Group, Fireman’s Fund, Chubb, Allstate and MetLife.

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

Technology Update

What Your Agency Can Do to Prevent Identity Theft
ACT’s latest report provides tips on safeguarding customers’ information.

According to the Federal Trade Commission, there are approximately 10 million identity thefts annually in the United States, and these thefts cost businesses and consumers an estimated $53 billion each year. Data portability, hackers, dishonest employees and security breeches have all led to the alarming amount of identity thefts, but there are steps agents can take to ensure their customers’ information is protected.

According to the ACT report “Protecting Agency Customer Information from Identity Theft,” agents should take the following steps to help prevent the theft of valuable and private information:

Common-Sense Precautions to Mitigate Security Threats

• No more passwords on sticky notes. Passwords should be kept hidden and private.  Agents should note that their carrier agreements are likely to make them responsible if an unauthorized party gains access to the carrier’s systems using an agency password.
• Escort your visitors throughout the office. Know your night-time cleaning crew.
• Desktops should be password protected and employees should log off of their system when they go to lunch, attend a meeting or leave in the evening.
• Secure the office when leaving in the evening.
• Keep non-public customer and policy information off of PCs, portable devices and removable media. Encrypt any of this non-public electronic information that leaves the agency office. (See sections below for more details.)
• Encrypt back-ups and keep them in a secure place. 
• Determine if it’s necessary to keep particular types of sensitive, personal information in a system or if it can be pulled from a third-party source when needed.
• Consider housing systems and/or back-ups in a hosted data center that has 24-hour security, the latest security technologies, procedures and data traffic monitoring and perhaps even an armed guard.

Key Considerations in Setting-Up and Implementing an Agency Security Policy

A successful security strategy requires an agency to take proactive steps and implement multiple layers of protection. No single security measure is adequate by itself. Some of the major steps for an agency to consider taking include:

• Thinking through and then implementing a security policy based upon an assessment of the specific risks an agency faces.
• Developing and implementing written security procedures.
• Employee education and training on all of the security risks, the security policy and the procedures.
• Conducting security audits by outside experts periodically to identify security “holes.”
• Taking specific steps to secure the physical perimeter of the agency, escorting any guests in the office and prohibiting guests from accessing agency systems while in the office.
• Implementing password-protected firewalls that protect the perimeter of systems from intrusion by unauthorized persons and viruses.
• Diligently managing passwords to ensure that only authorized people gain access to a system, identities are authenticated and terminated employees’ access is immediately cut off. 
• Limiting employee access so they only view the information they need.
• Implementing the latest versions of anti-virus, anti-SPAM and intrusion software on desktops, servers, PCs and other portable devices and continuously updating them.
• Auditing employee activity regularly for compliance with the security policy and procedures.
• Monitoring systems traffic continuously for unusual activity that indicates a breach may have occurred.
• Implementing specific procedures for back-ups, PCs, home computers, portable devices and removable media. Keep non-public customer and policy information off of these devices wherever possible and encrypt them when they contain such sensitive data.

Next week’s IN&V will cover additional identity theft considerations, including protecting agency data while in transit.

To access ACT’s “The Independent Agent’s Guide to Systems Security” for more details and a sample agency security policy, click here. (Click on cancel if prompted for password.)

Jeff Yates (jeff.yates@iiaba.net) is executive director of ACT. This article reflects the views of the author and should not be construed as an official statement by ACT.

Legal Advocacy

New York Attorney General Settles with Unumprovident

On Nov. 1,  New York Attorney General Eliot Spitzer announced an agreement with UnumProvident (Unum), the nation’s largest disability insurer, settling allegations of deceptive conduct relative to the compensation practices it used with brokers and consultants (collectively producers) selling its group insurance products. 

This is the latest settlement involving allegations of improper conduct concerning the structure of incentive compensation in the insurance industry. It reinforces the investigation that has been ongoing since 2004 because past settlements with other carriers and brokers have been focused largely on the property-casualty side of the industry.

The settlement describes a variety of compensation programs created by Unum which incentivized producers for directing business to the company, such as arrangements in which the cost of incentive compensation was passed along to employers and their employees in the form of premiums, but typically not disclosed to the company’s customers; certain producers who met more rigorous production requirements were paid greater incentives, which were neither disclosed to the employers nor included on ERISA Schedule A reports; certain producers were paid additional compensation to sell the company’s products at higher margins, without disclosure to employers; employees of producers writing business with the company were rewarded with expensive trips abroad without disclosure of the rewards to employers; ad hoc payments were made to producers for services that may not have been performed or were not commensurate with the work done; producers meeting specified sales targets could ”earn-off” principal or receive a lower interest rate on loans from the company; and the company purchased a stake in some producers to provide them with desired capital.    

The settlement requires Unum to pay $1.9 million to the state of New York as a civil penalty and to pay $15.5 million into a fund for policyholders who were represented by producers who received contingent compensation. Contingent compensation is defined in the settlement as compensation paid to a producer which is contingent on: the number of policies or the dollar value of premium placed by the producer with Unum; the level of growth in the number of policies or dollar value of premium placed by the producer with Unum; the producer meeting a specific rate of retention or renewal of policies in force with Unum; the producer placing or keeping sufficient business with Unum to achieve a particular loss ratio or other measure of profitability; the producer providing preferential treatment to the company during the placement process, including giving Unum last looks, first looks, rights of first refusal or limiting the number of quotes sought from insurers; or giving anything else of material value to Unum.

Unum is allowed by the settlement only to pay compensation to producers for: group insurance (including long and short-term disability and life insurance) they placed or renewed with Unum on or after July 1, 2007; or that is expressly and conspicuously authorized in a separate writing by a Unum client or prospective client. Unum is not permitted to pay contingent compensation.

If, in the future, Unum wants to seek the right to pay contingent commission, it may do so if one or more other carriers that have signed settlements with the New York attorney general have the right to continue to pay contingent compensation. In this situation, Unum can request that the settlement be amended to allow it to make contingent commission payments “on substantially the same terms and to the same extent” as allowed by such other settlements.

The settlement prohibits Unum from adding supplemental compensation to the cost of insurance policies, though it can still be paid by the company. Supplemental compensation is defined in the settlement as “a preset percentage of some or all premiums … [for policies] in force with UNUM through that producer during a previous year.”

Unum also is prohibited from paying a service fee to a producer unless the client has agreed in advance and in writing to the payment and amount, to the services being provided, and to the fact that the company provides the same services if that is the case.

Starting July 1, 2007, Unum is required to disclose to clients the compensation it pays producers by providing a compensation notice and compensation statement to the client on forms included as exhibits to the settlement.

The compensation notice covers the details of all compensation the broker has or may receive from the company including: base compensation, how it is calculated and paid, the maximum supplemental compensation payable and how it is calculated, a Web site address and a toll-free number from which a client or prospective client can get compensation information paid or payable as to their insurance with the company and any equity interest owned by Unum in the producer. The compensation notice must be included with a bid, if any.  If there is no bid then the company can deliver it prior to the time the prospective client agrees to the proposed policy. The settlement also restricts the company from paying any compensation to the producer before the client has acknowledged the compensation notice in writing.

The compensation statement is very similar to the compensation notice, but it includes a paragraph referencing the date of any agreement by the client to pay the producer and the amount or percent of premium to be paid. The company is required to provide the compensation statement to the client with the insurance contract and to send it to the client annually on or before March 30 of each year.

The settlement prohibits Unum from making any loans to or purchasing any equity interest in any producer that sells its insurance after execution of the settlement agreement---except for non-controlling investments of equity securities of publicly traded producers when Unum is not entitled to a seat on the board of the producer and the investment is disclosed.

By July 1, 2007, Unum is required by the settlement to develop and implement a written producer compensation plan. The company also is required by the same date to implement company-wide written standards of conduct regarding compensation paid to producers, which includes training in business ethics, professional obligations, conflicts of interest, antitrust, trade practices compliance and record-keeping.

The settlement requires Unum to cooperate with the New York attorney general with regard to the ongoing investigations of Unum and the insurance industry. This obligation is structured like similar obligations applicable to other carriers that have entered into settlements with the New York attorney general.

According to the New York attorney general’s press release issued Nov. 1, Unum conceived many of the reforms in the settlement. The press release also notes that “it is anticipated that the agreement could serve as a model for carriers and other participants in the employee benefits insurance industry.”

The press release from the New York attorney general along with the settlement (called assurance of discontinuance) are posted on the members-only legal advocacy section of www.independentagent.com under the section on IIABA/Industry Information & News.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

Legal Advocacy

Spitzer Sues Coventry First for Life Settlement Practices

On Oct. 26 New York State Attorney General Eliot Spitzer filed a lawsuit against Coventry First, LLC, claiming it defrauded owners of life insurance policies by rigging bids and making secret commission payments in connection with life settlements. This action follows the extensive investigation, conducted by the New York attorney general over compensation disclosure practices and allegations of bid-rigging in the property-casualty industry, which has already resulted in a number of lawsuits and settlements.

In life settlements, investors buy life insurance policies from insureds at less than face value, make premium payments and collect the death benefits when the insured dies. The lawsuit against alleges that Coventry made secret payments called co-brokering fees to life settlement brokers and in exchange the brokers suppressed bids from life settlement companies other than Coventry.

According to the lawsuit, a life settlement buyer submits a gross, lump sum offer to a broker for the purchase of a life insurance policy. The broker will then determine how much to offer the seller/insured to purchase the policy and how much the broker should keep. The bidding of gross offers can continue like an auction until an agreement is reached on purchase price. Even though the broker receives gross offers, it will only present the net price to the seller/insured, keeping the actual gross offer and the broker’s compensation from the seller/insured. Coventry is alleged to have paid undisclosed co-brokering fees to brokers to keep the brokers from soliciting bids from other companies or to hide higher bids from the seller/insured. As a result of these co-brokering fees, Coventry was guaranteed to win the bids.
 
The lawsuit alleges that co-brokering fees undermine the broker’s duties to the seller/insured, lessen competition and keep the seller/insured from receiving competitive prices for life insurance policies. The lawsuit also claims that in certain instances the fees received by the broker were higher than the net price to the seller/insured.

The life settlement industry has grown in the past decade and that growth is expected to continue over the next several years. In 2005 investors purchased life insurance policies worth over $13 billion in death benefits. 

The press release from the New York attorney general along with the complaint are posted on the members-only legal advocacy section of www.independentagent.com under the section on IIABA/Industry Information & News.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432;  kathleen.graber@iiaba.net.

Legal Advocacy

Zurich Settles with Ohio Attorney General

On Oct. 25, Zurich entered into a settlement agreement with the Office of the Attorney General for Ohio and the Ohio Department of Insurance to resolve allegations of allocating or dividing customers or territories for insurance and insurance services; fixing, controlling or maintaining prices, rates, quotations or fees for insurance; and falsifying quotes at the request of brokers to facilitate steering, in violation of the Ohio antitrust law.

This settlement agreement follows several others already agreed to by Zurich, including the multi-state agreement with the attorneys general of California, Florida, Hawaii, Maryland, Massachusetts, Pennsylvania, Oregon, Texas, Virginia and West Virginia (providing for payment to policyholders nationwide of at least $121,800,000, with a possibility of an additional $29,900,000). The three-state agreement with the attorneys general of New York, Illinois and Connecticut (Providing for payment of $88 million to policyholders nationwide.) And a settlement endorsed by the National Association of Insurance Commissioners, also referred to as the regulatory settlement agreement. 

In exchange for the undertakings Zurich has agreed to in this settlement agreement, the Ohio attorney general is releasing the company from any actions based on the company’s use of finite insurance/reinsurance and/or non-traditional products.

The settlement agreement calls for Zurich to pay a $1 million civil penalty to the Ohio Department of Insurance and $6 million to the Ohio attorney general, of which $4 million is a civil penalty and $2 million is a reimbursement for attorneys’ fees and investigative costs. 

Like the other settlement agreements entered into by Zurich, this one requires the company to refrain from participating in any schemes regarding “placing, renewing, consulting on or servicing any contract, policy, agreement or binder of insurance sold to a commercial or business enterprise or a governmental entity.” 

In addition, Zurich cannot agree with any other broker, agent, insurance company, reinsurance company or insurance exchange “to allocate customers or markets to rig bids or quotes…” or enter into any kind of quid pro quo to be included on a list form which a broker or agent will solicit bids or quotes or any other type of pay-to-play arrangement.  The settlement agreement also prohibits Zurich from entering into any agreement to fix or stabilize prices, rig bids, allocate customers or otherwise violate federal or state antitrust laws, unfair insurance practices laws and any other insurance laws or regulations.

Zurich agreed to adhere to the business reforms it accepted in the regulatory settlement with other state insurance regulators including:  the development of a compliance program with training for all executive officers and employees that emphasizes a culture of compliance with applicable laws and regulations; enhancement or development of a disciplinary programs to assure misconduct is addressed according to a graduated scale of sanctions; and enhancement or development of a records retention policy. An executive summary dated March 22, 2006 on the regulatory settlement and the regulatory settlement itself are available on the members-only legal advocacy page of www.independentagent.com under the section on IIABA/Industry Information & News.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

P&C Trends

Industry Firmly in the Black
Revenue from agents and brokers expected to gradually increase until 2010.

Revenue generated by insurance agents and brokerage is expected to grow an average of 4.2 % in the next five years, according to a study released by IBIS World, a publisher of business research and analysis.

IBIS’s report on insurance agencies and brokerages projects a medium level of risk for the next year and moderate revenue growth for the rest of the decade, with revenue expected to increase from $87.5 billion in 2005 to $107.4 billion in 2010. According to the study, the strong growth rate is attributed to a soft market for risk products, which is a result of large returns on premium dollars invested. The improved revenue growth is expected to continue as agencies and brokerages write an increased share of total insurance policies.

“It is expected that insurance brokerages and agencies will experience some organic growth over the outlook, as brokerages and agencies improve their retail presence,” the report says. “Primary insurance underwriters are expected to further their focus on risk assessment, leaving an increased share of insurance policies to be written through agencies and brokerages.”

Growth in the industry gross product (IGP) is also expected to improve significantly as business volumes rise, according to IBIS.

“IGP is forecast to grow at an average real rate of 5.1% per annum over the outlook, increasing from 441.5 billion in 2005 to %53.2 billion in 2010,” the report says. “Industry assets are expected to grow at an average real rate of 5.6% per annum in the same five-year period, increasing from $147.4 billion in 2005 to $193.6 billion by year-end 2010.”

The number of people joining the industry has also grown since 2001; however that rate of growth slowly declined as 2005 drew to a close.

“Some merger and acquisition activity commenced in 2000 and became more pronounced as markets hardened,” IBIS’s report says. “Declining underwriting volumes, mainly resulting from rising insurance prices, left agencies and brokerages in a position where they started fighting for market share.”

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

On the Hill

Big “I” Takes Aim at Federal Regulation
Rusbuldt questions FreedomWorks organization’s support of federal insurance bureaucracy.

Big “I” CEO Bob Rusbuldt sent a letter late last week to Dick Armey, chairman of FreedomWorks, regarding the organization’s support of the National Insurance Act of 2006, which would create a federal regulator for the insurance industry. The Big “I” opposes federal regulation and Rusbuldt’s letter expressed disappointment that FreedomWorks had embraced “the creation of a massive new federal bureaucracy.”

“We encourage you to reconsider your decision to take a position that is clearly contradictory to the mission of FreedomWorks to fight for ‘less government,’” Rusbuldt wrote. “As you know, the NIA would create a new Office of National Insurance within the treasury department. Currently, there are approximately 13,000 people working to regulate the business of insurance across the country, but the NIA authorizes an unlimited number of new offices and federal government employees to comply with the provisions of a new federal bureaucracy. While the IIABA believes that significant reform of insurance regulation is needed, the creation of such a dual state-federal structure with overlapping bureaucracies would cause many more problems than it would solve.”

In the letter, Rusbuldt offered to speak with Armey about the Big “I” approach of using federal legislation to reform the existing state-based regulatory system and called for an open dialogue on the issue.

“The IIABA and its members are energized against all efforts to create a new federal bureaucracy and I know many of our members will be disappointed to learn that FreedomWorks has moved away from its mission and has instead decided to support one of the largest additions to the federal bureaucracy in recent history,” Rusbuldt wrote. “I am hopeful that once you and your organization have given this proposal additional thought, you also will come to understand that supporting the large bureaucracy, which would be created under the NIA is not in the best interests of the American public.”

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

L&H Trends

Look to Future Demographics for the Agency Market

Hockey standout Wayne Gretzky didn’t focus on where the puck was but rather where it was going. Businesses need to do the same to some degree by anticipating future trends and positioning the business to serve those changing demographics. In fact, companies like Procter & Gamble spend millions of dollars on market studies to anticipate future consumer trends.

Independent agents also should embrace this practice. While it is true that auto insurance and workers’ compensation will continue to be mandated coverages, the nature of the customer will continue to evolve. There has been much discussion in the media of the changing demographics of the United States, particularly the increasing diversity of the population. Another significant trend is the continued aging of the U.S. population. So where can an independent agent get important information about this trend? The Department of Health and Human Services’ division that focuses on the needs of older Americans, the Administration on Aging, has an excellent Web site, www.aoa.gov. It contains statistics such as the rate of growth of the senior population and size of income categories. Further, it provide estimates by state and county of the senior population so agents can focus in on the geographic areas in proximity to where they are located.

One of the statistics that jumps out is that the older population (persons 65 years or older) numbered 36.3 million in 2004 (the latest year for which data is available). By 2030, there will be about 71.5 million people ages 65 years or older, more than twice the number in 2000. People 65 and older represented 12.4% of the population in 2000 and are expected to account for 20% of the population by 2030. In 1900, just one out of every 25 Americans was age 65 or older. In 2000, it was one out of every eight people and it eventually will become one out of every five people who are ages 65 years or older.  This has lead to discussions about “pay as-you-go” financing of Social Security and Medicare and the implication for payroll tax increases and benefit reductions.

At the same time, this large group of seniors will have a variety of specific financial and insurance needs. Now is the perfect opportunity to review the services this group will need. Does the agency have at least a couple of auto markets for the oldest category of seniors (ages 80 years and older), which, statistically, is the fastest growing segment of the U.S. population? Does the agency provide Medicare supplement coverage, long-term care and immediate annuities as a product line?  Is the agency location convenient for seniors to travel to and is it easily assessable for people who may need assistance walking or sitting? Is anyone in the agency taking specific coursework in working with seniors and understanding their needs? If not, the Certified Senior Advisor Program provides good materials. Are the agency personnel networking with professionals dealing with seniors such as estate attorneys, accountants and assisted living centers admission counselors? More than one-third of all seniors have incomes in excess of $50,000 and will need advice in meeting their financial needs and responsibilities.

There is no doubt what the future demographic trends are for this country. Take some time to review the Administration on Aging’s information to gauge how your agency can serve this important market segment so your agency can also be assured of having a successful future. 

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