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Note: Insurance News & Views will not be published next week due to the Thanksgiving holiday. The next edition will be published on Nov. 29. Happy Thanksgiving!

Big “I” National News

P&C Trends

Mixing Business with Family
New study outlines predictors for family business performance.

Family businesses are thriving in terms of revenue and jobs, and a new study by Massachusetts Mutual Life Insurance Company (MassMutual), the Family Firm Institute and Cox Family Enterprise Center predicts that they will continue to be successful despite challenges with technology, perpetuation and management.

Family unity and cohesion are critical to family business success, according to the study. Eight-seven percent of respondents say family members share values and 83% report unity on ownership matters such as strategy and management. Richard Beskin of Beskin and Associates, Inc. agrees and says working with his brother, Roy, at their Virginia Beach, Va, agency just makes sense.

“I have found there to be absolutely no drawbacks and nothing but accolades and positive experiences,” he says. “My brother and I enjoy a wonderful give-and-take relationship...If you have a sibling you have always clicked with and, in the business environment, you can continue to click (with), you don’t have to stand on as much ceremony. My brother and I are moving toward the same goals and have the same work ethic, and there’s rarely a situation where people’s feelings get hurt because we both know where each other is coming from.”

Mike Combs of Combs Insurance Agency, Inc. in Palmer, Alaska understands exactly where Beskin is coming from, but the family ties that bind his agency are even stronger. Seven of 15 employees are family members, a situation Combs says has its benefits and drawbacks.

“I think the benefit is the loyalty you create with a family business,” he says. “There’s more at stake than just salary. It’s not as easy to walk away from a family business because this is part of what I do, part of who I am. You fix things instead of letting them fester. The biggest drawback is that too many decisions are based on family decisions instead of best practices. Like any other family, there is always going to be some amount of heartburn, especially when decisions have to be made that don’t necessarily follow the ideals of a family situation. Sometimes tough decisions aren’t always family decisions.”

While the study reports that family businesses are fairing well, it also finds many at risk for financial problems due to a lack of a formal succession plan --- an issue many independent agencies struggle with. Among the family business owners expected to retire in the next five years, fewer than half have selected a successor and of those expecting to retire in six to 11 years, less than a third have done so, the study says. However, that’s not the case for Mel Washburn of Washburn & Wilson Insurance Agency, Inc. in Bethel, Vt. Washburn started the agency with his son, Matt, 18 months ago with the intention of one day passing it along to him.

“That’s why he’s right here beside me --- I hope there is a seamless transition somewhere down the road in 20 years,” he says. “My son is a ball of fire just getting out of college. The God send is that he’s really computer knowledgeable and hooked up all our modems and phone lines.”

Technology savviness is important to just about any agency, but it’s also what helps bridge the generation gap in many family-run businesses, as was the case with Thad Leonard of Carl M. Leonard & Sons in Tulsa, Okla. Leonard is the third generation of his family working at the agency, which was started by his grandfather in 1941 and will be passed on to him by his father, who he’s worked with since 1978.

“In the early ’80s, we started automating and that was something he knew nothing about, had no interest in and wasn’t going to learn it…he at one point went home and told my mom, ‘Thad is automating the office and he’s running it now….maybe I ought to retire,’” Leonard says.

Leonard’s son recently graduated from college, but has yet to decide if he wants to continue the family business. If he does, he’d be the fourth generation of Leonards to run the agency --- something his father says he hopes for, but isn’t going to force. Washburn has the same hopes for his recently graduated son, but would also never pressure him to take on the responsibility.

“You have to be very careful you don’t violate the old principle that if you want it more for them than they want it for themselves, then it’s a prescription for disaster,” he says.

Both agency owners agree that passing the business on to a family member is important because it preserves the integrity of the company and ensures its ethical standards. It’s a finding that isn’t surprising given that most family businesses (60%) believe their ethical standards are more stringent than those of competing firms, according to the MassMutual study. Such strong ethical values are the foundation for any family-run agency, according to Tommy Cook of John T. Cook & Associates, who’s been running the agency alongside his wife in Myrtle Beach, S.C. for nearly 25 years.

“I’ve talked to agents who sold out to banks and other entities, and I’ve had several tell me that they felt like it was a mistake,” Cook says. “Income wasn’t why we went into business, we went into it because we like the business…I’ve talked to people who want to buy the business and they just want the bottom line.”

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor. For more in-depth information on perpetuation planning, be on the lookout for the December issue of IA magazine.

VIEW: P&C Trends

Individual Health Growth-Rate: A Multiple of P&C
What increasing individual health premiums mean for independent agents.

A.M. Best’s Aggregates & Averages shows that even when compared to relatively robust hard-market growth, individual health far outpaces p-c growth at an average 19.7% annual rate compared to 8.1% and 5.7% for commercial and personal lines, respectively. What is going on with this near-tripling of individual health premiums? Should independent agents care?



The research indicates two things. First, there is relatively high medical services inflation, but that only accounts for about 5 percentage points of the 19.7% year-over-year compound growth rate. The more significant factor seems to be a shift in individual health insurance purchases---consumers are increasingly going it alone. This point was solidified in an Oct. 13 BestDay audio interview with Jeff Smedsrud, chief strategic development officer for Independence Holding Company, an insurer focusing on the individual health market. Independence plans have grown from $0 premium in individual and small group medical to $300 million in just three years. Smedsrud cites “a tremendous movement toward consumer-directed health plans.” He pointed out that employers increasingly do not provide health coverage, forcing individuals and family members to find coverage on their own.

So, should independent agents care? Yes, and here is why. It’s telling that Smedsrud notes in the interview that much of Independence Holding’s success can be attributed to the fact that the company has chosen a “very agent-centric” strategy. This view was echoed recently when a service provider in the business of assisting independent agencies in the individual health market called on the Big “I” Advantage sm membership services operation. Essentially, both Independence and the provider would argue there is no equal distribution channel to IAs in terms of helping individuals face the challenges of individual health insurance. To the ranks of individual health providers, independent agents look like well-rooted, reliable community members, with established storefronts, who act as trusted insurance advisors in every city, town and neighborhood across the country. Who better to assist with individual health insurance?

The opportunity looks to be substantial as individual purchase continues to be a larger part of the more than $300 billion premiums in the U.S. health and HMO industry. That growth and more frequent purchases by individuals could represent a significant opportunity…and there is plenty of room for agents to take part. IIABA’s 2006 Agency Universe Study explains that, while 50% of all agencies have some individual life, health or annuities business, it only makes up for about 3% of the average agency’s revenues. This percentage will surely increase. The provider visiting Big “I” offices cited several cases of independent agencies entering this area and in a short-period of time the agencies had established new profit centers in individual health.

Have any opinions, experiences or other advice to share? If so, please contact Paul Buse at paul.buse@iiaba.net.

Editor’s note: This is the fifth installment in a series examining A.M. Best’s 2007 Aggregates and Averages. To read the first installment, “By the Numbers,”  click here. To read the second installment, “Medical Malpractice: Lessons for a Soft Market,”  click here. To read the third installment, “Premium Trends: Top 10 Personal Lines Writers,” click here. To read the fourth installment, “Mirror, Mirror on the Wall,”  click here.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM and a licensed p-c agent.

L&H Trends

Estate Tax Review Begins
Federal tax will disappear in 2010; congressional action desperately needed.

This week the Senate Finance Committee held a hearing on the federal estate tax. The estate tax issue is a very significant one, but likely won’t receive the attention and scrutiny in the media that it deserves. As 2008 approaches, there are a number of tax laws scheduled to sunset in 2010, and if Congress does not act, they will revert to their pre-2001 status. This means the burden is on Congress to do something soon, but political pundits point out that very little tends to get done in an election year --- this is especially true if it appears that control of the White House may change.

The reason this debate is significant is that, in 2010, the federal estate tax disappears completely, but without congressional action, the estate tax will reappear at a tax rate of 55% and the estate exemption (the amount of assets that can be passed free to a beneficiary other than a spouse) would only be $1 million. Many people forget that unless all incidents of ownership are removed, life insurance proceeds are includable in the decedent's estate. Thus, the $1 million threshold is not very high and would impact many people with homes that have appreciated, have a meaningful level of life insurance and assets in their 401(k)s and/or IRAs. Also, affected would be many owners of businesses of any size --- as would their employees if they died and the business had to be sold to pay estate taxes.

Of special interest is Warren Buffett, who was invited to testify at the hearing. Buffett has been an advocate of a very robust estate tax and also more progressive income taxes. Buffet and Bill Gates are examples of “super rich” individuals who have set up charitable trusts and funded them with significant amounts of company stock and cash to further many laudable humanitarian goals. However, many people impacted by relatively low estate tax exemption amounts are small and medium-sized business owners whose net worth is mostly tied up in the illiquid assets of a closely held business. While life insurance and estate planning techniques can help mitigate estate taxes, the cost of legal advice and insurance premiums can be significant. Of course, low estate tax thresholds will be a boon for the sale of permanent life insurance, but is it really equitable and in the country’s best interests to jeopardize family businesses and farms in return for tax revenue?

No doubt this debate will continue into 2009, when the elections are over, but the outcome of the estate tax debate, Social Security taxes and income taxes will greatly influence people’s desire to work hard and succeed. Tax simplification has been a mantra for two decades now with little results to show. In fact, the tax rules may become even more complicated by the end of the decade. Independent insurance agents need to watch the debate and inform their customers about how the outcome will impact their lives and the steps they need to take to ensure financial stability for their businesses and families.

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

Legal Advocacy

Marsh to Collect ‘Enhanced Commissions’
New commissions expected to begin in early 2008.

Marsh & McLennan Companies CEO Michael Cherkasky announced in a Nov. 8 investor call that Marsh would begin collecting an “enhanced commission” from insurers in the middle-market and small commercial business. According to Cherkasky, Marsh’s inability to accept contingent commissions since 2004 has created an “inequitable and un-level playing field” in these two market segments where the company competes against mid-sized and regional brokers that can accept contingent commissions. He added that the additional commission would be fixed and “not contingent or variable on volume, profitability or any other factor.”

Cherkasky also stated on the investor call that “a couple” of carriers have “agreed in principal with our enhance commission approach,” and he expects the new arrangements to begin in early 2008. Cherkasky added that the enhanced commissions would be disclosed to clients at the time of placement and subject to client approval.

This announcement by Marsh comes in the wake of a third-quarter earnings statement where it reported a 39.8% drop in profits from continuing operations to $80 million. The drop was so steep and unexpected that the Associated Press reported that Standard & Poor’s Rating Services may lower its credit rating for the company and place its counterparty credit rating of BBB/A-2 on watch list with negative implications. A drop below BBB would give the company’s bonds junk-bond status.

The drop in profits is another blow to Marsh, which has been beset by management problems. Earlier in the fall, Marsh forced the resignation of Marsh Inc. CEO Brian Storms after employees “lost faith in Brian Storm’s leadership and direction” according to Cherkasky.

For more information about producer compensation issues, log in as a member to www.independentagent.com, go to “Legal Advocacy” and select “IIABA/Industry Information and News,” or contact Kathleen Graber, associate general counsel at 703- 706-5432; kathleen.graber@iiaba.net.




Legal Advocacy

Principal Financial Group Joins Carriers Settling on Compensation Disclosure
The group will pay $4.4 million in restitution to contract customers.

Yesterday, Connecticut Attorney General Richard Blumenthal announced a $5 million settlement with the Principal Financial Group to resolve allegations concerning undisclosed compensation paid to brokers for access to business involving certain annuity contracts. Principal will pay $4.4 million in restitution to contract customers that may have been damaged by the company’s actions and a $600,000 penalty to Connecticut. 

The settlement agreement stated that Principal paid approximately $3.2 million in undisclosed compensation to BCG Terminal Funding Company, Brentwood Asset Advisors, LLC, Dietrick and Associates, Inc., Sharp Benefits, Inc. and USI Consulting Group through “expense reimbursement arrangements,” “marketing agreements” or “service agreements.” The settlement alleges that the concealed compensation arrangements “were fashioned as ‘a means of adding some additional compensation without having to be completely up-front’ with the pension plan sponsors about the compensation that the brokers received.”

The $4.4 million payment for restitution will be available to customers that purchased the contracts between Jan. 1, 1998 and Jan. 13, 2006 from the named brokers receiving the undisclosed payments.

The settlement prohibits Principal from paying any producer any compensation from Nov. 14, 2007 to Nov. 14, 2011. Compensation under the settlement agreement includes “anything of material value given to a producer,” but specifically excludes “a commission set at the time of each sale, placement or servicing of a particular (contract) that is agreed to, in writing, by the plan sponsor” as well as non-excessive meals and entertainment, education and training and payments to captive producers.

The settlement also provides for Principal to adopt a series of business reforms. Those reforms include written disclosure to brokers and customers prior to binding of all compensation and commissions paid to the producer or if not known, how the compensation will be calculated in relation to that contract. In addition, the written consent of each of covered contract customer to the compensation and commissions must be obtained. Principal must disclose its compensation and commission practices on its Web site within 60 days, and is required to implement standards of conduct and training to certain employees.

Principal did not admit to any wrongdoing in the settlement, and specifically stated in the settlement that: “(1) Principal disclosed the overall cost of the contracts, which included the cost of broker payments; (2) the brokers did not steer any business to Principal in return for these payments; (3) the pension plan sponsors suffered no harm as a result of any conduct by Principal; and (4) Principal is settling the matter to avoid the cost of litigation.”

For more information about producer compensation issues and to access a copy of the Principal settlement agreement, log in as a member to www.independentagent.com, go to Legal Advocacy and select IIABA/Industry Information and News, or contact Kathleen Graber, associate general counsel at 703- 706-5432; kathleen.graber@iiaba.net.