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Big “I” National News

P-C Trends

Pandemic Possibilities 

How an avian flu outbreak could affect insurance industry.

The avian influenza strain, also known as H5N1 or bird flu, has already caused casualties around the world. While the virus has yet to make an impact on the United States, preparations for a possible flu pandemic are already underway in anticipation of a worse-case scenario.

So far, humans who have died from H5N1 all contracted the virus from direct contact with infected birds. However, the strain has the potential to cause a pandemic if it mutates to allow for human-to-human contact. If a mutation occurs, the U.S. Department of Health and Human Services is predicting a moderate pandemic could cause 209,000 fatalities nationwide and a severe pandemic would increase the death toll to 1.9 million. According to a recent report by the Blue Ribbon Commission on Mega Catastrophes, the country is not prepared for this kind of mega-catastrophe.

“No one is ready if the pandemic occurs within the next several years. Further, the risks to human life are great and especially so in developing countries,” the report says. “When a virulent and easily transmissible strain of the flu emerges it will take as long as six months to develop and produce a vaccine. First the virus must be isolated and identified, then an appropriate vaccine found and tested and, finally, the vaccine must be produced in sufficient quantities to inoculate every American. But, during the six-month period the pandemic will be well advanced with devastating consequences.”

The commission released its second interim report on mega-catastrophes, “Preparing for Pandemic Flu: A Call to Action,” earlier this month. The report provides several recommendations on how to prepare for a possible pandemic. The commission, formed to develop comprehensive reports regarding the particular challenges resulting from mega-catastrophes, coordinated with a variety of experts in the medical, science, economic and insurance fields to determine the best way to handle a pandemic if it should occur. As reported in the  Oct. 26 IN&V, the commission released its first interim report, “Accelerating the Katrina Recovery,” last month and plans to release full-length report on all mega-catastrophes, including hurricanes, floods, earthquakes and terrorism, in April 2007.

The commission’s report lists several recommendations on how to prepare for a pandemic, including a request that Congress conducts a study on how the pandemic would impact the life insurance industry.

“...we urge Congress to promptly undertake a study of the potential impact of a pandemic, including a worst-case analysis on the life insurance industry. Such a study should also review the options available for ensuring that policyholders can be paid and that confidence in the industry remains. Such options could include allowing life insurers to begin establishing tax-deductible pandemic loss reserves as a way of building up capital for a pandemic event, as well as federal loans to state guaranty funds in exigent circumstances,” the report says.

According to a recently updated report by the Insurance Information Institute, “Pandemic: Can the Life Insurance Industry Survive the Avian Flu?” the total dollar value of death claims from a flu pandemic for individual and group life insures would be about $133 billion---more than double the approximate $50 billion in death claims that is normally pays out each year.

The III’s report also sites a risk of asset deterioration in the event of a pandemic since many businesses would lose customers who fear exposure to the virus. These businesses could also be forced to shut down in the event of a human quarantine. This risk has caused the international p-c insurance company Markel Corporation to write the first business interruption coverage for contagion, including the avian flu.

Markel’s outbreak extra expense coverage, which is priced on the per diem limits selected by each insured, provides a per day limit ranging from $1,000 up to $50,000 for a maximum of 30 days. The money can be used to replace lost revenue, payroll, communications expenses or any other contingent loss resulting from a closure.

Demand for the product, originally launched in Toronto, Canada following the SARS outbreak, has gone up since avian flu became a potential threat and Markel is now writing policies for U.S. businesses.

“We believe that the contagion peril is just another emerging risk that, when properly designed and priced, the insurance mechanism can play a role in managing the risk of loss,” says Barrett Hubbard, managing director of Markel's Mint Canadian Specialty Underwriters. “We have seen an increasing rate of submissions and are currently writing about one policy per month. We launched the product through Markel Corporations U.S. subsidiaries in August of 2006, and we are just entering the early stages of coordinating marketing effort. Interest has been strong across a diverse group of industries including education, food services, child care, health and related biotech industries, entertainment personal health/exercise, building managers---we have even seen submissions from law firms.”

For more on avian flu and insurance, see  “Flying Under the Radar” in the July 2006 Independent Agent magazine.

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

On the Hill

Democratic Takeover a Mixed Bag for Agents, Brokers 

Potential progress seen on TRIA, flood reform, but doubtful for tax cuts, legal reform.

The Democratic takeover of Congress in last week’s elections is expected to produce mixed results for independent insurance agents and brokers, with potential progress in some areas, but a number of likely new challenges are looming on the horizon.

Areas where progress may be made include the extension of a federal terrorism risk insurance backstop and continued bipartisan support for flood insurance reform. A mixed bag is anticipated on natural disaster reform and regulatory issues, though key obstacles remain that could keep a full-blown optional federal charter (OFC) from becoming a reality. Issues expected to take a hit include tort reform, certain tax cuts and the continuation of the insurance antitrust exemption under the McCarran-Ferguson Act, among others.

On the positive side, Democrats have generally been more supportive than some conservative Republicans of the Terrorism Risk Insurance Act (TRIA), which the Big “I” wants to see extended. The most recent TRIA extension is due to expire Dec. 31, 2007, but a number of top Democratic leaders in both chambers of Congress have indicated their support for a continued federal role.

Another plus for agents and brokers is continued congressional support of a comprehensive flood reform package that included several Big “I”-backed provisions. The Big “I” is also hopeful that Democrats will join with Republicans to move the bipartisan Non-admitted and Reinsurance Reform Act, a great first step toward overarching, common-sense regulatory reform.

Regulatory reform falls squarely in the mixed bag category, with two influential Democrat members expected to lead the charge to create an OFC for the insurance market: Rep. Paul Kanjorski (D-Pa.), who will become the Insurance Subcommittee Chairman in the House, and Senator Tim Johnson (D-S.D.), who will be the No. 2 Democrat on the Senate Banking Committee. While these members may be in stronger positions to push OFC, Democrat opposition to rate deregulation (a key component of OFC for those p-c companies supporting it) will make OFC for the p-c market more difficult to accomplish.

Also falling into the mixed category is natural disaster reform, which has supporters and detractors in both parties that largely break down along regional lines, not partisan ones. Many members from the coast support a natural disaster backstop and other members from the heartland oppose it.

Several areas stand out as concerns, with certain tax cuts and legal reform all but dead on arrival when the Democrats take charge. Permanent repeal of the estate tax appears out of the question, although some hold out hope for a compromise before existing legislation curbing this tax expires at the end of 2010. On legal reform, asbestos litigation legislation now looks to be a long shot at best.

Another major area of concern is an anticipated move by some Democrats to repeal or significantly curtail the insurance industry’s antitrust exemption under the McCarran-Ferguson Act. There is a degree of support among Democrats and Republicans for such a move, and it will be harder to stop now. Democrats also may move on several consumer issues, including new disclosure requirements for the financial services industry in general. It is not yet known exactly what shape such moves may take, or how aggressively Democrats will pursue these issues, but the Big “I” will remain vigilant to protect agents and brokers.

The Big “I” is well positioned, having moved months ago---much earlier than many other associations or corporations---to add additional Democratic staff to its Capitol Hill office. The national association has established longstanding relationships with lawmakers on both sides of the aisle, including many members of Congress who now stand to take over leading positions of power. The margins of control in both chambers of Congress remain extremely small, and President Bush has two more years at the White House, so federal policymakers on both sides of the aisle will play important roles in determining the business environment in the 110th Congress. The Big “I” will continue its bipartisan approach to protecting its members’ livelihoods in the months ahead.

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

P-C Trends

Gaining Some Strength

Low third-quarter property losses indicate health of p-c market improving.

Property losses during 2006’s third quarter resulted in the third lowest record among third quarters in the past 10 years, according to preliminary analysis by the Insurance Services Office (ISO).

P-c insurers are expected to pay homeowners and businesses approximately $971 million for third-quarter property losses resulting from seven catastrophes in 20 states---this is compared to $48 billion in losses during third quarter 2005, the industry’s worst third quarter on record.

According to the RIMS Benchmark Survey, commercial insurance premiums fell slightly in the third quarter and property insurance was the only line of business that increased, up 1.7%. Property insurance premiums continue to increase in regions with high risk of hurricanes and earthquakes, while those in low to no-risk areas are still seeing falling premiums.

“The situation remains grim for property-casualty insurance buyers in Florida and along the Gulf Coast and earthquake coverage is skyrocketing in California,” says Joseph Restoule, a member of RIMS board of directors. “It doesn’t appear as if property insurance premiums in these areas will improve anytime soon, but the upside is that risk managers are getting relief in other lines of insurance.”

Alex Soto, Big “I” president and president of the Miami-based InSource, Inc., has a first-hand understanding of the challenges coastal regions face.

“We’re having huge problem with availability and affordability in Florida,” Soto says. “Part of it is because there are very few insurance companies that were willing to commit to selling insurance here. The fact that we have gone through a season and we haven’t had any hurricane losses encourages (me) that insurance companies are going to have some very fine results all over the U.S., particularly in Florida...those companies that stayed here and stuck it out will receive profits, and I am hopeful that we will have another season without any losses (next year).”

In the first half of the year, the p-c industry reported an underwriting profit of $15.1 billion, a 31.8% increase over the same time last year and, pending any major hurricanes, may report record profits for all of 2006, according to RIMS. However Gary Kerney, assistant vice president at ISO, is still wary of the industry and weather’s unpredictability.

“It appears what we are seeing is a hard market, and that is going to continue particularly in those U.S. areas subject to catastrophes and subject to hurricanes…other lines of insurance seem to be softening though,” Kerney says. “The fourth quarter is generally a very quiet period unless we have some major storm activity, but there are always surprises that pop up,” he says.

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

P-C Trends

State Auto Insurance Co. Joins Trusted Choice^®

State Auto joins growing list of companies participating in brand movement.

The State Auto Insurance Companies have become the latest independent agency system insurance group to join the Trusted Choice^® consumer brand movement. State Auto, based in Columbus, Ohio, offers personal and business insurance through 3,000 independent agencies in 27 states.

"We believe in our independent agents and recognize the unparalleled advice and value they offer consumers," says Bob Restrepo, chairman, president and CEO of the State Auto Insurance Companies. "Becoming part of the Trusted Choice^® family is the latest demonstration of State Auto's commitment to our outstanding independent agency force, which has not wavered during our 85-year history. We look forward to working with our independent agency partners to utilize the Trusted Choice^® brand, reminding consumers of the tremendous benefits of independent agents in making their insurance decisions."

“State Auto is an ideal company partner,” says Dave Evans, executive director of Trusted Choice^®. “Its dedication to the independent agency system is so strong and its relationships with their distribution force are so concrete that this partnership makes perfect sense. We will work together to promote the ideals, values and benefits of Trusted Choice^® agents: advocacy, choice and customization.”

“State Auto is committed to Trusted Choice^®,” says Robert Rusbuldt, Big “I” CEO. “State Auto was founded on the principle that local agents are neighbors who provide personal, professional and efficient service---that meshes perfectly with the mission of Trusted Choice^®.”

Founded in 1921 as an independent agency company, State Auto continues to advocate the independent agency system as the best method of serving the needs of policyholders. State Automobile Mutual is one of only 14 insurance companies in the nation to have received an A+ (superior) rating from the A.M. Best Company for more than 50 consecutive years, and State Auto Financial Corporation was named the 2006 "Best Managed Insurance Company in America" by Forbes magazine. For more information, visit www.stateauto.com.

The Big “I” and several independent agency companies launched Trusted Choice^® in 2001 to highlight the benefits independent agencies and brokerage firms offer consumers including: choice of companies, customization of policies and advocacy support. For more information, visit www.TrustedChoice.com.

Emily Crane (emily.crane@iiaba.net) is Big “I” director of media relations.

L&H Trends

Clock is Ticking

The United States was founded on a rugged, pioneer spirit based on people looking for economic and religious freedom. The early colonies faced hardships and sometimes an entire community succumbed to disease or harsh conditions. As Thanksgiving approaches, it is time to reflect on---and learn from---the pioneers’ spirit of self-reliance.

Seventy years ago, the president and Congress established institutional governmental programs to provide a safety net for older Americans who retired. About 40 years ago, they established medical coverage for the poorest of Americans. While these programs initially complimented the work of charitable organizations, they are now referred to as “entitlement programs” and there is great debate about how to best sustain their viability given the aging of the American population. In 1900, one out of 25 Americans was age 60 and over. Currently, one out of five Americans is age 60 or over, and that statistic will soon be one of four.

What does this have to do with independent insurance agents? Funding these programs will require larger future costs and benefit reductions. What might these benefit reductions look like? Beginning Jan.1, 2007, the subsidy for Medicare Part B premiums (approximately 75% of the cost) will be eliminated for higher income retirees. Also, the look-back period for asset transfers not to be counted for Medicaid was increased from three to five years.

To put the economic realities in perspective, look at the United States’ national debt clock (www.brillig.com/debt_clock). The national debt is now $8,607,606,311,900 and it has grown at an average of $2.14 billion per day since Sept. 29, 2006. Also, remember there is not a single penny of actual funding set aside for Social Security payments, which right now are a net surplus for tax revenues. In several years this will change to a net deficit that will continue to grow.

Harking back to the pioneer spirit of self-reliance, Americans will need to save for retirement, long-term care and other health insurance programs. Today there are a plethora of insurance products to meet this need. Independent agents are well positioned to help solve this enormous societal problem. Selling long-term care policies will help to transfer this risk from the government to the private sector, so establish a game plan for 2007 to execute on a strategy to serve this marketplace.

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