T H U R S D A Y ,  N O V E M B E R   2 9 ,  2 0 0 7 

Big “I” National News

P&C Trends

Holiday Shoppers Misinformed on Insurance Coverage for High-Tech Gifts
Survey finds 96 million households lack key knowledge on protecting electronics.

Last week, as the holiday shopping season kicked off, Trusted Choice^® and the Big “I” released the results of their consumer survey regarding insurance coverage on high-tech electronic gifts. The survey found that approximately 42 million American households plan to give or receive high-tech electronic products this year. However, about seven out of eight households don’t fully understand key aspects of their insurance coverage for these purchases.

“With so many people giving and receiving electronics this holiday season, it is important for consumers to understand how to protect these gifts,” says Big “I” President & CEO Robert Rusbuldt. “In fact, any time people acquire an expensive or unusual item, we advise they consult with their Trusted Choice^® independent insurance agent. This new research shows us not enough consumers are doing that.”

The survey presented respondents with five questions about insurance coverage for high-tech home electronics. An overwhelming seven out of eight households (96 million) answered at least one of these questions incorrectly. More than 1/3 or 42 million households said they were likely to purchase or receive high-tech electronic products including iPods, iPhones, high-definition/plasma televisions, video game systems and computers. However, only about one-fifth of respondents said they had contacted their insurance agent with questions on coverage for high-tech electronic products when they purchased them in the past.

“As our research shows, so frequently most consumers don’t fully understand their insurance policies,” says Madelyn Flannagan, Big “I” vice president for education and research. “Making matters worse, with the ever-changing technology of these types of electronics, consumers need to keep in mind that policies may not always reflect the latest features.”

Respondents also were presented with five statements and were asked whether they agreed or disagreed that the situation was usually covered by most homeowner’s or renter’s insurance coverage. Their collective responses are as follows:

• More than half (60%) believe small electronic products stolen from them, either from their home or automobile – even those valued at less than $500 – are usually covered or don’t know whether they are or not.

• Approximately 55% believe electronic equipment that is damaged or destroyed as a result of a power surge is usually covered.

• People are better informed about damage resulting from home installation or loading/unloading in transport. Less than half (42%) said that such damage is usually covered.

• Only about one-third of respondents (35%) think digital downloads such as iTunes or podcasts are usually covered.

• Finally, only one-third (34%) believes gift cards, regardless of their value, are usually covered.

Along with the survey results, the Big “I” provided consumers a series of tips to help them with some common and important exceptions that many do not understand. For more information or for a copy of the tip sheet to share with your clients, contact Patrick Royal at Patrick.Royal@iiaba.net.

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

P&C Trends

Taking Shape
Agents weigh in on survey examining what shapes peoples’ careers.

What defines a person’s professional life? What shapes and molds it into a satisfying career? A recent McKinsey Quarterly survey presented those questions and several others to working professionals around the world in order to determine what leads them along their career path.

The survey found most people experience a “pivotal” moment at some point in their careers and the majority of respondents were in their 30s when the event occurred. For many, that moment involves a career change and, according to the survey, it’s usually due to a new-found passion in another field.

Michael Grannemann of All Service Insurance Agency in Berger, Mo. can identify with that statistic.

“I had actually thought about pursuing insurance for quite some time due to my real estate background,” Grannemann says. “I actually started selling real estate when I was 18. I then moved into a career with lasers at the age of 25, however, I still sold real estate off and on. At the age of 30 I started in insurance and have been here ever since. I started my own agency approximately three years ago and it has had a positive outcome on my career.”

Sherri Fleming of the Boswell Insurance Agency in Elba, Ala., is also familiar with being new to the workforce. A former captive agent for Mutual Savings, she made the switch to being an independent agent 18 months ago.

"I was a captive agent for Mutual Savings Life Insurance Company for two years,” she says. “I ran a debit until a car accident left me unable to work for nearly four years. My agent presented me with the idea, and having recently left my job, I decided to give it a try. I feel that this opportunity to work for an independent agent is a positive in my life. I feel like I have started over and that I am doing a better job than ever before. When I was reinstated as an agent, I was thrilled.”

Beau Bishop, agency manager at Alliance Insurance Group of Hot Springs in Arkansas, made a career jump, but his switch was based on maintaining the balance between his work and home life.

“I worked on Capitol Hill as a congressional staffer and a political consultant,” he said. “While I loved working in the political arena, the hours and lifestyle were not conducive to being the type of husband and potential father I wanted to be. Becoming an independent agent has allowed me to bring this balance back into my life and provided a very positive atmosphere to raise a family.”

Bishop’s reasoning for switching professions is not uncommon. The perfect work-life balance is important to most professionals, but it can be a challenge to juggle both. McKinsey found that 40% of survey respondents have experienced difficulty maintaining the balance between work and home. However, for independent agents, the two aspects go hand-in-hand, according to Luis Ros a broker at Ros, Seguros & Consultoria in Santo Domingo, Dominican Republic.

“This industry is very social-intensive so you have to like working, being with and servicing people,” he says. “But the right balance really depends on the person and not the activity itself, in my opinion. When you like what you do, and like your life as well, the transition between one role and the other is effortless. I enjoy very much being a broker and find it very easy to keep in balance with my personal life.”

Says Bishop: “This industry is based on sales and customer service. Most people want to know their insurance agent on a personal level. When potential clients see you at your child’s baseball game or dance recital, I believe this creates a sense of normalcy. This creates the trust and respect needed to allow you the opportunity to protect someone’s assets.”

Maggie Lifland, owner of Arrow Insurance Management in Frisco, Colo., has a different take. She says maintaining her work-life balance is less about her profession and more about location.

“I think I have an excellent balance, not because of the industry, but because of our location in the Rocky Mountains,” Lifland says. “I work hard to make sure that my staff has freedom and a work/personal life balance as well. We work a four-day work week, have a profit sharing plan instead of commissioned agents and make a point to allow people the freedom to ski on a powder day, go to the kid's school functions and take time off.”

Another key finding of the survey was that most respondents said the most profound effect on their careers was due to something work-related, not from family considerations or a change in personal aspirations. Yet that is not the case for Mark Pancrazi of A.T. Pancrazi Agency, Inc. in Yuma, Ariz. He credits his parents with leading him to professional success.

“I think my father and my mother have played a major role in the shaping of my career,” he says. “Not so much for the work I do but more for the moral and ethical values they have groomed into me through out my life.”

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

Legal Advocacy

State Farm Wins Katrina Ruling
Appellate court’s ruling could set precedent in Mississippi.

A federal appeals court handed State Farm a major victory in a Hurricane Katrina case earlier this month. The plaintiffs, John and Claire Tuepker, were Mississippi homeowners and sued State Farm because it denied their claim for damage to their home caused by Hurricane Katrina. The homeowners claimed the policy’s flood exclusion was ambiguous when read in conjunction with the hurricane deductible. They sought a ruling that “any damage to plaintiffs’ insured residence and property caused by ‘storm surge’ is not excluded under the subject policy and that the subject policy’s ‘flood’ exclusion is not applicable and is ambiguous.”

The trial court found that losses due directly from water in a storm surge were not covered by the policy in question. However, it also found that for damage caused by both wind and rain, which are covered losses, and water which is an excluded loss, the coverage under the policy becomes a “question of which is the proximate cause of the loss.” The trial court found that the State Farm policy was inconsistent with this settled rule of Mississippi law, and the exclusionary language was invalid. The same court also decided the “anti-concurrent-causation clause” in the State Farm policy was ambiguous and invalid, and that State Farm had to prove that the flood exclusion applied before it could deny the plaintiffs’ claim.

The appellate court agreed with the trial court’s ruling that the water damage exclusion in State Farm’s policy was valid, unambiguous and enforceable. The State Farm policy excluded from coverage water damage, including due to a storm surge, whether or not it was driven by wind.

The appellate court also overturned the trial court’s determination that the anti-concurrent-causation clause was ambiguous and invalid. It reasoned that the “excluded losses – here, any loss which would not have occurred in the absence of one or more of the excluded events – will not be covered even if a non-excluded event or peril acts ‘concurrently or in any sequence’ with the excluded event to cause the loss in question.” The court determined that the State Farm policy clearly provided that “indivisible damage caused by both excluded perils and covered perils or other causes is not covered.”

State Farm has used the water damage exclusion and the anti-concurrent-causation clause to deny hundreds of Katrina claims in Mississippi. So far, court rulings have been running the gamut on this issue, from total victory for insurers to total victory for homeowners. Now that the Mississippi appellate court has ruled that the policy exclusion and causation clause are enforceable, some observers believe that there will be more consistency going forward on State Farm’s remaining Mississippi claims arising out of Hurricane Katrina. However, since the court’s ruling was tied to the specific language of the State Farm policy, the decision may not provide much guidance for insurers using different policy language.

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

L&H Trends

The Evolution of Third-Party Life Insurance Transactions
NCOIL wrestles with life insurance settlements.

During the past two decades, permanent life insurance policies have undergone an evolution with respect to third-party transactions.

First, originating with the 1980s and the onset of HIV/AIDS, there was a burgeoning cottage industry for third-party purchase of a life insurance policy. Why? AIDS patients required significant levels of care and, in some instances, medical insurance plans did not provide full coverage and/or the individual may not have had medical insurance. In either case, in order to help provide funds for living expenses and treatments, the viatical settlement industry was launched. The person surrendering the policy received a discounted payment, which created controversy as some industry people felt the people surrendering the policy were desperate and being victimized. However, with the advent of AIDS “cocktails” and the improved life prognosis for AIDS patients, some viatical settlement firms found that their mortality assumptions were overly aggressive and no longer applicable. 

The viatical settlement industry also grew as acute cancer patients and other terminally ill individuals considered surrendering their policies to a third-party for immediate cash. And, the life insurance industry also created a new avenue for funds prior to the death of the insured: the accelerated death benefit. The benefit allows the policy owner to receive, in advance of the insured person’s death, a significant portion of the death benefit that otherwise would be paid after death to the beneficiaries. Often as much as 80%, and sometimes more, is available at any time within the last year or two of the person’s projected life. With this development, there was less need for viatical settlements, although there are still some viatical settlement activity.

The next phase of the settlement industry dealt with insureds who sold their life insurance (permanent or term) to a third party. In fact, the definition of a life settlement is the sale to a third party of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. The concept behind life settlements is an insured who bought the insurance for a specific purpose either believes that the reason is no longer important, they cannot afford their premiums or they want the proceeds before they die. In any event, when life insurance policies are sold for more than the total amount of premiums paid, the excess amount is taxable. Of course, many people would believe that this concept violates the principle of “insurance interest,” which means that the beneficiary of the life insurance policy must have a personal or business interest to the insured, so as to prevent a third party from taking out a policy and killing the insured to collect the proceeds. The life insurance industry does not like life settlements for a variety of reasons: 1) life insurance proceeds are income tax free, which is a significant tax subsidy; 2) lapse assumptions are built into the premiums and thus some policies will be paid that would otherwise lapse; and 3) the amount of expenses that are incurred in life settlements are quite significant.

Finally, there has been a further evolution of third-party life insurance transactions known as stranger-originated life insurance (STOLI), which involves having a third-party sponsor the proposed insured to take out a life insurance policy with the understanding that the policy will eventually be transferred to the third party. As a result of these practices, there have been a number of position papers and discussions by the National Association of Insurance Commissioners and National Conference of Insurance Legislators about promulgating standards, such as minimum time that the policy has to be retained by the owner, agent practices, tax treatment, etc. Undoubtedly there will be more regulations coming forth in these areas and agents will be well advised to stay abreast of state and federal requirements. Most important, agents need to understand that life settlements should only be considered by the insured with their eyes wide open and considerable discussion should take place regarding the internal rate of return (IRR) of the life policy if held until death and whether there are other resources available.

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

Forms & Substance

A Customer’s Exponential Value
Put a number on what your customers mean to the bottom line.

Some people feel customers are the lifeblood of the insurance business. Some might even say they are the most important part of a business. Others argue that their employees are the lifeblood of their business. Truth is, there is a case for both sides.

An agency needs employees to make or do the “stuff” that customers buy. Without customers, there is no one to sell to. Without customers, nobody makes any money, an agency can’t keep people employed and, ultimately, without both those things, there’s no agency. Yes, customers are very valuable. But, let’s take this a step further.

Have you ever thought about the financial value of a customer? Take this example of a grocery store customer. Say the average customer buys $50 in groceries during each visit and visits the store twice a week for 50 weeks each year. In a year, the customer is worth $5,000. Then say the average customer moves every seven years, so over a period of seven years, the customer is worth $35,000 to the grocery store.

But there is more. Agents have to believe that if they do a good job, their happy customers are going to refer others to them, such as a new neighbor who just moved into the area. Conservatively, say the average customer refers at least two new customers. These referrals might not make the existing customer spend more, but they are worth at least $70,000 of new business in the grocery store example. So, losing one customer can cost more than $100,000 ($35,000 plus $70,000 worth of referrals).

This type of reasoning applies to virtually any type of business. It’s important to see the big picture. If a customer complains to the grocery store owners about the steak he/she bought last week, it would be in the owner’s best interest not only to refund the money, but also give some “free” steak. It may cost $10, but that is less than 1/100 of 1% of what the customer is ultimately worth.

Every business has different numbers, but the principle still holds true. There always will be returns, refunds, complaints, etc., and by cheerfully taking care of them, an agent builds trust and customer retention. Even the customers whose problems are taken care of, yet never do business with an agency again, can be valuable.

Finding the value of a customer is easy. What is the average sale per customer? How often does he/she buy? How long will a customer buy? Multiply those three factors together and that’s the value of the customer.

Don’t forget the referral factor. Will the happy customer refer two, three, four or more customers? Multiply the value of a customer by the number of referrals and agents can get a better understanding of each customer’s value.

Does everyone in your agency know what your customers are worth? It will validate the importance of the employee and the decisions they make.

To read the entire article, click here.

Shep Hyken (shep@hyken.com) is a professional speaker and author specializing in customer service and customer relations.