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Big “I” National News

Legal Advocacy

Out with the Old, In with the New 

As carriers react to 65% tipping point decision, agents’ questions remain.

Eliot Spitzer made it clear last Thursday that he will end his tenure as attorney general of New York in the spotlight. By notifying St. Paul Travelers, Zurich, AIG and ACE that the so-called “65% tipping test” has been met for personal lines auto, homeowners, boiler & machinery and financial guaranty coverage, those carriers cannot pay contingent compensation to agents for business placed in those lines starting Jan. 1, 2007. The same day Spitzer gave notice to those carriers, the attorneys general of Illinois and Connecticut also notified St. Paul Travelers, Zurich and ACE that they can no longer pay contingent compensation to agents for the same lines covered by Spitzer’s notice for the same reason---they, too, believe that the 65% tipping test has been met. Their notices did not go to AIG because it reached a separate settlement only with New York.

In short, the 65% test provides that if more than 65% of national gross written premium is written by 1) insurers that do not pay contingent compensation and 2) insurers that have signed settlement agreements with a 65% test, then the carriers with those agreements must stop paying contingent compensation in the next calendar year, once notified by the attorney general.

Much has happened over the past seven days as the affected carriers reviewed and assessed the notices to determine their next steps.

St. Paul Travelers was quick to react, notifying its agents by the next day that for business placed staring Jan. 1, 2007, in the lines covered in the notices, it is prohibited from paying contingent commissions. In a follow-up conference call with agents Monday, Jay Fishman, the company’s chairman and CEO, said that for 2007, the company will implement a new approach to compensating agents for those lines. The old approach of paying contingent commission based on a formula under which a calculation is made after the end of the year is out for those lines. The new plan calls for the total compensation paid to agents to be split between base commission, which is not affected by the settlements or notices last week, and supplemental commission, which will be a fixed amount paid in the same time frame as contingent compensation currently is paid. The fixed amount for each agency will be communicated to agents by the end of the first quarter of 2007, but will be effective Jan. 1.

Fishman told agents that “In total, we intend for personal lines compensation in 2007 to be at least equal to 2006 total compensation.” He noted that the new plan is not a promise to pay “every agency the exact same amount or rate as they received in 2006” but that the company believes “most of our agencies will receive a total compensation rate that is substantially the same” as in 2006 while differentiating for business performance.

Fishman made three other important points. First, St. Paul Travelers will continue to pay contingent compensation for all lines covered by agents’ commercial lines agreements that are not covered by the notices barring such payments. Second, the company’s base commissions are not affected by this development in any way for any line of business. And third, 2006 contingency commission will be paid on schedule and is not affected by this change.

In essence, the new plan for 2007 will be structured to pay agents for their historical performance. Fishman committed that “no matter what you’ve heard or believe, we will continue to offer compensation that is competitive, predictable, differentiates your agency based on the performance of your business and complies with our legal obligations.”

Following receipt of the notices, Zurich Public Relations Director Keith Owens told IIABA that “Zurich has received the notice from the New York attorney general (NYAG), is reviewing it and will take appropriate responsive action consistent with the terms of its agreement with the NYAG and Connecticut and Illinois attorneys general. This development will not impact contingent commission payments for 2006. Zurich will continue to offer contingent commissions where appropriate from a business perspective, except where prohibited by regulation and legal agreements.”

As for AIG Auto, covered by the settlement reached by AIG with Spitzer’s office, its President and CEO Tony Pavia told IIABA that “beginning in late 2004, AIG Agency Auto initiated a process to eliminate the contingency earning agreements in place at that time. AIG Agency Auto had no contingency agreements in effect in 2005 and 2006 among its producer force. AIG Agency Auto, and all other applicable AIG units, will be reviewing the recent notice issued by the New York attorney general concerning the prohibition of payments on contingency agreements relating to certain coverages/lines of business, and will continue to comply with the terms and conditions of the settlement agreement. AIG Agency Auto remains committed to the success of our producers and will continue to provide a broad array of products at competitive commissions.”

ACE declined to provide any comments to IIABA.

Since the announcement last week, there have been questions about whether the incentive payments made by carriers distributing through direct and captive agents count toward the 65% test. The answer appears to be yes. The reason lies in clever drafting in the settlement agreements. Since “contingent compensation” is specifically defined in the settlements to cover only payments from insurers to “producers” who are independent agents and brokers, the payments by insurers through direct and captive agent channels would not be considered contingent compensation so their the premium would count when calculating the percent of premium from carriers not paying “contingent commission.” Therefore, it appears that the 65% test may more easily be met than would be the case if the plain meaning of the phrase "contingent compensation" or “incentive compensation” could be applied.

This outcome is frustrating for many, made more so by the complexity of the settlements. Beyond that, many find it ridiculous and inexplicable that the illegal activities of a small handful of people in commercial lines has resulted in significant changes by carriers to their business models for retail agents in personal lines who had nothing to do with the improper activity uncovered.

It is important to note that these changes apply across the country, not just in the states like New York, Connecticut and Illinois where the carriers signed settlement agreements with the AGs. The agreements themselves ban those carriers from paying contingent compensation anywhere in the United States if the 65% test is met. But, the ban affects only the carriers that have signed the agreements. Other carriers can continue to pay contingent compensation because it remains a legal business practice in our free market economy.

No one knows what will happen next. Will other carriers under investigation or involved in litigation sign settlement agreements with the same or similar terms? Will new allegations of wrongdoing come to light or result in litigation? Will there be efforts to seek adoption of new regulations or laws? What other changes, if any, will carriers implement? The list goes on. The uncertainty of the circumstances adds to the unrest this issue has inspired in some.

What we can predict is that attention-grabbing headlines are likely to continue, even if the substance behind them is weak or nonexistent. We also know that independent agents will continue to be proud that they offer consumers choices, which should never be construed as a bad thing.

As 2006 draws to a close and 2007 approaches, IIABA will continue to advocate aggressively on this issue to preserve what is important to members for a business environment that fosters growth and success.

Debra Perkins (debra.perkins@iiaba.net) is Big “I” executive vice president and general counsel.

P&C Trends

NAIC Ranks States on Auto Insurance Cost

New Jersey has the most expensive auto insurance rate in the country.

When it comes to the cost of auto insurance, New Jersey is No. 1, according to the National Association of Insurance Commissioners (NAIC).

The NAIC’s 2003-2004 Auto Insurance Database Report, which includes the average cost for personal auto insurance nationwide, lists New Jersey as the most expensive jurisdiction with Washington, D.C., and New York coming in second and third, respectively. The report, generated to help states asses their particular markets, ranks each state according to its average premium and expenditures for the year. The pure premium, loss ratio, claim frequency and claim severity were also calculated by coverage.

New Jersey, which has topped the list since 2000, saw an average premium of $1,221.08 in 2004, increasing $27.91 from 2003. Washington, D.C., saw an increase of $49.96 in its average premium increasing to $1,184.63 from $1,134.67 in 2003, and New York’s average increased by $3.71 since 2003, meaning an average rate of $1,171.62 for 2004.

“Historically, New Jersey has paid two to four times the national average in dividends to policyholders, and at times this has been as high as six times the national average, which would reduce the average expenditure and combined average premium for New Jersey consumers if dividends were included in premiums,” the report says.

According to Sheri Acconzo, president of the Independent Insurance Agents & Brokers of New Jersey (IIABNJ), the high premiums can be attributed to a variety of factors.

“A few things to consider when looking at our rates---New Jersey is the most densely populated state in the country, and there is a higher cost of living in the northeast,” she says. “Also, many consumers in New Jersey choose higher limits of coverage based on their per capita income and level of assets to protect.”

While premiums in New Jersey are high, Acconzo says this isn’t an indication of the state’s market.

“Although the report indicates that we have the highest rates in the country, IIABNJ believes that the New Jersey auto insurance marketplace has improved. Just a few years ago we had a serious availability crisis. As a result of the auto reform enacted in 2003, New Jersey consumers now have choices---they can shop for the best price and coverage available,” she says.

North Dakota is the least expensive state for auto insurance with an average of $562.

The national average cost for 2004 was $823.38, increasing $14.06 from $823.38 in 2003.

Due to the varying factors from state to state that affect the average expenditure and premium rate---including: underwriting and loss adjustment expense, types of overages purchased, driving locations, accident rates, traffic density and auto repair costs---the NAIC warns against making direct state-to-state comparisons based on the information in the report.

“It is reasonable to consider that the general economic conditions in a state may affect the price of auto insurance, but no direct measure of this characteristic can exist. There are measurable variables that can be used as imperfect substitutes for these general conditions to approximate their influence on auto insurance price,” says the report.

NAIC has generated a database of information about cost factors in each state so insurance regulators and the public has access to the material. The database includes information on insurance markets, traffic conditions, medical costs, crime rates, automotive repair costs, economic conditions and insurance-related state laws. The data was gathered from statistical agents including: the American Associations of Insurance Services, ISO Data, Inc., National Independent Statistical Service, and Property and Casualty Insurers Association of America.

The NAIC’s 254-page report is for sale through its Web site at www.naic.com.

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



P&C Trends

Lightning Strikes Concern Among Homeowners

Cost of homeowner’s claims from lighting damage on rise.

High-definition televisions, laptops, stereo systems and video game consoles are at the top of many people’s wish lists this holiday season; however, these high-priced items could end up costing homeowners more than they are worth.

Hartford Financial Services Group, Inc., has seen a 77% increase in claims filed between January 2001 and July 2006 for lighting strikes, and the company attributes the increase to the prevalence of cutting-edge electronics and escalating rebuilding costs. Lightning has the potential to fry electronic items because it sends surges of voltage into a home’s electric system---these surges also can cause electronic items to become overloaded and catch fire. There is also the damage accrued if and when the lightning hits the house directly.

“People are purchasing many more high-end appliances and electronics, such as flat screen televisions, home theater systems, computers and office equipment, which can be very expensive to replace when damaged. Labor and material costs associated with rebuilding have also been rising and can add to the price tag of a claim,” says Vicky Pace, an assistant vice president of claims at The Hartford.

The Hartford estimates that it received 36,000 lighting related claims nationwide from January 2001 to December 2005, and while homeowners polices cover damage from the lightning, less the deductible, it’s an incident that can be avoided if the right precautions are taken.

“If you live in a lighting-prone area, consider installing a lightning protection system on your home, building or a nearby tree,” says James Kelley, assistant direct of loss control at The Hartford. “This can help provide a safe path for lightning currents to follow and discharge, reducing the potential for damage to your property. Keep in mind, these systems should be installed in accordance with your local building code and Underwriters Laboratories (UL) and/or National Fire Protection Association (NFPA) guidelines.”

The Big “I” also offers the following suggestions, which agents and brokers can pass along to customers with homeowner’s policies:

Tips for Preventing Lightning Damage

Outlets and Plugs

• Check for outlets that have loose-fitting plugs, which can overheat and lead to fire.
• Never remove the ground pin (the third prong) to make a three-prong plug fit a
two-conductor outlet; this could lead to an electrical shock.
• Never force a plug into an outlet if it doesn’t fit. Plugs should fit securely into outlets.
• Avoid overloading outlets with too many appliances.
• Replace any missing or broken wall plates.
• Make sure there are safety covers on all unused outlets that are accessible to children.
• Check for any hot or discolored outlet wall plates; this may indicate dangerous heat buildup at the connections.

Power Cords and Extension Cords

• Ensure all power cords and extension cords are in good condition, not frayed or cracked.
• Cords should never be nailed or stapled to the wall, baseboard or another object.
• Do not place cords in high traffic areas or under carpets, rugs or furniture.
• Extension cords only should be used on a temporary basis; they are not intended as permanent household wiring.
• Ensure extension cords and electrical products are listed by an independent testing facility such as Underwriters Laboratories Inc., CSA, ETL or MET labs, and are properly rated for their intended use, indoor or outdoor, and meet or exceed the power needs of the appliance or tool being plugged into it.

Light Bulbs

• Check the wattage of all bulbs in lamps and light fixtures to ensure they are the correct wattage for the lamp or fixture.
• Replace bulbs that have higher wattage than recommended; to find out the correct wattage, check with the manufacturer.
• Make sure bulbs are screwed in securely—loose bulbs may overheat.

Circuit Breakers and Fuses

• Circuit breakers and fuses should be the correct sizes and ratings for their circuits.
• If the correct size is unknown, have an electrician identify and label the size to be used.
• Always replace a fuse with the same size fuse.
• Create a circuit map that clearly identifies all outlets, fixtures and the major appliances each circuit serves.

Appliances

• Ensure all appliances are certified by an independent testing laboratory such as UL, CSA, ETL or MET Labs, and read and follow the manufacturer’s instructions carefully.

GFCIs and AFCIs

• Ground fault circuit interrupters (GFCIs) prevent accidental electric shock and electrocution by shutting off a circuit when a “leak” of electric current is detected off the circuit. Required in homes since the early 1970s, homeowners should consider GFCIs on all general-purpose circuits. GFCIs should be tested monthly and after every major electrical storm.
• AFCIs help prevent fires that often result from problems with outlets, switches and frayed and cracked cords by sensing the particular signature of an arc—where electricity has to “jump a gap”—and, like a GFCI, acts immediately to shut off the circuit, thus depriving the hazard the opportunity to start a fire. AFCIs are currently required in all new home construction in the bedroom circuit, but should be considered in all homes, particularly older homes, and on all general-purpose circuits.

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

Legal Advocacy

Texas Finalizes Zurich Settlement

On Dec. 4, Texas Attorney General Greg Abbott announced that Texas and nine other states have finalized their settlement against Zurich American Insurance Company. The other states include California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Virginia and West Virginia. This action finalizes the settlement often referred to as the multi-state agreement that Zurich reached with these states in March 2006.

The agreed final judgment and stipulated injunction formalizes and finalizes the multi-state agreement with the attorneys generals of the participating states. It is a companion to the settlement of a class action in New Jersey where Zurich is required to pay policyholders nationwide of $121,800,000 (with a possible additional $29,900,000) as well as the regulatory settlement endorsed by the National Association of Insurance Commissioners (NAIC).

While the final judgment does not change any of the terms in the regulatory settlement, it sets the date for the pre-binding disclosure statements Zurich has agreed to require of its agents and brokers to begin May 5, 2007. The company’s disclosure process and Web-based information began Nov. 4.

The final judgment makes clear that if Zurich believes it has suffered a market reduction due to compliance with the disclosure provision of the regulatory settlement, it can petition the settling regulators through of the NAIC’s Broker Activities Task Force. The recommendation of that task force must be given considerable weight by the Texas attorney general in determining if modifications will be made.

An executive summary dated March 22 about the regulatory settlement and the multi-state agreement and copies of those agreements themselves, as well as of the final judgment, are available on the members-only the legal advocacy page of www.iiaba.net, under the section on IIABA/Industry Information & News.

IIABA will continue provide updates on significant developments regarding this matter.

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

On the Hill

GAO Focus Could Mean Increased Scrutiny

Report asks Congress to review catastrophe preparedness, crop insurance fraud.

The nonpartisan Government Accountability Office (GAO) will spotlight catastrophe preparedness and crop insurance fraud in 2007, which could mean increased Congressional scrutiny for the National Flood Insurance Program (NFIP) and the Federal Crop Insurance Program (FCIP).

U.S. Comptroller General David Walker this week released a list of 2007 GAO priorities affecting these particular insurance industry issues, among others. The report will go to leaders of both Democrats and Republicans in the House and the Senate.

Of particular interest to p-c insurers is the suggestion that Congress examine more closely the availability of private insurance for major catastrophes on the scale of Hurricane Katrina. The report also suggests identifying means of improving the NFIP’s financial resources and funding mechanisms and mitigating repetitive-loss risks, as well as increasing compliance with purchase requirements and pushing forward expeditiously on modernization of Federal Emergency Management Agency (FEMA) flood maps.

With legislation to overhaul the NFIP thus far stalled in the 109th Congress, the report recommends identifying ways to improve the program's financial resources and funding mechanisms, as well as mitigating repetitive losses; increasing compliance with purchase requirements; and expediting efforts to modernize the Federal Emergency Management Agency's flood maps.

Additionally, the report suggests greater oversight of the $25 billion in annual federal government spending on subsidies and disaster payments for farmers. The report asks Congress to “strengthen internal controls in the federal crop insurance program to weed out fraud, waste and abuse.”

A congressional staffer working on a committee of jurisdiction of one of these federal programs indicated that “while these are merely recommendations from the GAO, they are in line with some of the new leadership's stated priorities, and I would expect Congress to initiate many of these proposed investigations in the next Congress.”

The Big “I” is prepared to meet any challenges that arise head-on.

“Should Congress follow Comptroller Walker’s recommendations and ask the GAO to investigate these suggestions, agents should expect significant oversight of the federal role in these programs and should be prepared for Congressional proposals to eliminate or reduce any waste, fraud and abuse in these types of programs,” says John Prible, Big “I” assistant vice president for federal government affairs. “It is unclear what amount of waste, fraud and abuse may exist, and what Congress may do in response to these recommended studies, but IIABA will work with both the committees of jurisdiction and the GAO in any investigations in the 110th Congress, and any proposals that may come out.”

“Obviously, with the majority changing in Congress, 2007 will be a year of change on Capitol Hill,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. "We will be closely and alertly monitoring any new developments, such as these, that will affect independent insurance agents and brokers, and we will work hard to advance our members’ agenda on all important insurance issues.”

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

L&H Trends

Technology Aids Aging Population

New technological developments can help elderly live independent lives.

Just about everyone is aware of the aging population, not just in the United States. In fact, the fastest-growing segment of the U.S. population (on a percentage basis) is people aged 85 years and older. For independent agents with significant personal lines books of business, this is no surprise. Depending on the state or region the agency serves, it can be challenging to find auto markets that want to write drivers older than 80. Also, given that some seniors have two residences and can have extended absences, accommodations may have to be made so that bills and other communications reach the appropriate address.

Studies show that the senior population’s two overwhelming areas of concern are health issues and the ability to maintain their independence---living independently and having the financial ability to do so. Everyone is aware of the financial cost of nursing home care and/or paying for an aide to be at a senior’s home on a regular basis (although there is a broad misconception among the general public regarding the fact that Medicare covers these types of expenses). Virtually everyone would prefer to live independently in their own homes for as long as possible. The children of seniors, especially those who live out of the area, have great anxiety about this issue, as they are concerned about the possibility of a fall or a general decline in healthy living habits if there is not periodic involvement and oversight.

Fortunately, one good trend has developed. With encouragement and assistance from the federal government, there has been a focus on developing technology to provide seniors with assistance in performing the activities of daily living and to allow for monitoring and assistance in the event of a fall. (Falls are the leading cause of injuries for seniors.)

Congress passed the Assistive Technology Act of 1998 to provide incentives and encourage the use of assistive technology devices and services for people with disabilities and impairments. As a result, there are a variety of companies offering numerous devices that allow seniors (and people with disabilities) to live independently. For example, there are electronic aids to interact with and control appliances through voice activation, switch access and computer interfaces which transmit signals through a house’s electrical wiring and allow for remote control of electrical devices. There is an excellent Web site dedicated to providing information on the variety of assistive devices (currently more than 20,000) at www.abledata.com.
 
Agents and brokers should include a link to this Web site on their Web sites and, if the agency sends out newsletters or has brochures in the office describing the agency’s services, offer this Web site as a good source of information. There is a continuing trend to have long-term care policies pay for some assistive devices if they allow the policyholder to remain at home. This is a win-win for the insurance company and the insured. In one project, a company installed a wireless monitoring system in apartments for senior citizens (which took about 20 minutes to install and uses sensors to pinpoint where residents are at any particular time). The system detected at least four falls by the seniors living in the apartments. The issue of allowing seniors independence yet allowing a comfort level for their family may be greatly aided in the future by the use of this innovative technology. Be sure to let customers know where they can learn more about these developments.
 
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.