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 Big “I” National News

P&C Trends
NAIC Holds Quarterly Conference
Financial crisis, licensing reform among the key items discussed.

The nation’s insurance regulators gathered for their winter conference and five days of exhaustive sessions last Friday. It’s been a few tough months for the National Association of Insurance Commissioners (NAIC) and state insurance regulation in general. Since July alone, the organization has seen its CEO abruptly depart, the dawning of a nearly unprecedented financial services meltdown and political opportunists attempt to disparage the work of state regulators for short-term political gain.
 
Despite this run of bad luck, state insurance regulators have reason to be proud. The sound performance of insurance regulators in ensuring the stability and solvency of insurers and protecting American policyholders – both before and after the emergence of the current crisis – stands in stark contrast to what has occurred in other financial sectors. Some have attempted to use this unfortunate situation to somehow call for the establishment of a fractured and optional insurance regulatory system, and the NAIC has also done an admirable job rebutting such arguments and defending the state system. Those following the crisis, and the ensuing media coverage, have witnessed outgoing NAIC President and Kansas Insurance Commissioner Sandy Praeger and her colleagues ably debate the merits and track record of state regulation.
 
Describing all of the events that occurred during the NAIC’s quarterly conference would test the endurance and focus of even the heartiest insurance junkie, so the following are some highlights:

• The NAIC elected its new team of officers, and the group will be led by incoming President Roger Sevigny (N.H.). Commissioner Sevigny will be joined by President-Elect Jane Cline (W.Va.), Vice President Susan Voss (Iowa), and Secretary-Treasurer Kevin McCarty (Fla.). In addition, the NAIC’s new CEO is expected to be named soon.
 
• IIABA continues to press for meaningful agent and broker licensing reform at the NAIC, and some small steps are being taken. The Big “I” is especially focused on simplifying the licensing process for producers operating in multiple states and streamlining the duplicative layers of licensure that currently exist.
 
• The country’s current financial crisis remained a major topic of conversation, and discussion centered on the marketplace challenges and capital issues facing some in the life insurer community. The American Council of Life Insurers presented regulators with a series of proposed reforms intended to provide reserve and capital relief to life insurance companies and the NAIC continues to consider these recommendations.
 
• A regulator working group unveiled proposed revisions to an existing NAIC model law concerning the sale of annuities. Although few dispute the merit for reasonable and balanced suitability requirements, this new proposal would dramatically expand the current model and have the potential to significantly increase the regulatory compliance burden of producers who sell annuities.
 
• Finally, the NAIC approved its 2009 budget, which projects revenues of more than $73 million and expenses of nearly $71 million.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior counsel for state government affairs.





P&C Trends
Stability Drives E&O Decisions
Rate increases take a backseat to carrier experience, commitment to marketplace.

As the insurance industry nears the end of the soft market, agency E&O premiums are likely to rise in 2009. However the spike is unlikely to deter many independent agents who are seeking stability when purchasing or renewing their agency’s E&O policy --- not the lowest price.

Agents are paying closer attention to their E&O carrier’s financial stability, are more open to risk management solutions and are actively comparing the many available coverage options, according to Joni Fairbrother, E&O administrator and IAS assistant vice president at Independent Insurance Agents & Brokers of Arizona.

“There are a tremendous number of options now, with 15 to 20 carriers in the E&O marketplace,” says Fairbrother. “In today’s economy, agents are looking at E&O coverage as a long-term investment. Price is important, but agents are also looking for E&O to be one stable area where they won’t have a burden.”

Jeff Lewis, director of Southwest Insurance Brokers, LLC in Phoenix, Ariz., says a recent increase in his agency’s E&O premium was consistent with his expectations and will not compel him to change carriers.
“Stability is big,” Lewis says. “I probably get five to 10 solicitations a year from different markets, but even if anybody could save me 10 to 15% on my premiums, I wouldn’t change carriers.”

Ronnie Tubertini, president of SouthGroup Insurance Services in Ridgeland, Miss., agrees and believes the price is only part of the equation when it comes to shopping for coverage.

“In a soft market like we’re in today, companies come in and out of the E&O business,” he says. “I’m looking for a company that has a lot of experience, and I’m not going to change companies just because my premium increases somewhat.”

When Mark Priestaf, president of Servant Insurance Services in Franklin, Wis., launched his agency in July 2008, he didn’t look for a bargain; instead he sought out an established E&O carrier for coverage.

“I didn’t shop the market,” he says. “For me, it’s a trust factor. I hope my clients trust me, so I place the same trust in my E&O carrier.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.





P&C Trends
An Ode to Rational Financing
Monitor price-earnings ratios to understand real value.

Price-earnings ratios of major market indexes are estimated to be trading in the lower teens, down from results of 18.5 in 2007 and as high as 30 several years ago. Clearly, stock promoters are reflecting on what p-e ratios actually mean, as agents realize they may have bought stocks, in recent years, at equivalent prices they would never pay for an insurance agency acquisition.  

Below is the S&P 500 historic p-e ratio going back to 1936 (first available data).

The average p-e ratio has been 15.75 since 1936, and ratios have only reached and been consistently above that average since the 1990s. The market has also remained at ratios well below the average for extended periods of time.

To understand p-e ratios, one must understand the Gordon Growth Model—perhaps the most widely used measure of any business value. It quickly and efficiently adjusts a stream of future income to its value today, accounting for the investment’s risk and expected profit growth. In the formula shown below, “K” represents the business cost of obtaining funding (the average cost of paying investors and lenders), while “G” represents the average growth in projected profit. The calculation used to estimate the value of $1 of earnings is analogous to a p-e ratio and represents what an investor would pay for $1 of earnings at a given risk. The calculation uses 10% as the average cost of financing for a business in the U.S. and 3% as the growth rate. U.S. Gross Domestic Product increases have averaged about 3% on a real basis since the Great Depression.

Price or Value = Profit / (K-G) or Average Example = 14.3 = $1 / (.10-.03)

This formula generates a p-e of 14.3, which is slightly below the average for the S&P 500 since 1936. This calculation has guided the business world for many years, and the recent financial crisis will surely encourage many to more carefully watch the p-e ratio of stocks.

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


L&H Trends
College Costs Outpace Inflation
Agents can help customers address rising tuition costs and plan for the future.

There is quite a disparity between the cost of college tuition in the 1980s and today. In fact, statistics reveal that college costs have skyrocketed over the past 25 years --- attending college now costs 439% more than it used to. The increase in tuition and fees between 1982 and 2006 has put college out of reach for many Americans and is greatly increasing the debt burden of those who do enroll, according to the National Center for Public Policy and Higher Education. Comparatively, the Consumer Price Index rose only 106% over the same period, the cost of medical care increased 251% and the average family income increased just 147%.

Adding to the high cost of college is the tightening credit market which has made college loans more difficult to access. University endowment funds have also taken a hit, which may decrease the amount of financial aid colleges can provide. Rising state government deficits are also translating into higher tuition costs at state schools. Harvard recently announced that its endowment fund lost $8 billion in the past four months, and, this week, the California state university system announced it will reduce the statewide entering class by 10,000 students next year.

While little can be done to slow the increase in tuition, independent insurance agents can help their insureds battle rising college costs by sharing two important lessons. First, most families underestimate the amount of life insurance their children would need in the event of a parent’s premature death. Given today’s higher college costs, an adequate amount of life insurance to pay for a dependent’s college tuition can range from $100,000 to $200,000 depending on the children’s ages and whether they attend a state university or private college.

Second, there are several tax efficient ways to save for college, such as prepaid tuition plans available through states (Section 529 Plan) or private colleges. President-elect Barack Obama has indicated his administration will help Americans pay for college by creating the new American Opportunity Tax Credit. This fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, covering two-thirds of tuition at the average public college or university and making community college tuition completely free for most students. Credit recipients will be required to conduct 100 hours of community service in exchange. Presumably, higher wage earning families will not be eligible for the credit.
 
Independent agents can help their customers decide how to best to pay for college with solutions including permanent cash value life insurance, ROTH IRAs, mutual funds and prepaid tuition plans.  The most important concept agents can impress on their customers is to start saving for their children’s college educations as early as possible. 

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


Tech Update
Web 2.0: Empowering a Cultural Transformation
New technologies are providing more efficient communication and increasing agency productivity.

There is an entire universe of very cool technology making up the Web 2.0 landscape. Yet, technology just for technology’s sake makes little sense. If Web 2.0 were just about the technology, it would be far less compelling. Technologies are neither good nor bad. Rather, it is how they are used.

Web 2.0 technologies are the enablers to a set of social and cultural trends that are transforming the world. Peers coming together and tapping into a collective intelligence to create value characterize this new world. Through this culture individuals draw strength from each other and  collectively gain control, influence and power.

A great deal of personal and informal business Web 2.0 usage is taking place today. Unfortunately, many agency owners just haven’t been able to get their heads around the concept—at least not as a business strategy. Yet, making the Web 2.0 culture part of your agency’s business plan may very well be a matter of survival.

Web 2.0 is not a fad. It’s a long-term hard trend that has significant implications on how your agency can most effectively interact and communicate with your prospects, customers and employees. These tools are many times free and very easy to use. There are now a variety of tools available to agencies for both knowledge sharing and collaboration. Here are a few examples:

Web Sites: Most traditional agency Web sites limit visitors to viewing content. The sites are online versions of printed brochures that far too often are static and quickly become out of date. Web 2.0 Web sites, on the other hand, expand the user experience by encouraging participation and asking users to add value.

RSS: Really simple syndication, or RSS, is a basically a personal news wire service. When you create content you can use RSS to automatically notify the world that you have added information to your blog or Web site. People interested in your Web site or blog subscribe to RSS feeds so that when you site is updated, the RSS reader grabs the latest content and delivers it to them.

Del.icio.us: The Web 2.0 capability known as del.icio.us can be installed as a plug-in to your Internet browser. It allows you to bookmark and tag Web articles immediately with keywords that resonate specifically with you. As a result, rather than sending a link to an interesting article in e-mail, coworkers or customers can access del.icio.us and can see the stories you have tagged.

Social Networking: Many agency owners question the value of social networking and think that those using social networking sites such as LinkedIn are wasting time at the workplace when they could be “out selling.” Yet, social networking tools are becoming the building blocks of trusted professional relationships.

The technologies of Web 2.0 continue to evolve and change at an ever-increasing pace but the social and cultural changes they enable have permanently transformed the way our world works. Ignoring the Web 2.0 culture is not an option. Social media and other Web 2.0 capabilities are creating new opportunities by facilitating communication inside your agency and extending collaboration beyond agency walls. Having a strategy and setting goals are keys to insuring success with any new endeavor—this is especially true with something as transformational as Web 2.0.

Rick Morgan (rick@Aartrijk.com) chairs the Web 2.0 Social Media Subgroup established by the ACT Strategic Future Issues Work Group and is a senior associate with branding consultancy Aartrijk.