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A Look Back, a Look Ahead |  S&P: Negative Outlook Possible Regardless of TRIA Extension |  Independents Unite: Cross-Market with Other Independent Businesses |  Look to Your Small Business Clients for New Opportunities |  Back-to-Basics Selling |  Big "I" National News

P & C   T R E N D S
A Look Back, a Look Ahead
S&P, Fitch assign industry ‘stable’ outlook.

2005 was tough. Between catastrophic hurricanes and regulatory investigations, the insurance industry very well could have taken a beating this year. Yet the industry proved resilient by maintaining its "stable" outlook in two recent reports. Fitch Ratings’ "Review and Outlook 2005-2006: U.S. Property-Casualty Insurance" and Standard & Poor’s’ "U.S. Personal Lines Insurer 2006 Outlook" both say the industry was able to withstand 2005’s perils, although it did not emerge totally unscathed.

According to Fitch, this was the most devastating year ever for insured catastrophe losses. Although these losses will create a "shift in marketing trends," the report says that "Fitch is not convinced that these events will promote a broad market hardening as some market experts have indicated."

Beyond the hurricanes’ impact, there are other issues that could affect the industry in the new year. "The insurance industry remains cyclical," the Fitch report says. "Although market pricing has been conducive to significant underwriting profits in recent years, the industry has not fully reaped the benefits of this environment and the industry has not produced adequate returns relative to its cost of capital. This underwriting opportunity is likely to diminish over the next several years."

Fitch predicts that 2006’s p-c underwriting results and profitability will improve. It predicts new written premium growth of 5.6%, up from 2005’s 3.2%. It also anticipates a return to overall underwriting profitability next year with a combined ratio of 97.9%.

According to the S&P report, 2005’s hurricanes, lead by Hurricane Katrina, dealt a blow to the personal lines sector, reducing earnings "across the board."

"Personal lines companies will have to enhance their risk management and underwriting practices even more," the report warns, "for it’s unlikely in the current political environment that state insurance departments will be willing to approve high rate increases, especially in the affected states."

Still, the industry still receives a "stable" outlook from S&P. However, the outlook is contingent on personal lines writers not altering their contractual obligations concerning flood coverage. The report points out that although President Bush signed a bill that increases FEMA’s borrowing levels for its flood insurance program, it’s still unknown how much of Katrina’s flood-related damage personal lines companies will cover.

Also noteworthy: Since 2000, none of the 21 S&P-rated personal lines companies experienced an upgrade, but downgrades have decreased significantly in the past three years. And in 2005, 10% had positive outlooks, compared to none in 2004.

"Despite increased competition and catastrophe losses, we expect major personal lines companies to stay focused on improving risk management, maintaining a disciplined underwriting approach and profitably using sophisticated risk control tools, cutting-edge technology and improved risk segmentation in their homeowners’ and auto lines," the report says.

Jennifer Sikorski (jennifer.sikorski@iiaba.net ) is IA’s associate editor.

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O N   T H E   H I L L
S&P: Negative Outlook Possible Regardless of TRIA Extension
Company may issue negative report even if Congress passes bill.

Standard & Poor’s Rating Services has announced there is a chance it will place the commercial lines property-casualty insurance sector on negative outlook regardless of whether Congress renews or extends the Terrorism Risk Insurance Act (TRIA).

In the Dec. 8 report "Whether TRIA Sinks or Swims, Commercial Insurers Will Feel Impact," the company says it certainly will issue the negative outlook if Congress fails to renew or extend a terrorism insurance backstop. But it could also do so even if Congress does keep a backstop in place if that backstop is insufficient.

In part, the report reads: "If Congress fails to renew or extend TRIA, we will place the commercial lines property-casualty insurance sector on negative outlook. What this means is that over the next six months, we would expect the number of downgrades in this sector to exceed the number of upgrades. Extension or renewal could also result in a negative outlook for the commercial sector, if coverage provided by the extended or renewed act is so diluted that it effectively removes any beneficial effect."

The report notes that not every commercial insurer rating will be lowered, but it does mean that S&P will review the following items for each of the companies it rates and assesses:

1) Which of its lines of business have terrorism exposure;

2) Its concentrations of exposure;

3) Its risk management capabilities;

4) How effective are its mitigations of any exposures (e.g., through reinsurance);

5) Its quantity and quality of capital.

The report continues: "On a case-by-case basis, we will either affirm or adjust our ratings to reflect those considerations. Companies that accept large concentrations of terrorism risk relative to their overall books of business and capital, and that do not have sufficient risk management practices in place to mitigate those risks, will be reviewed for downgrades."

The House and Senate each have passed differing versions of S. 467, which would modify and extend TRIA. Currently, both chambers are negotiating to get a unified bill passed and placed on President Bush’s desk for his signature before TRIA expires Dec. 31. It is expected that a compromise might be reached as early as the end of this week or early next week, though changes to any specific items in either bill were unknown at press time.

The S&P report cites the fallout from the active hurricane season as a factor in assessing the economic risks of failure to renew a meaningful federal backstop, a case the Big "I" also has made in appealing to Congress: "… [A] single terrorist event could easily cause catastrophic losses well above the levels experienced this past year from Hurricane Katrina. If the attack is nuclear, biological or chemical in nature, losses significantly more than $200 billion could result, which could threaten the solvency of some insurers and significantly reduce capital for the commercial lines sector as a whole."

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.

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L & H   T R E N D S
Independents Unite: Cross-Market 
with Other Independent Businesses

I was recently reading my small-town weekly newspaper when a 7 by 7 inch ad caught my eye. It was an ad for the local independent pharmacy that read: "Have questions about the new Medicare Prescription Drug Coverage? Jackie Jones, Independent Agent of Jones Insurance, will be at our pharmacy on Tuesday, Dec. 13, from 9 a.m. until 4 p.m. For the past eight years, Jackie has specialized in working with senior citizens and their Medicare needs, and she will be available to help you compare plans to determine which plan will best suit your personal economic needs, as well as help you enroll in the correct plan."

This ad is a very smart move for both parties. First, the pharmacy is battling with national drug stores, such as Wal-Mart, in our area. By running the ad and providing this service, it is emphasizing the relationship side of the business and putting its customers first. As more customers get catastrophic prescription drug coverage, they will have their prescription drug needs met. And this is a great way for the agent to get free third-party advertising (which helps with the credibility of the ad). The agent is also seen as an expert in the field and someone who is working with seniors in the community.

Your agency can seek out this type of opportunity in a couple of ways. If your agency has someone specializing in long-term care insurance and Medicare supplements (including Part D coverage), have them look to partner with an independent pharmacy for a similar promotion. Another option is to partner with a local nursing for a seminar on LTC insurance. Most nursing homes badly need private funds to balance Medicaid reimbursements, which are significantly lower.

If your agency doesn’t have this type of expertise, consider partnering with an agent who specializes in LTC/Medicare supplements (Jones is the sole employee of her agency). The agency could refer customers to her, and she could keep the agency in mind for personal and commercial lines customers. In fact, it might make sense to invite her to join the agency, eliminating her current overhead expense and expanding her book through cross referrals.

When competing with national chains, the greatest asset local businesses have is goodwill. Maintaining your agency’s reputation and promoting it in the community is the best way to counterbalance national chains’ large-scale advertising and name recognition.

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

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A G E N C Y   M A N A G E M E N T
Look to Your Small Business Clients for New Opportunities

Have you checked in with your small business clients recently? They have been busy planning expansion and capital outlays, according to the just-released NFIB Small Business Economic Trends Report.

Some of your small business clients might have new facilities that need new or expanded coverage, according to the NFIB poll. The share of small-business owners planning to make capital expenditures in the fourth quarter rose five points to 34%. Twenty percent believe now is a good time to expand facilities. Although strong at this stage of the expansion, those expecting conditions to improve over the next six months declined three points to a net 11%, while a net 23% expect higher real sales over the next six months, fewer than October’s reading, but solid.

Have you asked your small business clients if they have new equipment or vehicles that need to be covered? The frequency of reported capital outlays over the past six months rose to 64% of all firms, up three points. Forty-five percent bought equipment, 27% acquired vehicles and 16% improved or expanded their facilities. Seven percent added new buildings or land for expansion and 15% spent for new fixtures and furniture. Median outlays were about $32,000, substantially higher than recent readings.

Although job-creation plans were lower, the decline came after three months of near-record readings that more than offset hurricane-associated losses. Fifteen percent of owners said they increased employment in November, while 11% reported workforce reductions. However, employment is still growing---have you pursued worksite marketing opportunities? Overall, small businesses added a net 0.15 employees per firm, seasonally adjusted. Workers are getting harder to find: 12% of those surveyed said the availability of qualified workers was their primary business problem.

Katie Butler (katie.butler@iiaba.net) is IA editor-in-chief.

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A G E N C Y   M A N A G E M E N T
Back-to-Basics Selling

There are a vast number of selling methodologies insurance agents use to promote sales. All are workable, to a point, but all also miss the mark because they depend on buzz words, gimmicks and short cuts.

However, time and again we encounter successful producers---urban, suburban and rural---who continue to grow regardless of the economic or insurance climate. These producers invariably follow the same guidelines, although every one of them feels that the guidelines are his or her personal secret.

Here are three timeless guidelines for producers who want to increase sales:

1. Keep in touch with your existing customers. Not by a single, systematic process, but according to their individual needs and desires. After all, you got to know them, didn't you? Keep up the relationship. Combine this relationship building with the simple process of asking for referrals (every year) to generate growth.

2. Prospect, whether at a low or moderate level, continuously. This does not mean being a pest at parties. This means that you discipline yourself to identify five accounts every week that you do not know and would like to insure (assuming you have markets). Regardless of how successful and busy you are, continue to prospect.

3. Make your own telephone calls. I know this flies in the face of the recent telemarketing revolution, but successful salespeople either enjoy, don’t mind or learn to live with cold calling. Telemarketing works for commodity products in commodity industries. However sales made through telemarketing often lack the relationship building that cements you to a customer. So we continue to use telemarketing for products that don't need producer intervention. But we train the producers we encounter how to make calls and get through to decision makers at commercial accounts.

Think about it. If a telemarketer is lucky enough to get through to a commercial account’s decision maker, and if the decision maker expresses a need, the telemarketer is not capable of answering any questions or fulfilling the need aside from setting an appointment for a producer. And these decision makers are very busy. Even if they are interested in analyzing their insurance, many feel that they are of a stature that the agent should be the person who contacts them, not some telemarketer.

For more information, click here.

Al Diamond (al@agencyconsulting.com) is a Virtual University faculty member and president of Agency Consulting Group, Inc.

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