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T H U R S D A Y , D E C E M B E R 2 0 , 2 0 0 7
Note: Insurance News & Views will not be published next week. The next edition will be published on Jan. 3. Happy Holidays!
Big “I” National News
2007 In Review
Making Headlines in 2007
Credit scoring, Katrina rulings, TRIA put industry on roller coaster ride.
Credit scoring, Hurricane Katrina claims, TRIA and natural disaster legislation --- this year, an array of legal and government affairs issues had the independent insurance industry on the edge of its seat in 2007.
Insurance News & Views takes a look back at some of the year’s top stories.
Credit Scoring
In June, the Supreme Court handed insurers an important credit scoring victory The ruling --- in cases Safeco v. Burr and GEICO v. Edo --- clarified the use of consumer credit reports and the obligation insurers have in using the information under the federal Fair Credit Reporting Act (FCRA). The act requires insurers to notify an insured when an “adverse action” is taken based on their credit.
The FCRA is not exact in specifying when insurers must give notices, and some previously thought the notices were only for instances when a customer’s information had a negative impact on the insurance rate or terms. The district court that originally heard the case agreed with the insurers, but in 2006 the U.S. Court of Appeals for the Ninth Circuit ruled that adverse action notices were also required when more favorable information would have improved the customer’s rate/terms. However, this year’s Supreme Court ruling found an adverse action only occurs when a consumer pays a premium higher than what he/she would have paid had the credit information not been taken into consideration. It also said that notices are not necessary in cases where a better credit history or superior score would have produced a cheaper rate.
The Supreme Court also ruled on penalties applied to insurers who don’t follow the FRCA’s adverse action notification requirements. By law, insurers who fail to comply with the requirements are liable for any actual damages a consumer incurs, but those who willfully violate the law can be liable to each consumer for damages between $100 and $1,000. In 2006, the circuit court determined that GEICO and Safeco had purposefully disregarded the law and therefore willfully violated the notice requirements even though the insurers said they followed plausible legal interpretations provided by attorneys and adhered to a lower court opinion. The Supreme Court ruled that the industry was in fact conforming to the FCRA’s notice requirements and clarified that the penalties associated with violation are reserved for companies that do not have an objectively reasonable basis for their interpretation of the law.
A Change in Momentum in Katrina Rulings
In January, State Farm lost a crucial Hurricane Katrina lawsuit in which it argued that water destroyed the plaintiffs’ home, a loss not covered by its policy. However, the court ruled in favor of the plaintiffs and awarded them $223,292 in actual damages and $2.5 million in punitive damages. Many believed the case would set a precedent and that insurers would resolve their remaining claims from the storm. Yet, the momentum insureds gathered from the January ruling dissipated as insurers won several victories in Katrina cases throughout 2007.
In August, a Federal Appeals Court in New Orleans ruled in favor of a group of insurers in a case involving alleged ambiguities in policies regarding water damage. The plaintiffs in the case were policyholders who had property destroyed when the New Orleans levees failed; however their policies excluded flood damage. The plaintiffs believed they were entitled to compensation based on the belief that their damages were caused by negligence due to faulty design, construction and/or maintenance of the levees and that damage caused by negligence was not specifically excluded. A lower court found that all policies, except one, were ambiguous as to whether water damage was covered. The plaintiffs in the case filed for an appeal in a federal court, however, the federal court’s decision differed from the lower court’s and said the “event was a flood within the term’s general prevailing meaning…” and it said the flood was excluded from coverage under the plaintiff’s policies.
State Farm, which was part of the previous case, also won another Katrina-related suit in a Mississippi Federal Appeals Court last month. The plaintiffs claimed their policy’s flood exclusion was ambiguous and that damage from the storm surge was not excluded. A trial court found that the policy did not cover losses due to water in a storm surge, but also that the exclusionary language in the policy was invalid. It also ruled that 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 plaintiff’s claim. The Appellate Court agreed with the lower court on the validity of the water damage exclusion, but overturned the trial court’s ruling that the anti-concurrent causation clause was ambiguous and invalid.
TRIA
Earlier this week, the House of Representatives passed the Senate’s version of H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA), legislation to extend the federal terrorism insurance backstop, which is set to expire at the end of the month. The bill, sponsored by Rep. Michael Capuano (D-Mass.) and House Financial Services Committee Chairman Barney Frank (D-Mass.), is critical to maintaining affordable and available terrorism coverage.
This legislation would extend the current federal terrorism insurance backstop for an additional seven years. In addition, it would modify the definition of terrorism to include domestic acts of terror and would require ongoing reports to Congress on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events.
The bill has encountered a few road bumps on its road to passage this year. In September, the Congressional Budge Office released a report concluding that the act would increase direct federal spending by $10.4 billion between 2008 and 2017 and by an additional $13.7 billion after 2017. The report also determined the loss to taxpayers, which includes estimates of additional revenue generated by TRIA, would be $8.4 billion between 2008 and 2017.
The bill, which was previously approved by the Senate, has now moved to President Bush for his signature.
Natural Disaster Legislation
In March, Senators Bill Nelson (D-Fla.) and Mel Martinez (R-Fla.) introduced six pieces of legislation addressing hurricane and other natural disaster insurance issues across the nation. Nelson and Martinez each took the lead in sponsoring three bills and serving as the lead cosponsor of the other three.
Nelson’s bills include: The Catastrophe Savings Accounts Act, which creates tax-exempt catastrophe savings accounts (CSAs) for consumers and allows for tax-free distributions from CSAs to pay expenses resulting from a major disaster; the Policyholder Disaster Protection Act, which allows insurance companies to make tax-deductible contributions to a tax-exempt policyholder disaster protection fund specifically for the payment of policyholders' claims arising from certain catastrophic events; and the Homeowners Protection Act, a federal backstop for state natural catastrophe insurance programs to help the United States better prepare for and protect its citizens against the risks of natural catastrophes.
Martinez’s bills include: The Non-Admitted and Reinsurance Reform Act, intended to streamline and reduce barriers in state regulation of non-admitted insurance and reinsurance; the Hurricane and Tornado Mitigation Investment Act, which will provide a tax credit equal to 25%, of mitigation expenditures; and the National Hurricane Research Initiative, a 10-year, $4.35 billion dollar initiative to build a foundation for better and more coordinated research to predict and prepare for hurricanes.
In November, Senators Hillary Clinton (D-N.Y.) and Bill Nelson (D-Fla.) also introduced the Homeowners’ Defense Act of 2007 to addresses the growing problem of the availability and affordability of natural disaster insurance. The act would create a National Catastrophe Risk Consortium and a National Homeowners Insurance Stabilization program. Both programs will help prevent potential insolvencies and stabilize the private insurance market so catastrophe insurance is more readily available before and after a major disaster. The consortium program would allow multiple states to pool their catastrophic risk and hopefully achieve an economy of scale and risk diversity that will lead to a lower cost of reinsurance than states could achieve on their own. The stabilization program would allow the treasury department to make loans to states and their reinsurance plans to ensure their continued liquidity in the aftermath of a natural catastrophe.
The 2008 Forecast
Look for a comprehensive outlook on 2008’s key industry issues in the Jan. 3 issue of IN&V.
Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.
P&C Trends
Time is of the Essence
Study finds insurance customers’ satisfaction decreases as repair time increases.
The time it takes to repair a home or automobile has a major impact on insurance customers’ claims satisfaction, according to J.D. Power & Associates 2007 Insurance Claims StudySM, released earlier this week.
The inaugural study from J.D Power gauges 10,832 auto and homeowners insurance customers’ satisfaction with their claims process by looking at factors including claims settlement, claim servicing, first notice of loss and the estimation and repair process.
According to the study, 64% of auto customers whose vehicles are repaired and returned within two weeks have an average satisfaction of 843 on a 1,000-point scale. Yet the satisfaction level drops to 772 for the 36% of customers who have to wait longer than two weeks. The study finds similar trends among homeowners who had to wait longer than expected for their repairs. There are, however, ways to circumvent the decrease in customer satisfaction when it comes to length repairs, according to Jeremy Bowler, senior director of the insurance practice at J.D. Power & Associates.
“We’ve noted that some companies that aren’t the fastest at repairs, but achieve higher satisfaction because they do a much better job to educate the customer as to what is involved and why it may take a month instead of a couple of weeks,” he says.
The study finds that the number of people a customer deals with during the claims process also has an influence on satisfaction. Approximately 75% of customers with an agent said they contacted the local agency first when filing a claim; however, more than a third of these customers were either told to call their insurer or transferred to a call center. These redirected customers tend to have lower satisfaction with their claims.
“If the customer is agent-served, that customer, the majority of the time, is going to call their agent first and if the agent isn’t being helpful then their satisfaction goes down,” Bowler says. “If they have to explain the claim to an agent and then re-explain it to someone else, their satisfaction level also goes down. Some companies advise agents not to get too involved in the claim because they are not adjusters, so an alternative approach might be (for the company) to alert the customer’s agent; if an agent follows up within one business day of the first notice (of loss), that’s another driving factor of satisfaction.”
Another major component of satisfaction is how much out-of-pocket expenses a customer incurs as a result of the damage to their automobile or home. The study finds that one in four claimants has out-of-pocket expenses (in addition to their deductible) that are not fully reimbursed and these people tend to be the least satisfied with the handling of their claim.
“When a customer is not liable in the case of a car accident, 8% of survey responses indicated they had to lay out some cash,” Bowler says. “Most was for deductibles and they were later reimbursed. Most companies are not interested in handling the short-term debt. What we saw from these customers, from the get go, is that if they weren’t liable, often even if carriers did take care of them, they didn’t feel like they did so.”
Bowler’s advice to independent agents and brokers on maintaining satisfaction during the claims process: be the customer’s biggest ally.
“The bottom line is the agent, especially the independent agent, is in a good position to give good counsel as to which claims are going to take longer and to give advice about what questions customers should be asking or what phone numbers to call,” he says.
Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.
 VIEW: P&C Trends
The Subprime Crises’ Impact on Insurance Industry
The dollars and cents behind the mortgage mess.
Recently, the news media has been rife with articles on the fallout from the subprime mortgage crises. With estimates of losses in the tens of billions, what is the likely impact of the subprime mess on the insurance industry?
With the A.M. Best Company analysts reviewing insurer exposures not only for risky assets in mortgage securities, but also for liability on policies issued on high risks for D&O and E&O claims, this issue will likely become a staple for reading material during the next 12 to 18 months. For some perspective, examine the dollars involved, the impact on the “other liability” line of business and the insurers most likely to bear the brunt of the loss and defense costs.
On loss dollars, projecting ultimate insured losses is an uncertain business, but credible industry analysts have stepped forward with their prognostications. Bear Sterns analysts and reinsurance broker Guy Carpenter both project D&O claims arising out of the subprime crises will be about $3 billion. Reinsurance broker and Marsh McLennan unit Guy Carpenter predicts the E&O policies are actually the bigger exposure and adds $16 billion to the mix from mortgage broker professional liability policies for a total of $19 billion.
Look at the $20 billion and its impact if loss costs were to fall within the line of business (LOB) of “other liability” with 20%/50%/20% of loss and defense costs hitting in the years 2007, 2008 and 2009, respectively. Projected premiums will go forward at the average growth for the “other liability” LOB (dotted green line) of the past 10 years. Assuming the $20 billion in loss dollars is added on top of the existing average 10 year loss ratio for the LOB, the below spike in loss ratios results (dotted red line).
*Source: A.M. Bests Aggregates & Averages
This pushes loss ratios above a typical break-even for this line of business of 70% to 75%, but it is hardly a Hurricane Katrina and the flood LOB loss situation. It could be worse if softening marketing conditions depress premiums; its possible losses then would be more than $20 billion. Given that reinsurance will soften the impact, overall it looks like something the industry can take in stride at this loss level. The top 10 writers of this line of business and their 2006 net written premium and five year average loss ratio on the LOB are listed below. Individual insurer results on this line could vary significantly depending on exposures to the high-risk areas for D&O on banks and subprime lenders and E&O insurance on the nearly 50,000+ mortgage brokers firms nationwide.
*Source: A.M. Bests Aggregates & Averages
Paul Buse (paul.buse@iiaba.net) is president of Big “I” AdvantageSM and a licensed p-c agent.
On the Hill
House Passes TRIA
Legislation extending federal terrorism insurance backstop now waits for president’s signature.
On Tuesday, The House of Representatives passed H.R. 2761, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007. The legislation will extend the federal terrorism insurance backstop, which is set to expire at the end of this year. The bill, previously approved by the Senate, now moves to President Bush’s desk for his signature. The administration has previously said it would not oppose this version, and the president is expected to sign this bill into law before the end of the year.
“We are enormously pleased that Congress has approved a new backstop that will help provide needed coverage for the business customers of independent agents and brokers and for our nation’s economic security,” says Big “I” President & CEO Robert Rusbuldt. “This legislation is crucial to maintaining affordable and available terrorism coverage and brings certainty to policyholders, insurers and the insurance market as a whole.”
The legislation would extend the current federal terrorism insurance backstop for an additional seven years under the same terms as current law (e.g. current deductible, co-pay and trigger levels), with the exception of a new accelerated recoupment. Under the new provisions, the $27.5 billion recoupment by the federal government of funds paid out under the program would be required to be paid back on an accelerated schedule in order for the impact of the program to be revenue neutral. In addition, it would modify the definition of terrorism to include domestic acts of terror and would require ongoing reports to Congress on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events. Additionally, the bill adds a number of clarifying provisions regarding the $100 billion annual liability cap.
“This action comes at a critical time as the program is set to expire in a matter of days,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We thank the leadership of both the House and Senate for their support and recognition of the need to pass terrorism insurance legislation before the current program’s expiration. We are especially grateful for the hard work of Chairman Frank and Ranking Member Bachus in the House and Chairman Dodd and Ranking Member Shelby in the Senate.”
Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.
On the Hill
Senate Turns Down Amendment to 2007 Farm Bill
Big “I” grassroots campaign helps defeat bill that would have cut Federal Crop Insurance Program.
On Dec. 13, the U.S. Senate rejected an amendment to the 2007 Farm Bill offered by Senators Sherrod Brown (D-Ohio), Clair McCaskill (D-Mo.) and John Sununu (R- N.H.) that would have drastically cut the Federal Crop Insurance Program (FCIP).
The Farm Bill, which passed the full House in July, would provide for the continuation of agricultural programs through fiscal year 2012. Senators Brown, McCaskill and Sununu threatened early on to offer an amendment that would cut the FCIP by $2 billion dollars and transfer that money to nutrition and food stamp programs. The Big “I” immediately expressed concerns about the Brown/Sununu amendment and the proposal’s impact on farmers and the crop insurance market. The defeat of this amendment became a top priority for the Big “I” and its government affairs team.
The Big “I” launched three separate rounds of grassroots efforts against the amendment through November and the early part of December, and also ran full-page advertisements against the amendment in The Hill newspaper, one of the largest circulation newspapers on Capitol Hill. The Big “I” also worked with agriculture leaders in the Senate, including Senators Pat Roberts (R-Kan.), Kent Conrad (D-N.D.), Saxby Chambliss (R-Ga.), Ben Nelson (D-Neb.) and Charles Grassley (R-Iowa) in compiling a “whip list” to track senators who supported and opposed the Brown/Sununu/McCaskill amendment. This list proved to be a valuable tool, as it allowed the Big “I” and their industry partners to focus lobbying efforts on those Senators who were undecided.
At the 11th hour, the Big “I” had a conference call with Chairman Tom Harkin (D-Iowa) to discuss the amendment and its prospects for passage by the Senate. Unfortunately, Harkin informed the Big “I” that he believed it was likely to pass the Senate and that he had pledged to Brown that he would support it.
Though losing the support of Harkin was a major blow, the Big “I” pressed on with its lobbying and grassroots effort to defeat the Brown/Sununu/McCaskill amendment. During debate of the amendment on the Senate floor, just before the vote, Sens. Roberts and Conrad made impassioned defenses of the crop insurance industry, independent agents and the FCIP. They correctly described the amendment as nothing more than an effort to devastate an invaluable risk management tool for American farmers.
After Brown, McCaskill and Harkin all spoke in favor of the amendment; the full Senate went to the floor to cast their votes on the future of the FCIP. In the end, the Senate rejected the Brown/Sununu/McCaskill amendment by an overwhelming vote of 32 to 63.
The Senate and House must now complete a conference committee to reconcile the differences between the Senate and House Farm Bills. The Big “I” expects this committee to meet in January 2008.
“Even I have to admit I was pleasantly surprised by defeating this amendment with such a wide margin,” Big “I” President & CEO Robert Rusbuldt says. “The bottom line, however, is that this was a tremendous win for America’s farmers and the independent agents that serve them. I am immensely proud of our government relations team, our state executives and every independent agent that took part in our multiple grassroots campaigns. The defeat of this amendment was a true Big ‘I’ team effort, and this effort will hopefully mean the continuation of this vital risk management tool for American farmers for many years to come.”
John Prible (john.prible@iiaba.net) is Big “I” assistant vice president for federal government affairs.
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