T H U R S D A Y ,  J A N U A R Y   3 1 ,  2 0 0 8 

Big “I” National News

P&C Trends

Head Above Water
Commercial lines pricing is softening---but how much?

Commercial lines are the lifeblood of many independent agencies, but as prices decline, many agents are feeling the ripple effect on their profitability.

Towers Perrin’s quarterly survey of commercial lines insurance pricing and trends (CLIPS) recently reported that average prices for all lines of coverage combined have decreased 4 to 5% from 2006 to 2007. The survey also found an average price decrease of about 5%, with large accounts and specialty insured experiencing the largest decreases of almost 9%.

“The CLIPS results have consistently indicated a less dramatic decrease in commercial insurance prices than other industry pricing surveys,” says Jeanne Hollister, managing principal and practice leader, Property/Casualty Insurance, Americas. “For example, several agent/broker surveys quoted decreases in prices in excess of 10% in the third quarter of 2007, compared with the CLIPS finding of 5%.”

According to Bruce Denson, president & CEO of Cobbs, Allen & Hall in Birmingham, Ala., the decline is much worse than the 4 to 5% in the CLIPS report. He says commercial lines pricing at his agency has dropped approximately15% in the last three years.

“There’s been deflation in all commercial line products, so we have to grow organically to make up for the decrease in prices,” he says. “There are several reasons (for the decline), the biggest reason is insurance companies are in a mode to grow and they are being very aggressive with pricing. Their capital base has been stable…they also made underwriting profits two years in a row. They want to grow so they are going to be aggressive with their pricing.”

The insurance companies’ pricing has set up a domino effect for agents’ profitability. 

“We have seen commercial accounts at 50 to 60% off. You cannot do that and run a business and have that kind of swing,” says Gene Earick, secretary treasurer at Roby-Foster-Miller-Earick in Mansfield, Ohio. “The reason that is a problem is our insureds, who have relied on independent agents, are being compromised because of price. It’s so drastic (of a difference) and because their businesses are going though some tough times and are being squeezed, the guy who you have had for 20 years might go somewhere else because of price. What’s bad is you have agents and underwriters willing to do this (drop to lower commissions) because they have no skin in the game….I’ve seen this happen in the last 40 years I’ve been in the business.

They say if you put enough business in the books you should be fine, but that’s not the case,” he says. “A lot of them (insureds) are taking the lower price…and you get a lot of agents saying 50% of something is better than nothing. When you have agents out there that are willing to write at any price, you water the whole thing down. You may think you are gaining business, but you are losing business the same way.”

Towers Perrin’s survey determined that D&O liability and employment practices liability lines realized the greatest year-over-year declines of all commercial lines, but declines are being felt across all lines, including personal. 

Survey findings suggest that insurance carriers expect loss ratios for accident-year 2007 to be higher than those in accident-year 2006, as price reductions were not matched by reductions in the expected costs of claims.

This is bad news for independent agents and the loss of cross-selling makes the blow two-fold.

“Some of the bigger companies, (when buying agencies) won’t compensate for personal lines anymore,” Earick says. “A lot of the time those personal lines are tied to a commercial account. You cannot divorce the two. In commercial you lose your largest account and you lose everything.”

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

VIEW: P&C Trends

States’ Share of Premium to Population
Breaking it down from high to low.

Last week, Insurance News &Views examined the relationship of a state’s share of premiums to its share of population using California, Florida and Ohio as examples.  Many readers inquired as to how other states compared. The challenge of presenting all states and their share of premiums and population over multiple years is unmanageable without numerous individual graphs, but all states can simply be compared in a single year by dividing the state’s share of premiums by its share of population --- thereby creating a single ratio of premiums to population.

Below are the results of that calculation for all states and the District of Columbia. States are color coded by those above a one-to-one ratio, at a one-to-one ratio and below a one-to-one ratio. The quotients vary from a high of 1.69 to a low of .71.

2006 State Ratio of Premium to Population



*Source: Population Division, U.S. Census Bureau and A.M. Best Company.

Taking advantage of the single measure for the relationship of premiums to population, more states fit on a single graph. Below are five additional states going from the highest, Delaware, to the second lowest, Utah. (Ohio was the lowest, but it was graphed last week.)




*Source: A.M. Best Company and United States Census Bureau.

Take caution in attempting to make definitive conclusions from any particular state’s ratio of premiums to population, as a multitude of factors can influence both. However, when looking at the figures, agents can probably rationalize why a state has particular ratio. For example, the up-tick in Louisiana from 2005 to 2006 would seem to be a result of property premiums increasing after Hurricane Katrina, which was amplified by an outflow of people from the state. In other states, the explanation as to why the relationship of premiums and population varies is not as obvious --- take Delaware for example.

Any member interested in data for a specific state can email Paul Buse at paul.buse@iiaba.net.

Editor’s note: Next week IN&V will take a look at how states compare in loss ratios.

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




Producer Compensation Issue Update

AIG Reaches $12.5 Million Multi-State Settlement
Company will pay 10 jurisdictions for misconduct in producer compensation practices.

On Wednesday, American International Group, Inc. (AIG) confirmed that it has entered into settlement agreements with nine states and the District of Columbia as a result of their respective investigations into the producer compensation and placement practices of the company and some of its subsidiaries. This is the latest series of settlements involving claims of misconduct stemming from the industry-wide investigations into producer compensation practices.

Under the terms of the settlements, $12.5 million will be shared among the 10 jurisdictions. AIG will also make producer compensation disclosures in writing to accompany the policies issued, on its Web site and via a toll-free number. AIG has agreed to cooperate with investigations and proceedings on this issue. Additionally, AIG must proceed with its work through an independent consultant to comprehensively examine and make recommendations about its internal controls over financial reporting, the structure and reporting of its internal audit department and disclosure committee, its policies and procedures  relative to regulatory compliance and legal functions, its records management and retention practices, the adequacy of its whistleblower policy and training agreed to with the Securities and Exchange Commission.

The settlements are subject to court approvals and were reached with the attorneys general of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Pennsylvania, Texas, West Virginia, and the District of Columbia; the Florida Department of Financial Services; and the Florida Office of Insurance Regulation. The settlement with the Texas attorney general also resolved allegations that AIG entered into an illegal non-compete agreement against Allied World Assurance Company, which constituted an unreasonable restraint of trade. AIG is required to pay Texas an additional $500,000 to settle this allegation.

AIG is accused of having engaged in a range of misconduct, including market allocation in violation of the law, and bid rigging with Marsh & McLennan structured to make it appear that competitive bidding was undertaken for commercial policyholders when that was not the case. Additionally, AIG was purportedly involved in a “pay-to- play” with brokers who would steer business to the carrier with the highest contingent commissions --- violating the interests of their clients.

Florida Insurance Commissioner Kevin McCarty described the settlement by saying it “further demonstrates the progress Florida is making toward establishing a national standard for transparency in insurance transactions.”

AIG denied the allegations against it, but indicated in the settlements that it agreed to their terms “to avoid the uncertainty and expense of protracted litigation.”

Copies of representative examples of the settlements are available to IIABA members by logging into www.independentagent.com and going to the Legal Advocacy section under IIABA/Industry Information & News, Litigation. For more information, contact Amy Hendricks, assistant general counsel, at 703-706-5386; amy.hendricks@iiaba.net.

Amy Hendricks (amy.hendricks@iiaba.net) is Big “I” assistant general counsel.

VIEW: L&H Trends

Hurdles Ahead
The tough issues facing the next president.

In the midst of the presidential primaries, with the outcome still undetermined, there is no doubt the next president of the United States will have a number of vexing issues to resolve. On the international front, terrorism, wars in the Middle East and unfriendly and/or unstable regimes pose difficult challenges for the next president, the next generation and beyond. Putting aside the international obstacles, what is the single business domestic confronting the next president and Congress?

While many people might answer the economy, I would weigh in differently. It may not seem as immediate to big and small businesses, but, in my opinion, the most significant domestic issue facing the next president is how to address our aging population and government programs including Social Security, Medicare and Medicaid. The chart below illustrates the future growth of the three major entitlement programs.




While the future cost of Social Security has been widely discussed by the media, Medicare and Medicaid will have a significantly greater rate of growth of future spending. If the United States’ gross domestic product (GDP) is targeted to grow by 69% during the next 25 years, and Medicaid and Medicare spending is anticipated to increase by more than 200%, it will greatly affect our ability to compete in the global economy.

This situation harkens back to the science fiction, B-movie of the 1950s, “When Worlds Collide,” written by Edwin Balmer and Philip Wylie. The premise of the movie is a scientist who discovers Earth is on a collision course with a wandering star (“Bellus”) and the only chance the human race has of surviving depends on building a giant spaceship and landing on the fictional planet Zyra. The movie dramatically counts down the days until the pending collision and the race to finish the spaceship in time. The interesting backdrop is that, since space is limited and all the workers can not fit on the spaceship, they will hold a lottery at the last moment to determine who gets to go and ultimately have a chance for survival. 

Unfortunately, there is no definite date when social program spending will collide with the budget, but there is no doubt it will become more difficult to balance state and federal budgets as discretionary spending becomes a smaller component of total government spending.  However, at some point, younger citizens will reach a tipping point for increases in payroll and income taxes and they will accept cuts in Social Security. This means people will have to supplement government programs with products like long-term care insurance (LTCi), IRAs/401(k) plans and Medicare supplement coverage to augment changes to entitlements. Independent insurance agents are well positioned to offer these products and educate customers on this looming issue.

For future generations of Americans, there is no spaceship to board to leave the problems here on Earth, and the outcome should not necessarily be determined by a lottery system based on the age of when people will receive the benefits. It is time for our president and Congress to embark on a path to solve this problem --- sooner rather than later.

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




Forms & Substance

Business Income and Additional Insureds
Why lenders want to be listed as an additional insured on business coverage.

When a building is purchased on credit, it’s common to name the lender as the mortgagee on the commercial property insurance policy. That’s usually necessary to secure the loan, and the interest of the mortgagee is normally protected by statute as well as the mortgage holder clause under the policy.

But what if the lender also wants to be named as an additional insured for the owner’s business income insurance? The insurance company doesn’t want that and there’s a good reason why. Virtual University faculty member Mike Edwards recently received the following question:

“Our commercial insured bought a building and there is a mortgage on it. The bank, of course, wants to be named as the mortgagee for the property insurance. They also want to be named as a loss payee on the business income policy. The insurance company does not want to do this saying there is 'no insurable interest’. What do you think?”

We don’t really know why the bank wants to do this. The best guess is either they are looking for business income proceeds because they prefer to be able to continue the full mortgage payments (principal and interest) in lieu of a settlement under the mortgage clause for the principal only, or the insured also has one or more other loans they’re trying to protect.

The insurance company has a point --- the bank has no insurable interest in the business income under the insured’s policy. Their only interest is in the building and, if that’s adequately insured, they’ll get their financial interest out of it. Perhaps the business has some loans or lines of credit with the bank as well, and they want to protect an uninsurable (from the perspective of the building owner’s coverage) business risk with a piece of the BI. The company is under no contractual obligation to do that. From the insurer’s perspective, a policy mortgage clause exists primarily because state laws mandate it. There is no similar statutory mandate for business loans.

The bank isn’t covered if the insured’s business fails and he can’t pay back the loan, so why should they be explicitly protected if the business burns down? If anything, the insured would have business income coverage to pay for continuing expenses, so the bank is more likely to get their money in the event of a covered loss as opposed to just a business downturn. They should be happy with that or get out of the business --- some things are not directly insurable and a business loan is a speculative risk, not a pure risk.

Upon further inquiry, it appears the insured wants the bank named as a loss payee or additional insured because the loan agreement he signed requires it. The insurance contract involves two parties, the insured and the insurance company. Barring some statutory requirement, the insurer has no obligation to either the bank or the insured to comply with this request. If the loan requires they be named as an additional business income insured, the named insured should read his loan agreements better and discuss the insurance implications with his agent before signing it.

To read the entire article, including a reader dissention, click here. 

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University.