THURSDAY, MAY 6, 2010 

                                                Big “I” Association News




P-C Trends
Shedding the Stock
Property-casualty insurers look to bonds and cash over equities.

Recently, A.M. Best reported in BestWeek (“Caution Prevails as Insurers Rethink Investment Strategies”) that insurers appear to be retooling their investment portfolios with a bearish view of the future. Given the drop of the Dow Jones Industrial Average this week, perhaps those moves may have been prescient. But even had insurers not starting moving away from stocks, the general ability of p-c insurers to pay claims would not have suffered. Regulation of the p-c business has been effective and insurers are not generally exposed to swings in stock markets.

Unlike most other industries, the insurance industry is an excellent example of very nearly total transparency. All p-c insurers are required to file standard financial statements with the state of their domicile. These standardized filings make for quick and easy analysis for industry watchers. Based on the aggregation of these figures for all 2,402 p-c insurers, insurers have modest exposure to stocks in general. As the chart below illustrates, investments in stocks average 12.4% of invested assets over the last 20 years and even before the financial crises beginning in the fall of 2008, insurers were below the average of the last 20 years about half of their peak at the end of 1999.



Source: A.M. Best Aggregates and Averages

P-c insurers, rather than investing heavily in equities, tend to invest most of their assets in long-term bonds and cash/short term investments. As of the end of 2008, the investment-side of the balance sheet of the average p-c insurer—excluding premium receivables and direct investment in affiliates—are 73% long-term bonds and 9% in cash and short-term investments. Expectations are that when industry figures are released for the end of 2009, P-C insurer will have even less equity holdings and more in bonds and cash. The aggregate data to see that precisely generally becomes available from industry sources for the prior year-end in mid to late summer.

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





On the Hill
Iowa Big “I” State Executive Testifies before Congress on Crop Insurance
Bob Skow highlights the important role crop insurance plays in protecting America’s farmers.

U.S. House of Representatives Agriculture Committee Chairman Collin C. Peterson (D-Minn.) held a field hearing last Friday in Des Moines, Iowa to review U.S. agriculture policy as the committee begins the process of writing the 2012 Farm Bill. This is the first in a series of hearings scheduled across the country to consider new ideas regarding federal food and farm policy. Seven members of Congress attended the hearing and heard testimony from nine witnesses on a variety of farm policy issues. Bob Skow, chief executive officer of the Independent Insurance Agents of Iowa, was the only crop insurance agent representative to testify.

Skow’s testimony focused on the role of the agent in the sale and delivery of crop insurance. He pointed to the workload and complexity involved in selling crop insurance. A crop agent’s responsibilities require an extensive hands-on approach in both writing a policy and reporting claims that invariably requires an extensive amount of time and labor. This also increases a crop agents’ threshold for errors and omissions (E&O) exposure.

Skow described crop insurance as an indispensable financing tool that many farmers count on for protection and described how this safety net provided by the program gives lenders confidence in extending farm credit. He also discussed a letter signed by the entire Iowa congressional delegation expressing their concern with the second draft of the Standard Reinsurance Agreement. If adopted into law, these proposals will have a devastating impact on Iowa’s agricultural economy.

Skow closed his testimony by reminding Congress that crop insurance has long provided stability and security to America’s farming communities. He emphasized that all proposals should continue to build on the strong public private partnership of the crop program.
To review the entire testimony click here.

Jen McPhillips (jen.mcphillips@iiaba.net)is Big “I” senior director of political affairs.





L-H Trends
Another Warning Light Goes On
As entitlement programs go bankrupt, consumers will need to be more financially self-reliant in retirement.

Michael Tanner, senior fellow at the Cato Institute, opened the recent Retirement Industry Conference held by LIMRA, LOMA and Society of Actuaries by outlining the growing problem the American entitlement programs are creating for U.S. financial stability. “The present value of our future obligations is more than $100 trillion and as the full force of entitlement programs kicks in, it will only get worse,” Tanner said.

Tanner went on to outline the specific liabilities of the major entitlement programs: Social Security, Medicare and Medicaid. According to Tanner, Social Security faces unfunded liabilities of more than $15.8 trillion, while the Medicare budget shortfall is as much as $100 trillion. Medicaid, he said, faces the same type of accounting challenges, but it will soon add hundreds of billions of dollars to federal, not to mention state, spending. Collectively, unfunded liabilities will eat up more than 40% of the U.S. GDP by the middle of the century. Can we pay for these programs by raising taxes? Tanner estimated that the U.S. would have to raise both the corporate tax rate and top income tax rate from the current 35%t to 88% and the current 25% tax rate for middle-income workers to 63%.

The implication for American public and independent insurance agents is twofold: The government will have to revise these programs and curtail benefits to some degree. As a result, Americans will have to be more self-reliant in providing for their own financial security in the future. The insurance industry is continuing to look at ways to use products, riders and product guarantees/enhancements to provide guaranteed income streams. One of the difficulties in solving for this new equation is that retirement surveys time and time again indicate that retirees have an aversion to annuity products because they do not want to lose their ability and flexibility to accelerate withdrawals from an IRA or from their savings. Also, they also do not want to diminish the opportunity to pass along an inheritance to their kids. On one hand, this sentiment is contradictory to the notion of traditional defined benefit pension plans that provide guaranteed income for life (or two lives by selecting a joint and survivor option). On the other hand, people want to be able to combine their retirement needs with a desire to provide a meaningful bequest.

The insurance industry has tapped into this sentiment by providing Guaranteed Lifetime Withdrawal Benefits (GLWB), which create the security of a minimum income stream for the life of the holder (e.g. 5%), but also allows for upside growth if the underlying investments increase. However, unlike an annuity payment where the remainder resides with the insurance company, a GLWB approach allows for the remaining amounts to be distributed according to the beneficiary.

The aging of America's population presents some daunting challenges for current and future retirees. Agents should tap into innovative insurance products to meet the needs of this group. While these products have nuances and there are trade-offs, they will be an important piece of the retirement puzzle.

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


Forms & Substance
Severability Under the CGL Policy
Requests for cross liability often come from uniformed third-parties.

Not long ago, the Virtual University "Ask an Expert" service received a rash of "cross liability" questions. The term "cross liability" deals with whether or not one insured can sue another insured under a liability policy. Contract requests to provide this coverage under a CGL policy usually arise from ignorance.

The questions included:
"I had a certificate request that wanted the policy language to include a severability of interest provision and to remove the cross liability exclusion. I have not seen this before what are your thoughts?"

"I need information about an endorsement under CGL called a Cross Liability Endorsement. Where can I find information about this endorsement? Thanks!"

"We have been questioned by a local attorney concerning the Comprehensive General Liability Policy on a Condominium Association that has 'All Owners of Record' as additional named insureds on the policy. He states that each unit owner is a member of the public and has the same rights as any member of the public to collect under the CGL Policy if they are hurt on the premises of the Condominium Association. We state since the unit owners are 'Named Insureds' on the Policy that they cannot collect damages incurred on the premises owned by the Association and all the members. We feel this is a suit against oneself. Another question we would appreciate your advise on is can this coverage be covered by using a 'Cross-Liability' Endorsement on the CGL Policy?"

With regard to the first two questions, the current ISO CGL includes severability language and there is no cross-liability exclusion. Here’s an example of what the VU faculty said:
“The "Cross-Liability" related language was put into the CG 00 01 in 1986. It is found in the form Conditions:

7. Separation Of Insureds
Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:
a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or "suit" is brought.”

Why people still ask for a "cross liability" endorsement to remove a nonexistent exclusion (unless they want to limit such suits) is a mystery. In fact, some states may have a statutory provision prohibiting the use of cross-suit exclusions in most basic liability policies. In these cases, agents are most likely dealing with attorneys or consultants who either don’t understand or don't even know what they're asking for. They are just looking at an outdated "cheat sheet" that says they should ask for this.

To the contrary, a typical cross liability endorsement will insert an exclusion preventing such suits. (See Inter-Company Products Suits endorsement CG 21 41.) This allows the removal of inter-insured sales from the premium base, in return for an exclusion that states that an insured cannot sue another insured. It’s more common to add, via endorsement, an exclusion for cross-liability suits rather than add an endorsement to prevent such suits.

Of course, all of this assumes that we're dealing with the ISO CGL form. Let the company underwriter handle this.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. For a response to the last question, go to: http://www.iiaba.net/VU/Lib/Ins/CL/CGL/FacultyCrossLiability.htm


Agency Management
Get Rid of Prospects to Increase Profits
Selling without segmenting might bring in revenue, but it will kill the bottom line.

The power of segmenting: it can have a powerful impact on your bottom line.
A few smart insurance companies are realizing that segmenting customers is important. For example, a few are separating customers into categories such as "How do you like to buy insurance?" and "How much service do you want?" Carriers are using independent agents for those customers who like personal and professional service. For customers who want to avoid insurance salespeople (at their own risk), carriers offer insurance online and through 800 numbers.

Agencies too must think about segmenting: Who is your customer? The time has long passed when every breathing human should be considered a prospect. Most agencies' customers are people who value the professional services independent agencies provide. Beyond that, most agencies only segment their markets by size and account type, such as personal lines, small commercial, middle market, truckers, high-end personal lines, contractors, etc. These delineations still apply, but more important divisions exist.

For example, it is important to consider how much service an account desires, how much service an account requires (a critical difference exists between desired and required) and the preferred purchasing method (whether it be through an agency or another source). What about customer age group, socio-economic status, lifestyle and personality such as analytical, impulsive, etc.? Consider these factors, along with the traditional means of account size and type, to identify the best prospects based on your agency's personality and abilities. Also consider these factors to learn how to best win their business and service the account.

For example, one razor company has defined its target very well even though only subtle differences exist in their market. It goes beyond the usual, "Our razor gives you the closest shave you've ever had and the women will love you if you use it!" This company specifically targets teenagers and their parents as they buy the boy's first razor. The company advertises mostly at Christmas and on a limited number of television programs. By limiting advertisements to only the target audience, the firm cut costs, achieves a higher penetration of the target market, and makes more money.

Think about your target market. With which groups are you most successful? Young people, old people, educated people, people that desire lots of service, people who require very little service, or people who want an agent's involvement but also want to get certificates and make changes online ? Some agencies make a lot of sales by targeting every breathing homosapien in their area. But there aren’t too many agencies with that philosophy that and make exceptionally high profits. Make more profits for less work and have more fun because your hit ratio will be higher by selling to those that desire your services and to those you desire to serve.

Chris Burand is the president and owner of Burand & Associates, LLC, a consulting firm for independent agencies and a Virtual University contributor.