T H U R S D A Y , A U G U S T  2 7 ,  2 0 0 9 

                                                   Big “I” National News


       

P-C Trends
Mild Hurricane Season Expected to Continue
Analysts weigh in on market pricing impact.

Hurricane Bill’s recent failure to reach the U.S. coastline matches forecasters’ initial predictions of a mild 2009 hurricane season, and an updated forecast from the National Oceanic and Atmospheric Administration (NOAA) indicates the rest of the season will continue to see below-average storm activity. While forecasters have not ruled out the possibility of a major storm, industry analysts say a quiet season could temper anticipated price increases, particularly in the reinsurance sector.

“The main difference from our earlier forecast is that we’re now expecting a little less (hurricane) activity because El Niño has formed,” says Gerry Bell , lead forecaster at NOAA. “(But), we’re still expecting 7 to 11 named storms, with three to six hurricanes and one to two major storms.”

So far, the 2009 hurricane season has produced four named storms: Anna, Bill, Claudette and Danny. Of those, Bill was eventually deemed a hurricane but tracked away from the U.S. coastline without causing significant damage. However, as tropical storm Danny brews off Florida’s eastern coast, forecasters are predicting the disturbance could become a hurricane as it moves up the East Coast this weekend, taking a path similar to Bill’s.

Armand Colaninni, executive vice president of commercial property insurance broker NAPCO, says the lack of hurricane activity has caused insurance prices to reach a plateau that, when combined with insurers’ improving profitability, could lead to falling prices in the long term.

“Carriers are starting to make money, and if they continue to do so, if the stock market continues to rebound and if there are no hurricanes, history would say rates would start going back down,” says Colaninni. “If there is a major hurricane event, it could have a pretty dramatic impact on pricing, (but) it would have to be a big event in excess of $20 billion in damages.”

Bob Hartwig, president  of the Insurance Information Institute (III), says a “disaster decade” for hurricanes means that primary insurance rates for coastal areas are not expected to change much, even if the 2009 season remains quiet. Hartwig adds that reinsurance rates will likely drop after an inactive season, which could slightly impact primary pricing, but he believes the overall effect will be minimal.

The hurricane season is currently at its peak activity period of August to October. According to NOAA, a below-normal forecast and a quiet beginning to the season don’t rule out the possibility of a major hurricane event during peak months. Forecasters point to the 1992 hurricane season, which had below-normal activity until Hurricane Andrew struck Florida on Aug. 24.

“Hurricanes can and do strike in all seasons,” says Bell. “We’re in the peak of the season, and people should have already completed preparedness plans or should prepare them imminently.”

Four years ago, the peak hurricane season produced Hurricane Katrina, the most economically destructive storm ever to strike the U.S.  Colaninni says that Katrina’s impact on the insurance industry is still being felt in accounts with heavy catastrophe exposures, although the storm’s effects on pricing and underwriting restrictions have largely faded away.

“History will tell you that in the insurance business, once carriers are in the black, things change pretty quickly,” he says. “This year has been interesting because people really expected dramatic (pricing) changes over an extended period of time, but prices are leveling off right now. If carriers keep making money, we’ll be back in rate reduction territory.”

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


 

P-C Trends
Large Broker Integro Revamps Business Strategy
Company moves from large-account to specialty brokerage.

Shortly after insurance broker Integro was founded in 2005, an Insurance News & Views article predicted that meeting the financial goals attached to accepting $320 million in investment capital was going to be a very tall order. That prediction appears to have become reality, according to an article in Business Insurance. Integro President Peter Garvey made clear this week that Integro has changed its strategy. It has trimmed staff, cut expenses and is moving from a large-account broker to a specialty broker. Apparently, even after making substantial progress, the financial challenges were indeed too much for the company to overcome.

In mid-2005, several high-level executives departed from Marsh & McLennan to form Integro. At the time, Marsh and several other “Pluto-brokers” had or were scheduled to pay millions in fines and settlements arising from legislation introduced by Eliot Spitzer. Well-capitalized and deep in talent, Integro set out to seize large client opportunities. As was pointed out in 2005, however, it’s one thing to raise $320 million of investment capital; it’s quite another to satisfy it.

The 2005 analysis pointed to the stark realities of trying to satisfy more than $300 million in investment capital by starting an insurance intermediary. Simply stated, it is extremely difficult. Integro needed about $3 billion in premiums at about 12% commission while achieving a 30% pre-tax return on revenues. That would’ve required a phenomenal $700,000 in revenue per planned 500 employees, and three out of every 20 Fortune 1000 companies would need to call Integro their broker.

The change in strategy does not imply that Integro hasn’t been successful. Quite the opposite is true. As its resume from published reports and  its Web site show, Integro has been rated No. 1 in a Business Insurance Readers Choice survey and has attracted 1,500 clients with an average premium of more than $600,000. Last year, the company was part of the successful launch of the Bermuda-based catastrophe insurance company Ironshore, Inc. At $1 billion in premiums, Integro is among the top 10 largest agents/brokers in existence. It also enjoyed a profitable first half of 2009 and expects to be cash-flow positive for the rest of the year with 20% organic growth.

What agents and brokers can learn from the Integro change in strategy is that financial realities are unforgiving and generally steadfast. 

“Agents and brokers seeking investment capital are well advised to seek out and know the source of that capital,” says Dave Tralka, president of InsurBanc. “Another lesson from Integro is no matter what happens, do well what you do well and inevitably the rest will take care of itself. While Integro did not achieve its original goals, its real successes in attracting and serving clients and probably a close relationship to investors allowed them to change strategy and continue forward.”

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

Tech Trends
Technology Critical to Carrier Choice
Small commercial lines agents see need for technology overhauls among carriers.

Commercial lines technology lags behind personal lines, which can be a serious downfall for  carriers since agents’ satisfaction with carrier technology affects their opinion of an insurer and can often overcome a less-than-perfect underwriting relationship.
 
While agency management system  connectivity can ultimately be the most convenient way to interface agents’ documents with carriers’ databases, a new study from Novarica shows some agents prefer to interface through agency portals. Karlyn Carnahan, a principal in Novarica’s insurance practice, believes that’s because connectivity is not always as robust as agents would like, and they often have to access the portal to make corrections anyway. Paul Puglisi, president of Puglisi Insurance Agency in Scotch Plains, N.J., says he often uses agency management system connectivity for re-quoting or servicing existing policies, but he prefers the one-stop service portals provide for writing new business.

Respondents to Novarica’s survey cited quick quote, full quote and app submission as essential factors in agency portals. Survey participants also clearly preferred commercial lines carriers with better portals, most frequently ranking Travelers, The Hartford and Auto-Owners as their top choices. Regional carriers Ohio Casualty and Cincinnati Insurance were also among the top 10 carriers.
 
Not surprisingly, respondents chose convenience as the most important factor when ranking carriers; however, the underwriting relationship was not heavily valued and was ranked among the least important factors by agents.
 
“Agents are willing to work with carriers who are fast and responsive even if the underwriting is less than ideal,” says Carnahan. “Even if (agents) don’t have a perfect underwriter, (they) will choose a carrier that can respond quickly with a decision, is very convenient and easy to work with.”

Puglisi believes commercial lines technology and good underwriting must go hand in hand, but he adds that companies could encourage better underwriting by offering more flexible technology platforms to fit a wider variety of risks.

“The product itself has gotten a little more flexible in what you can add and take away, but there is still not a good cafeteria-style form for the BOP,” says Puglisi. “It doesn’t seem like companies are using technology as an advantage; they’re using it as an administrative tool instead of using it to tailor individual policies.”

Puglisi also sees a need for many carriers to completely overhaul their online policy administration systems, and Carnahan says that’s been in the works for a while. 

“Many carriers still have very antiquated policy administration systems,” says Carnahan. “Replacing those systems is a major area of focus. Agent surveys over the past two years have not changed much – they all show that replacing the administration system is a priority. Until carriers have done that, it will be difficult for them to provide agents with the (online) capabilities they need.”

The good news for agents is that such an overhaul appears to be in many carriers’ plans for the near future; according to another Novarica study examining insurers’ IT budgets for 2010, 80% of large p-c insurers cited policy administration among their top three projects, and 53% expect to prioritize policy administration in 2010. Midsize p-c insurers are focusing the most on improving agent portals, with 36% stating that portals are a top spending priority. Overall, large p-c companies expect to have level or slightly higher IT budgets for 2010, while midsize p-c insurers anticipate spending slightly less. Puglisi believes companies will benefit from agent satisfaction in the long run if they “bite the bullet” and spend the money now to overhaul antiquated systems.

"With new technology and better programming, companies are often like huge ships where it takes them so long to make a turn,” says Puglisi. “If a carrier came to me and said they were planning a massive system overhaul, I would accept being frustrated (during the transition) if they just change it.”

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


L-H Trends
Giving Sound Estate Tax Advice
Agents need to consider the impact of estate taxes levied by states.

Since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) most independent insurance agents have focused on the federal estate tax exemption, which was increased, and the tax rate, which was slated to be reduced through 2010. However, since EGTRRA passed with less than 60 votes in the Senate, its tax provisions will sunset in 2010 unless they are extended by Congress, which is unlikely. The estate tax unified credit exclusion was $675,000 in 2001 and increased in increments to its present level of $3.5 million. The 2009 limits have been extended into 2010, but what the ultimate limits will be for 2011 and beyond remains to be decided.

In calculating estate taxes, agents should remember to consider the potential impact of estate taxes levied by states. Seventeen  states and the District of Columbia have retained their estate taxes after the federal changes. Of these, 15 states --- Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia and Wisconsin and the District of Columbia --- decoupled from the federal changes. Two states, Nebraska and Washington, retained their tax by enacting similar but separate estate taxes.

There are a number of nuances surrounding how states determine their estate taxes and how they interrelate with the federal estate tax exemptions. Independent agents should check their state’s laws for so they can help clients estimate the total amount of federal and estate taxes. If a client does not have adequate liquidity, permanent life insurance is an important vehicle to consider in meet his/her total tax obligation.

Also, given the massive deficits some states are facing, it is likely that they may increase their estate taxes to raise additional revenues. Of course, the same could happen with federal estate taxes. Agents should talk to customers about what steps they need to take to ensure their estate is positioned to take advantage of exemptions. Clients also need to make sure they have the resources to pay the tax without requiring a sale of their assets, particularly ownership of a closely held business – like an independent insurance agency.

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


Forms & Substance
A Guide to Suspending Auto Coverage
The suspension process is different for business and personal policies.

Commercial insureds may take vehicles out of commission during certain times of the year. Likewise, personal auto insureds might spend their winters in Florida and may want to suspend their auto insurance for several months to save money. The suspension of auto coverage is much more common in commercial lines than personal lines and, in fact, may be appropriate when a vehicle is used for only a small part of the year. Even so, there are pitfalls.
 
There are two ISO endorsements agents can use to suspend and re-activate coverage. Various coverages can be suspended using the CA 02 40 10 01 - suspension of insurance endorsement (several states have their own forms). The coverages and autos indicated on the endorsement are suspended except for maintaining or testing covered autos on the insured's property.

The insured can either exclude all coverages on all designated autos or autos in a class, or exclude selected coverages (liability, medical payments, UM/UIM or collision, not comprehensive or specified perils) by class. A premium refund is included if coverage is suspended for at least 30 days. To reinstate coverage, the CA 02 38 12 93 - reinstatement of insurance endorsement is used.

CLM Rule 102 specifies that the endorsement cannot be used for the following types of risks: risks in which a certificate has been filed in accordance with a financial responsibility law; risks subject to the requirements of any state or federal authority regulating motor carriers of passengers or property; and any other risks subject to compulsory insurance laws.

However, the ability to suspend coverage doesn't mean it's a good idea. In particular, coverage should never be suspended unless the insured has inviolate procedures in place that prohibit the use of a vehicle, preferably under penalty of death. In fact, from a risk management standpoint, suspended vehicles should also be made inoperable. Unlike the ISO business auto program, there is no standard suspension endorsement available in a personal auto program. Therefore, any personal auto suspension endorsement will be a proprietary form --- read it carefully and make sure you understand what is and isn't covered. Then make sure your insured understands the endorsement, using the documentation cited above for business auto exposures.

Most PAPs are written on a six-month basis. Unless a vehicle is going to be out of service for most of those six months, a suspension is probably not appropriate.

Click here to read the entire article, which includes several E&O caveats.

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