T H U R S D A Y ,  S E P T E M B E R  3  ,  2 0 0 9 

                                                Big “I” National News

P-C Trends
Earnings Challenges Continue for P-C Industry
Regional carriers have been hardest hit by struggling market.

The first six months of 2009 were turbulent for the property-casualty insurance industry, with deteriorating year-over-year underwriting results and lower investment income putting pressure on insurers’ profits. Regional carriers have been hit the hardest, and independent agents are feeling pressure as companies respond and cut costs in the face of market challenges.

A new review from Fitch Ratings shows that the industry continues to face earnings hurdles from soft pricing in most markets, anticipated higher accident-year loss ratios and investment challenges associated with the slow economic recovery. While the aggregate combined ratio for the first half of 2009 was 94% and return on average equity (ROAE) for p-c insurers improved to 6.7% from 4.8% a year ago, Gregory Dickerson, an analyst at Fitch, says that certain groups of insurers have been hit especially hard.

“Regional insures are somewhat consistently the weakest performers from an underwriting standpoint because they have a higher expense ratio and have to write at lower loss ratios,” says Dickerson. “They are at a competitive disadvantage and seem to have been hit disproportionately hard by higher frequency, low severity cat losses.”

Indeed, regional insurers saw the worst aggregate combined ratio, at 101.3%, which includes $332 million in catastrophe losses, and their ROAE was a mere 3.6% for 2009 compared to 6% a year ago. Tim Pine, a commercial insurance broker at Arroyo Insurance Services in Arcadia, Calif., says many of the regional carriers he deals with are moving to call center models to cut costs, and he has seen insurers of all sizes laying off underwriters.

“It’s starting to impact our business, because timelines are always an issue,” says Pine. “We get increased lag times for getting quotes, and the relationships that are developed over the years and our ability to get quotes on a more urgent basis are definitely impacted by those layoffs.”

From his agency’s location in the upper Midwest, Keith Kaetterhenry is seeing something quite different: a flood of insurers trying to concentrate their operations in his area. He says regional carriers are doing quite well and super-regional and national carriers are looking to the Midwest for growth opportunities not available in other areas. Kaetterhenry, president of Baer Insurance Services in Madison, Wis., says the only sign that carriers are experiencing a challenging period is their struggle to get premium growth because of audit returns and a declining premium base.

However, rate increases are in the cards for some sectors; according to Fitch, personal lines pricing is set to rebound faster than commercial lines, with signs of firming auto rates in certain areas. While Pine has not seen any relief from soft prices in his region, Kaetterhenry says he is seeing some light at the end of the tunnel in the form of gradual price strengthening in personal lines due to storm-related claims activity two or three years ago. Mike Gilbert, a principal at Murphy Insurance Agency in Minneapolis, sees carriers gearing up for a hardening market but hasn’t seen any actual pricing increases.

“Traditional hard market precursors like increased inspections activity and additional layers of underwriting review are becoming apparent for personal lines,” says Gilbert. “But, actual hard market conditions have not emerged.”

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

P-C Trends
Pulse on the Market: Umbrella Market Thrives as Need for Coverage Grows
Umbrella products are becoming more popular and lucrative for agents.

Since it’s not a legal requirement for businesses and homeowners, umbrella coverage isn’t always the first thing on independent agents’ and consumers’ minds. However, with liabilities on the rise in all sectors, agents are increasingly discussing umbrella options with their clients, and are finding the umbrella marketplace offers stability and customer retention benefits.

Agents and carriers agree that umbrella coverages have remained very stable in an otherwise uncertain market, with pricing and underwriting holding steady. According to Charlotte Edmonston, managing director at Arthur J. Gallagher Risk Management Services, the number of middle market and high net worth umbrella carriers has not changed significantly. The hardest umbrella risks for her to place have consistently been middle market accounts with limits between $2 million and $5 million, and uninsured motorists with limits above $1 million. What has changed, however, is the number of customers who need to consider umbrella coverage.

“The bar has dropped on who needs an umbrella,” says Edmonston. “In this day and age, with the growth of emerging wealth, a lot of people don’t realize when they cross into realm of needing excess liability coverage.”

For Edmonston, it has become standard to ask new clients whether they have umbrella coverage. There is a misconception among clients that personal umbrella policies include property coverage, so she is constantly educating consumers on what’s involved in an umbrella policy, why they need it and how much they need. Customers who come to Edmonston from direct writers are often particularly in need of guidance because they’ve never had a full review of their assets and liabilities.

“We get a lot of customers who are progressing through life and have outgrown their current insurance program, so we do a complete review and risk analysis,” says Edmonston. “Once we see them adding things like additional houses, Jet Skis or boats, we start schooling them on the need for personal umbrella coverage.”

Quoting simplicity is the key to educating customers about the protection umbrella coverage can offer, according to Ben Schaum, product development manager in Progressive’s personal lines division. His company offers an online umbrella quote agents can access immediately after quoting a standard auto policy, and customers are often surprised to find that umbrella coverage is reasonably priced. Schaum believes agents should offer personal umbrella coverage to as many customers as possible because of the great impact writing the extra policy has on customer retention.

“Umbrella is a great complement to homeowners and auto coverage, to give agents a third policy to solidify their relationship with the customer,” says Schaum. “That’s where the lucrative benefits stand.”

Commercial clients are most likely to need umbrella coverage since $1 million on a primary policy is no longer enough for most businesses, according to Marilyn Matre, assistant vice president of excess casualty underwriting for Liberty Mutual Agency Markets. She says clients often forget or aren’t aware of the large liabilities associated with being a business owner, and it’s up to agents to remind them, suggest umbrella coverage and re-evaluate the situation annually.

“We have some marketing materials geared toward product knowledge, including fliers that detail losses we’ve paid as a company,” says Matre. “Agents can go out with loss fliers for restaurants, hotels, building owners, contractors or auto and educate clients about losses that had exceeded the primary and gotten into the umbrella.”

Tony Burkhart, president of Burkhart Insurance in Vincennes, Ind. believes customers recognize the value in umbrella coverage when they’re presented with the facts. Because it’s relatively cheap coverage and liability claims continue to rise in both number and scope, Burkhart foresees an increasingly competitive umbrella marketplace that will rely heavily on specific endorsements.

“Tying umbrella coverage in with professional liability coverages will become a bigger issue, and companies that can do that will have the edge,” says Burkhart. “Umbrellas are becoming more of a driving force because $1 million used to be a lot of coverage, but it isn’t anymore.”

Editor’s note: This article is the first in an ongoing series examining trends in specific coverage areas. Click here for a detailed product listing of available umbrella markets. 

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




L-H Trends
Researching Relocation Trends
Agents can position themselves to help retirees relocate.

There is a stereotype that many retirees tend to migrate to “Sun Belt” states (those in the southern and southwestern regions of the country) because of the climate and the fact that Florida, Nevada and Texas do not have a state income tax. However, new research from Boston College’s Center for Retirement Research shows retirees don’t always relocate far from home, and independent agents can capitalize on their insurance needs related to moving.
 
The research shows migration to the Sun Belt during a 12-year period was not as prevalent as some might think, with about 7% of homeowners relocating in a given two-year period and almost 30% relocating at least once in 12 years. However, most of the moves were within 20 miles, and Frost Belt (the Upper Midwest, Great Lakes and Northeast regions of the country) to Sun Belt migration was reasonably modest.

The research indicates respondents’ reasons for moving fall into two broad categories: those who affirmatively plan to move, and those who react to changing circumstances. The first category of movers are referred to as “planners,” those who tend to have a higher socio-economic status and better health than the second category, which are referred to as “reactors.” Planners tend to use greater time and flexibility when selecting a destination to move to, while reactors may be pressed into a decision to move by unexpected circumstances beyond their control.

With the aging of the U.S. population, independent agents should consider how to position their agency to accommodate insureds who choose to relocate. If the data holds true across the country, it means that when personal lines customers reach retirement age, approximately 30% of them will move within a 12-year period. The research also suggests the majority of the movers will not relocate outside the service area of the agency. This means agents should be proactive in providing resources to their customers to accommodate their potential move. Agencies should post information on their Web sites regarding relocation and insurance needs, and agents can help insureds facilitate a move by discussing flood insurance coverage for the new home, auto insurance for aging drivers, Medicare supplements and other related insurance issues.

Agencies should take steps to ensure they have a solid relationship with their older personal lines insureds so that when the time comes to make a move, the agency will be included in planning for that move. Having a proactive plan to deal with the agency’s changing demographics is a great strategy to keep the agency relevant to its customers.

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


Legal Advocacy
Bar Association Sues to Shield Lawyers from Red Flag Rule
The outcome of the lawsuit may have repercussions for independent agents.

Last week, the gloves came off in a battle between lawyers and the Federal Trade Commission (FTC) over whether attorneys must comply with regulations commonly known as the Red Flag Rule. The American Bar Association (ABA), on behalf of its nearly 400,000 members, filed a lawsuit challenging the FTC’s recently expressed view that lawyers are “creditors” under the rule and must comply with its requirements. The outcome of the law suit may have future bearing on how independent agents are treated under the rule.

Although the FTC has not specifically listed everyone it considers subject to the rule, the agency’s increasingly broad interpretation of the term “creditors” has led to concern among businesses and professionals that provide services and bill for them later – such as lawyers – that they will be treated by the FTC as being subject to the rule. This has already happened to doctors, accountants and others not typically considered “creditors.”

The rule is designed to fight identity theft by requiring creditors with certain kinds of accounts to implement compliance programs to detect and prevent identity theft. With FTC enforcement of the rule scheduled to begin Nov. 1, there is increasing focus on questions about who is covered by the rule. 

There are some parallels between lawyers and insurance agents that have agents concerned about whether the rule will be construed as extending to their activities.
 
The lawsuit argues that since the practice of law is state-regulated, the FTC lacks the authority to regulate lawyers. It also points out that lawyers are “already subject to strict confidentiality and privacy requirements set forth in the statutes, rules of professional conduct and other disciplinary rules of the states in which the members are licensed to practice law.” Additionally, case law has determined that if Congress intended to change this balance of regulatory power between the states and the federal government, “it must make its intention to do so ‘unmistakably clear in the language of the statute.’” The ABA argues that Congress did not intend for the rule to apply to lawyers because they are not expressly included in the definition of “creditors.” In addition, the ABA suit contends that the FTC has not stated a rational connection between the practice of law and identity theft, such that the FTC interpretation “arbitrarily and capriciously,” includes lawyers as being subject to the rule.

Like lawyers, insurance producers are licensed and regulated at the state level. The privacy of the sensitive personal information they handle is already regulated. And, like lawyers, insurance agents are not expressly listed by Congress as a group covered by the rule. Further, the FTC has not stated a rational connection between the activities of insurance agents and identity theft to demonstrate any intent by Congress to cover insurance agents under the rule.

Each insurance agency operates differently and therefore needs to assess the definitions under the rule carefully to determine whether it must comply. The Big “I” has a summary of the rule in a memo titled, “Overview of the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, and the Drivers Privacy Protection Act,” starting on page 10 at letter G. This memo is available to Big “I” members who log in to www.independentagent.com and select Legal Advocacy under the Memoranda and FAQs tab.

Insurance agencies with questions about whether the rule applies to their specific business activities can seek guidance from local counsel. Some agencies may choose to comply with the rule rather than spend time or money seeking a definitive answer to a question that may be unduly complex by virtue of the way the rule is written. FTC guidance on the development of a compliance program is available at http://ftc.gov/redflagsrule.

At the time of publication, the FTC has not filed any response to the ABA lawsuit.

Scott Kneeland (scott.kneeland@iiaba.net) is Big “I” counsel.


Forms & Substance
Decoding Discontinued Operations
Misunderstandings can lead to E&O claims.

A homebuilder decides to hang up his hammer and retire to Florida. He contacts his agent to see what he needs to do about his insurance, which is coming up for renewal. The CSR advises him that he needs to do nothing because he has a CGL occurrence form, and the CSR tells him that, unlike under a claims-made form, he is protected "forever into the future" for claims. So, the contractor retires to Florida and enjoys the good life --- for two years.

After two years, the deck on a home he built on a hillside collapses during a party, sending 35 people snowboarding down the hill without snowboards...or snow. Luckily, no one is killed, but several people are injured enough to require medical attention. A claim is filed against the contractor who contacts his agent. Eventually, the carrier advises that he has no coverage.

At this point, the CSR, producer and agency owner finally take the time to read the contractor's CGL policy. They learn that, while the CGL does indeed cover claims "forever into the future," the claim must arise out of an occurrence that takes place during the policy period. A common misconception is that the occurrence happens at the time of the negligence --- in this case, when the deck was inadequately secured.

However, a careful reading of the CGL policy's insuring agreement reveals that, "This insurance applies to ’bodily injury’ and ‘property damage’ only if...the ‘bodily injury’ or ‘property damage’ occurs during the policy period." So, no CGL coverage is extended. Fortunately for the contractor, the claim is covered...by the agency's E&O policy.

Discontinued operations coverage and discontinued products coverage is a necessity for most contractors, manufacturers and others with similar exposures. Unfortunately, not every company writes this coverage, so it may be necessary to provide it on a surplus lines basis. Agents should be wary of this often misunderstood exposure, or they may find that their agency's operations suspended.

Click here to read the entire article. 

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