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T H U R S D A Y , M A R C H 2 6 , 2 0 0 9 Big “I” National News
On the Hill
Treasury Secretary Announces Obama Administration’s Systemic Risk Regulation Plan
Geithner mentions large insurance companies and global concerns during hearing.
Earlier today, the U.S. House Financial Services Committee held a hearing titled, “Addressing the Need for Comprehensive Regulatory Reform” with U.S. Treasury Secretary Timothy Geithner as the only witness.
As expected, Geithner presented the Obama administration’s framework regarding systemic risk regulation. He indicated that the administration will outline additional proposals in consumer and investor protection, and comprehensive reform of regulatory oversight in the next few weeks. He also mentioned that systemic risk issues require global cooperation and will be central to the G-20 Leader’s Summit in London early next month.
In his testimony, Geithner detailed the causes of the financial services crisis and the fact that, “(f)ederal law allowed many institutions to choose among regulatory regimes.” He said, “We must end the practice of allowing banks and other financial companies to choose their regulator simply by changing their charters; regulators must choose who to regulate.”
Regarding systemic risk, Geithner said that “we need to establish a single entity with responsibility for consolidated supervision of systemically important firms and for systemically important payment and settlement systems and activities.”
Not surprisingly, in light of the AIG situation, large insurance companies were specifically mentioned. In defining a systemically important firm, Geithner said that consideration should be given to the following characteristics: the financial system’s interdependence with the firm, the firm’s size, leverage, degree of reliance on short-term funding and the importance of the firm as a source of credit for households, businesses and governments, and as a source for liquidity for the financial system.
Geithner also elaborated on the administration’s resolution authority to unwind systemically-risky, nonbank financial firms and a plan to regulate credit default swaps. He said, “Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching, and no credible backing to protect the company or taxpayers from losses, must end.”
For more information on the treasury’s regulatory reform framework, click here.
Tom Koonce (tom.koonce@iiaba.net) is Big “I” assistant vice president of federal government affairs. 
P&C Trends
Contact is Key to Successful Agent-Carrier Relationships
Quality of relationship is more important to agents than price, compensation.
Consistent contact and diverse policy offerings trump price when it comes to agencies’ satisfaction with carriers, according to a recent study by J.D. Power and Associates. The 2009 Insurance Agency Satisfaction StudySM also revealed that agencies tend to drive most of their business toward the carriers they are most satisfied with.
Jeremy Bowler, senior director of insurance practices at J.D. Power and Associates, says the impetus behind the study, performed at the request of carriers, was learning how to optimize independent agencies’ success. According to Bowler, the most surprising finding was that pricing and compensation do not necessarily drive agency satisfaction; instead, it’s personal relationships that make the difference, as indicated by the 32% of the 1,539 insurance agent respondents who cited “key contacts” as the most important satisfaction factor. Only 10% cited price, while a mere 5% valued compensation highest.
“We had gone into the study expecting that high commission rates would bubble up in the charts as important to satisfaction, but we found that what’s more important is the quality of the people agencies interface with,” says Bowler. “It’s a question of whether people representing the carriers are accessible, responsible and personable.”
Dennis Dressel, president of Founders Insurance Group in Torrington, Conn., does not hesitate to name personal relationships as essential to his satisfaction with carriers.
“The most important thing to us is a personal relationship with the people in power at the insurance company,” says Dressel. “This is still a relationship business, as much as carriers try to make it automated, so we do business with the companies we have best relationships with.”
Dressel subscribes to another trend indicated by J.D. Power - the tendency to write more business with the carriers he is most satisfied with. The study shows that nearly 70% of agents with satisfaction scores of more than 800 points on a 1,000-point scale intend to increase business with the insurance company, while only 28% of agents with scores of 600 points or less indicate the same. Luke Praxmarer, president of Corkill Insurance Agency in Elk Grove Village, Ill., notes this trend is not at all unusual among independent agencies.
“It’s certainly not uncommon for an agency’s top three carriers to have 50 to 60% of their business,” says Praxmarer. “A standout factor for us is whether a carrier is responsive enough to quickly turn around something with a very short time frame.”
A carrier’s responsiveness is often improved by personal visits to its agencies. The study revealed that satisfaction levels are especially high when a business contact from the carrier visits more than once per month, but fewer than 15% of agents report receiving such frequent visits. Tom Schneider, president of Schneider insurance agency in Gahanna, Ohio, considers frequent visits with his carriers to be essential.
“In the best carrier relationships, you get to know the president of company, and they’re accessible and come out and visit you,” says Schneider. “Those carriers hold meetings where the heads of the company listen to you and know your name.”
Schneider also believes programs like co-op marketing and subsidies for new producer training speak to a carrier’s commitment to its agents. The 2009 Insurance Agency Satisfaction StudySM found that nearly 60% of agents polled did not receive any budget for local marketing or advertising. Among those agents who received and used all the advertising funds provided by the insurer, satisfaction scores average 808, compared with an average of 692 among those agents who were offered no funds.
Both Schneider and Bowler agree that the concept at the heart of J.D. Power’s study is that a carrier’s No. 1 customer is the agent, so if the agent isn’t happy, the carrier suffers.
“The agents are clearly the glue that binds, and if they can bind to the customer better than the carrier can, it’s disaster for the carrier if agent isn’t happy,” says Bowler. “If a carrier can keep an agent happy, they can also keep customers happy,” echoes Schneider. “Companies that are no longer with us are driven by the bottom line rather than by taking care of the agent.”
Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.  P&C Trends
Workers’ Compensation and the Economy
Do unemployment spikes precede increases in workers’ comp loss ratios?
We’ve all heard it: “When unemployment rates increase, workers’ compensation loss ratios are expected to follow.” As the story goes, employees who fear being laid off in hard times will look hard to detect injuries to provide them with workers’ comp benefits. Workers’ comp loss ratios may also spike in hard times because workers who take over the jobs of laid off workers may become overworked and more easily injured. In addition, employees who assume physically demanding jobs they are not trained to do can develop more injuries.
Before examining the graphical evidence, one might argue that the loss ratio spike will occur at the same time or even prior to the spike in unemployment. That is, workers generally know when hard times are coming, so when they actually arrive, the workers’ comp rate would have already spiked. That may still be the case, but one would expect the obvious correlated peaks in the chart below to show autocorrelation with unemployment spiking and lead to a later spike in workers compensation loss ratios.
Source: A.M. Best Aggregates and Averages 2008, 2000, 1994, 1987 and 1977 editions; Bureau of Labor Statistics
With unemployment rates approaching 25-year highs, will a spike in workers’ comp loss ratios follow? Only time will tell.
Paul Buse (paul.buse@iiaba.net) is president of Big I AdvantageSM and a licensed p-c agent.
L&H Trends
The Perfect Time to Give a Gift
Advise your high net worth clients on the advantages of the gift tax exclusion.
One consequence of the faltering economy has been the breathtaking increase in the national debt. In the near term there doesn’t seem to be an immediate impact on inflation. However, many economists are voicing concern about the long-term prospects for a return to the inflationary period of the mid-1970s. In order to reduce the size of the deficit – which President Barack Obama has pledged to do once the economy is back on track – there will have to be an increase in revenue to the federal government. There has been a lot of discussion regarding raising income taxes on Americans who have incomes in excess of $250,000 annually. But, federal income taxes are not the only avenue for more revenue. The opportunity to raise the estate tax is another tempting target because it directly impacts a much smaller number of people. The estate tax situation has been murky since the 2001 tax law, which increased the estate exemption and eliminated the federal estate tax for one year with a return to the 2001 levels in 2011.
While the ultimate size of the estate tax exemption, or the amount of a person’s includable estate that is subject to income taxes, is not yet known, there is no doubt that people with larger estates should be refocusing on estate planning reduction strategies to lower their potential estate tax liability. To that end, one of the most basic estate planning techniques is making lifetime gifts. The annual gift tax exclusion, or the amount that someone can give to any individual each year without it being considered a taxable gift (which is indexed for inflation), is $13,000. Thus, a married couple will be able to give up to $26,000 each to multiple recipients without incurring any federal gift tax.
Gifts of the annual exclusion amount to children, grandchildren and other beneficiaries are often recommended as an excellent way to reduce one’s taxable estate at no transfer tax cost. Outright gifts to grandchildren of the annual exclusion amount will also be exempt from the generation-skipping transfer tax (the GST). Gifts in trust for grandchildren who qualify for the gift tax annual exclusion can also qualify for exclusion from the GST if the trust is properly structured. Payments of tuition, if paid directly to the educational institution, and payments of medical expenses, if paid directly to the provider of the services, are also transfers that are not considered taxable gifts and are not subject to GST.
Gifts may be “split,” meaning that even if one spouse makes the entire gift, he or she may use the other spouse’s annual exclusion amount if that spouse consents. To illustrate, a wife can give the entire $26,000 to a child with no gift tax cost, as long as the husband consents to having his annual exemption applied to the gift. For this reason, many clients make the annual gifts in January, to be assured that both spouses are alive at the time of the gift. Estate planning professionals face the trade-off that when lifetime gifts are made, the recipient’s basis for calculating any future gain for tax purposes is the donor’s basis, which is usually lower than the market value. When beneficiaries receive an inheritance consisting of property, they receive a “step-up” in basis valued at the date of death (or six months later if elected). So from a beneficiary’s viewpoint, they typically would prefer receiving an asset with a step-up in basis through an inheritance rather than a gift. However, with the significant reductions in the value of stocks and real estate, now may be a perfect time to consider making lifetime gifts, rather than waiting until death to transfer assets. Independent insurance agents should be having a conversation with their higher net worth clients to discuss the most advantageous approach for their situation.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
Forms & Substance
Insuring Technology Products
How to insure clients against loss of important data.
A recent question from the Big “I” Virtual University “Ask an Expert” service involves the appropriate ways to properly insure MP3 players, iPods or other handheld electronic devices such as PDAs where clients may be paying for downloaded information from the Internet.
Obviously there is the cost of the device, but what about the lost data? What about the cost in time of the insured to download 2,500 songs onto the replaced electronic device? Can these types of devices be backed up by the user? What about a mechanical breakdown that causes the loss of all data? How does one deal with the varying value of downloaded data over a period of time?
These are great questions. No doubt there are thousands of consumers with thousands of dollars worth of downloaded music on their MP3 players, not to mention PDA users with important data on their handheld devices.
Needless to say, insurance is not the only solution to risk exposures, though it's the risk management technique that we'll focus on here. In many, if not most cases, electronic information is downloaded to a PC, then to the handheld device. So, there is naturally some spreading of risk by automatically creating a backup. On top of that, it is probably a good idea to maintain a secondary backup off-site. In addition, other loss control techniques can be used to safeguard the device and the data. Here, we will focus on the insurance implications.
First you must have damage from a covered peril. With the standard ISO HO-3, you're limited to the 16 named perils. Using the HO-5 (or HO-15 endorsement in the HO-91 program) converts the named peril to "special causes of loss," thus providing broader coverage, though the most common exposures such as wear and tear and mechanical breakdown would not be covered. The device itself is covered, with limited coverage for business use; otherwise, if the device is for personal use, the owner would have full Coverage C worldwide. Clearly the "lost time" to download isn't covered since the policy only covers "direct damage," with minor exceptions as noted below.
Under the Special Limits of Liability, the policy provides $1,500 coverage for certain types of personal data (we know that there is no coverage for business data). This limit includes the cost to research, replace or restore the information from the lost or damaged material. Whether MP3 songs qualify as “records” as required by the policy languageis perhaps debatable, but there is little doubt that PDA records would certainly qualify for this coverage if damage results for a covered peril.
To read the full article, click here.
If you do not know your Big "I" Web site user name and password, e-mail logon@iiaba.net to request your login.
Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.
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