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Big “I” National News

P&C Trends
Commercial Lines Fall in First Quarter
D&O, workers’ comp and property premiums experience biggest drop in two years.

The soft market is gaining momentum as commercial lines premiums posted the largest quarterly decrease since 2005 during first quarter 2008, according to the RIMS Benchmark Survey.

Of all the commercial lines tracked by Advisen, the company that collects and analyzes the data for the survey, directors and officers liability (D&O) experienced the most dramatic decrease of the quarter with premiums falling 19%. After experiencing a “moderating trend” in 2007, workers’ compensation was second with an 11% drop. And property premiums saw their largest drop since Hurricane Katrina with a 6% decline --- an indication of more competition in catastrophe-prone areas, according to the survey. There was also a 2% decline in general liability premiums, which have been steadily falling for the last two years.

“Frankly we were surprised to see a downward momentum building at this pace,” says David Bradford, editor-in-chief of Advisen. “It is an indication of just how overcapitalized the commercial property and casualty insurance industry is. Rapidly deteriorating rate levels will probably wipe out insurer underwriting profits this year, but if there are no major catastrophes, premiums should still continue to fall for awhile.”

Bob Hartwig, president of the Insurance Information Institute (III), is a bit more optimistic and believes this year’s underwriting results won’t be the worst the industry’s seen.

“Commercial lines in 2008 will be characterized by underwriting results that are still relatively good by historical standards, but which represent a sequential deterioration from prior periods,” he says. “The market remains very competitive and pricing, on net, remains down.”

The decline in the majority of commercial lines premiums is a good indication that the market will continue to soften well beyond this year, according to John Phelps, member of the RIMS board of directors and director of risk solutions for Blue Cross and Blue Shield of Florida, Inc.

“We expect to see the soft market continue into 2008,” he says. “Not only are soft market conditions on-going, they appear to be accelerating, due in no small part to the excellent combined ratios for key markets.”

Historically, the market cycle, from peak to trough, has averaged four or five years so insurers are unlikely to see reprieve from the current market conditions until 2010 or 2011, according to Hartwig. However, the fate of premiums is a bit more difficult to pinpoint.

“In terms of premiums, that’s more difficult to assess,” he says. “Premiums could simply remain flat after the trough for an extended period of time as they did in the 1990s or rise rapidly as they did in the 1980s and 1970s.”

According to Hartwig, there is a possibility that the soft market will be “shallower” than in previous cycles if insurers are more disciplined in underwriting and pricing, avoiding the large underwriting losses experienced in the past. However, economic conditions will still play a factor.

“Falling interest rates and poor stock market returns will have at least some effect in terms of imposing discipline on the market given that underwriting losses will be more difficult to offset with investment gains,” he says.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
2008 Hurricane Forecast Update
Report says Atlantic storm activity will be higher than initially expected.

The 2008 Atlantic hurricane season will be produce more storms than originally expected, according to an updated forecast from Colorado State University’s Department of Atmospheric Science.

In December 2007, CSU scientists Philip Klotzbach and William Grey projected a total of 12 named storms and seven hurricanes; however, as of April 1, they have updated their projections to 15 named storms and eight hurricanes.

CSU’s report also includes a substantial increase in the probability of a major hurricane making landfall on a U.S. coastline when compared to years past. The report lists a 69% chance of a Category 3, 4 or 5 storm hitting somewhere on the U.S. coastline this year, a 17% increase from the average probability over the last century. The east coast, including the Florida peninsula, has a 45% chance, up 14% from the 31% average over the past century, and the Gulf Coast from the Florida panhandle to Brownsville has a 44% chance of seeing a hurricane compared to the 30% average.

CSU has been forecasting hurricane seasons for 25 years, however, the school’s most recent predictions are based on a new extended-range prediction that includes 58 years of past data. Yet Klotzbach and Grey caution that no prediction is ever completely accurate.

“Everyone should realize that it is impossible to precisely predict this season’s hurricane activity in early April. There is, however, much curiosity as to how global ocean and atmosphere features are presently arranged as regards to the probability of an active or inactive hurricane season for the coming season,” the report says. “We issue these forecasts to satisfy the curiosity of the general public and to bring attention to the hurricane problem. There is a general interest in knowing what the odds are for an active or inactive season. One must remember that our forecasts are based on the premise that those global oceanic and atmospheric conditions which preceded comparatively active or inactive hurricane seasons in the past provide meaningful information about similar trends in future season. This is not always true for individual seasons.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




On the Hill
Big “I” Testifies on Insurance Regulatory Reform
Agent licensing reform important step for agent efficiency.

The Independent Insurance Agents & Brokers of America testified yesterday before a hearing of the House Committee on Financial Services Subcommittee on Capital Markets, Government Sponsored Enterprises and Insurance, to discuss insurance regulatory reform.

Tom Minkler, an independent agent from New Hampshire, chairman of the IIABA government affairs committee and a recently-elected member of IIABA’s executive committee, testified on the importance of maintaining the consumer protection strengths of the state-based insurance regulatory system while making needed improvements, specifically in the area of agent licensing.

Minkler testified that the most serious regulatory challenges facing insurance agents and brokers are the redundant, costly and sometimes contradictory requirements that arise when seeking licenses on a multi-state basis and the root cause of these problems is the failure of many states to issue licenses on a truly reciprocal basis. To rectify this problem, IIABA strongly supports H.R. 5611, the NARAB Reform Act, introduced in March by Capital Markets Subcommittee Members David Scott (D-Ga.) and Geoff Davis (R-Ky.). 

“This legislation would streamline nonresident insurance agent licensing, but is deferential to states’ rights – day-to-day state insurance laws and regulations would not be affected by this legislation,” Minkler said. “Given the strong bipartisan support for the NARAB Reform Act—there are already more than 30 cosponsors—we are excited about the prospects of this bill.” 

Minkler emphasized that NARAB II would build upon regulatory experience maintained at the state level, promote consistency, establish true reciprocity for nonresident agents and enhance marketplace responsiveness. The result for all stakeholders would be a more efficient, modernized and workable system of insurance agent licensing. 

“Our association has long asserted that the best method for addressing regulatory deficiencies is by enacting targeted legislation or federal legislative ‘tools’ that establish greater interstate consistency and streamline redundant oversight,” Minkler said. “The use of targeted and limited federal legislation on an as-needed basis can improve rather than dismantle the current state-based system and in the process produce a more efficient and effective regulatory framework.”

Katie Butler (Katie.butler@iiaba.net) is IA’s editor-in-chief.




VIEW: L-H Trends
Dealing with Negative Portrayals
Differentiating between independent agents and individual life insurance practitioners is the key to maintaining integrity.

Dateline NBC recently ran a one-sided piece on “independent insurance agents” victimizing senior citizens by using aggressive and deceptive sales tactics on unsuspecting seniors. NAFA (not to be confused with NAIFA) has responded by explaining that equity indexed annuities (EIAs) are not necessarily bad products and that the show’s producers didn’t bother to learn the product’s various features, making the show’s tactics very underhanded.

My review of the show doesn’t deal with EIAs or other product-related considerations.  Rather, my critique addresses a public relations issue for independent insurance agents--- how to categorize them. It’s difficult to have a “one-size-fits-all” description of independent insurance agents. Among the IIABA membership and property-casualty carriers, the independent insurance agents label relates to insurance agencies, rather than individual insurance agents, and most independent insurance agents provide p-c products and services --- personal lines and/or commercial lines --- and also life and health insurance policies.

However, the type of independent insurance agent Dateline profiled was the individual life insurance practitioner, not an independent insurance agency. The point in mentioning this distinction is not to criticize or infer that the individual life insurance producer is necessarily any better or worse in their business practices. But there is one essential difference from a consumer standpoint: independent insurance agencies typically have been in existence for 20 or more years and the employees are embedded in the community they serve. Since goodwill is the biggest financial asset of an independent agency, their reputation is extremely important to their future existence. Yes, independent insurance agencies have occasionally made a hiring mistake with a producer, but rarely will an agency tolerate an unethical person for very long because of their negative impact on the agency’s goodwill. Individual life producers don’t necessarily have the same impact, in terms of the threat to the business, in comparison to the individual who may or may not stay in the industry for long time. This viewpoint doesn’t mean consumers shouldn’t deal with new entrants to the industry, but it does mean they should be very cautious in dealing with someone without a track record who isn't tethered to an agency.

IIABA spends a great deal of time attempting to make the distinction in the consumer press between the “one-man” band individual life producer and an independent insurance agent, but quite often the distinction falls on deaf ears. So what can independent insurance agents do to deal with negative articles and news stories that don’t differentiate? The answer is they need to educate their customers about their agency, their practices and their people --- essentially their “brand.” It would be easy to say the Trusted Choice^® brand is the solution. However, regardless of whether an independent insurance agency is a Trusted Choice^® member or not, they need to focus on having a brand that customers can understand --- choice, customization and advocacy. They need to let their customers know about how long they’ve been in business, their background and credentials of their staff and community activities.

Misinformation will undoubtedly continue, but independent insurance agents do not have to be victims. 

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




Forms & Substance
Why Do Insureds Need D&O Insurance?
How to sell insured on the need for directors and officers insurance. 

Most agents, at one point or another, have been asked by insureds or prospects why they need D&O insurance or any other type of liability insurance other than CGL and auto. As most know, CGL isn’t enough, but explaining that to insureds isn’t always easy.

A D&O policy typically covers “wrongful acts” by directors and officers of an entity within their capacity to make decisions regarding the entity’s activities. A “wrongful act” is often defined as: “any error, misstatement, misleading statement, act, omission, neglect or breach of duty committed, attempted or allegedly committed or attempted by an insured person, individually or otherwise, in an insured capacity or any matter claimed against him or her solely by reason of his or her serving in such insured capacity.”

If the D&O policy excludes wrongful acts arising out of the provision of “professional services,” a separate E&O or other type of professional liability coverage may be needed, although some D&O policies now package E&O, EPLI and sometimes fiduciary liability insurance. All of these policies provide coverage for exposures, damages, claims and suits not covered by a CGL policy.

Directors and officers can be sued by the entity itself or by other current or former directors and officers, employees, shareholders, investors, lenders, vendors, customers, competitors, various government officials such as state attorney generals, the IRS and state and federal labor departments, consumer groups and many other third parties.

Since D&O policies typically include an intentional acts exclusion, the policy should include a severability clause so that coverage is afforded to an innocent insured who did not participate in such acts (think Enron). It is usually a good idea to include the organization as an insured in addition to the directors and officers. This can typically be done by endorsement and often at no additional charge.

The following are some examples of D&O claims:

* A minority shareholder in a family-owned electrical contracting business sued the two major shareholders on behalf of the company, claiming they breached their fiduciary duties. The minority shareholder claimed that the majority shareholders, by drawing excessively large salaries and bonuses, caused the company to lose money. The court ruled in favor of the majority shareholders, but the defense costs amounted to six figures.

* A mid-sized manufacturing firm hired an employee away from one of its competitors, bringing the person on as an officer. A year later, that new officer’s ex-employer sued the officer and his new firm, alleging that the officer misappropriated trade secrets and violated certain provisions of is termination agreement.

*The plaintiff filed a complaint against their competitor alleging that a former employee, now working at the competition, engaged in unauthorized use of confidential and proprietary information and committed other acts of unfair competition. As a result, the plaintiff alleged it has suffered irreparable and immediate injury. In addition, the plaintiff alleged that the defendant has possession of its confidential information and intellectual property.

* The federal government sued the CEO, the president and other officers of an East Coast manufacturing company for price fixing. After an extensive trial, the allegations were dismissed due to lack of evidence, but the defense costs and fees incurred approached a million dollars.

* A company enters into an investment agreement with a third party and agrees not to negotiate with other entity regarding financing or a potential acquisition for a two-week period. During the exclusivity period the company engages in negotiations with another investment group. The third party alleges breach of investment agreement and intentional and negligent misrepresentation.

To read the entire article, including some D&O statistic, more claims examples, and links to related articles, click here.

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