THURSDAY, APRIL 29, 2010 

                                                Big “I” Association News




Incentive Compensation
Rusbuldt Responds to Willis CEO, Joe Plumeri
Controversy over incentive compensation reappears at RIMS conference.

This week at the recent Risk and Insurance Management Society (RIMS) 2010 Annual Conference, Willis Group Holdings Chairman and CEO, Joe Plumeri, took aim at the payment of incentive compensation with the same rhetoric he has repeated since he announced in October 2004 that Willis would no longer accept contingency payments from insurers. He has launched a public awareness campaign to educate risk managers about the inherent conflicts of interest created by contingent commissions, and urge buyers to “use their wallets to send a strong signal against the controversial payments.” Mr. Plumeri contends that “ignorance is the biggest obstacle in getting our message across on contingents” and that brokers should “not [be] putting profit before principle.” When asked whether Willis negotiated higher standard commission rates to make up for the firm’s lost income from contingent compensation, Mr. Plumeri responded, “Of course, we have. Just because we won’t accept contingents doesn’t mean we don’t expect to be paid for our services.”

I take serious issue with Mr. Plumeri’s assertion that the higher negotiated commissions Willis is paid result in a better outcome for the client. He unfortunately has confused legitimate incentive compensation with the steering, bid-rigging and other illegal practices that Willis and other firms were accused of in 2004.  In fact, incentive compensation is used effectively in virtually all sales environments to reward excellence in service and productivity. It doesn’t matter if the compensation is blended in to a higher percentage of standard commission or paid separately after the fact. The effect is the same—it rewards sales and service performance. Willis says the higher standard commissions it receives are “certainly not enough to influence the placement decision.” But yet, Willis objects when others—who don’t have the market clout to get them up front—receive the same payments at a different point in time.

Many would argue that the payment of higher compensation up front might diminish attention to client risk management. Having some portion of compensation depend on the performance of the risks placed serves insurance buyers well—it encourages appropriate attention to risk management, thoughtful design of coverages and care in selecting deductibles. When producers meaningfully and favorably affect loss ratio and cost effectiveness for the client, the client benefits. Producers are driven by retention and growth of business with the client over the long-term, not a payment at the end of a year.

The reality is that Willis, as the world’s third largest broker with 17,000 employees, can take this position because their enormous size allows them to. Public policy and perception, however, must not lose sight of the fact that agency size and clout does not determine quality customer service. Main street agencies all over the country are part of the bedrock of their communities and provide outstanding benefits to clients day-in and day-out, all year long. The fact that they lack the size and clout that Willis enjoys does not mean that they have less integrity or provide less service—it simply means that they lack the scale to negotiate for all their compensation to be paid at one time.

Mr. Plumeri’s express target is competitors who have not negotiated higher up-front compensation. But he is silent about the role of carriers who pay incentive compensation after the end of a sales year. It is not clear why he would want Willis to support carriers with more business when he objects to those carriers paying incentive compensation. The Big “I” supports the right and ability of insurers to choose how to pay producers for strong sales performance, including up-front fees like Will has negotiated and other lawful payments like incentive compensation paid after the close of a sales year.

Willis made a thoughtful and conscious decision to stop accepting incentive compensation, and it expects everyone else to follow the same course. In the five plus years since Willis made that decision, under the guise of saying it wants to “level the playing field,” it has sought to convince others that incentive compensation is improper. But since Willis confirmed that it has negotiated higher standard commissions to make up for the lack of incentive compensation, it is unclear what about the playing field is unlevel. Willis now knows it will receive all compensation, regardless of its performance. If other agents and brokers can’t earn incentive compensation and can’t negotiate higher commissions up-front, then the result is anything but a level playing field.  In fact, many independent agencies may be unable to survive, leaving customers fewer choices from which to obtain the services they need.

I will close with a challenge for Mr. Plumeri. I support the right of Willis to negotiate its compensation arrangements upfront, taking advantage of its size, reputation and relationship with insurers. But I take issue with the theory that its compensation approach is the only appropriate way to conduct business in an attempt to force its decision on the entire industry. If Mr. Plumeri is truly interested in transparency, he would instruct all Willis producers to publish the firm’s commissions on the policies they offer, along with industry information on the average commissions for that line of coverage. At that point, insurance purchasers will have the information they need to evaluate value and cost, and that will be to the client’s benefit.

Bob Rusbuldt (bob.rusbuldt@iiaba.net) is Big “I” president & CEO.





On the Hill
Senate Considers Financial Services Regulatory Reform
Current bill leaves day to day insurance regulation at the state level.

This week, the U.S. Senate began consideration of landmark legislation to modernize regulation of the financial services industry. The House passed its version of reform in December 2009 and pressure has steadily grown on the Senate to act in kind as President Barack Obama has made this the Administration’s number one domestic policy priority following passage of health care reform.

Over the past several weeks Senate Banking Committee Chairman Chris Dodd (D-Conn.),  Ranking Member Richard Shelby (R-Ala.), and other senators on the Banking Committee have been attempting to reach a bipartisan compromise on S. 3217, the “Restoring American Financial Stability Act of 2010.” Sensing that Democrats could use the issue politically and to hasten negotiations, Senate Majority Leader Harry Reid (D-Nev.) attempted to bring the Democratic version of the legislation up numerous times this week via a “motion to proceed” and until yesterday, failed to garner the necessary 60 votes to end a Republican-led filibuster. After blocking the motion for three days in an attempt to make the bill more bipartisan, Republicans decided to allow for debate and the motion was agreed to by unanimous consent. Consequently, the Senate will begin debating S. 3217 today.

Insurance has not been the focus of the legislation as there is a recognition that the insurance market has not seen the same sort of issues as the banking and securities sectors. The bill leaves day-to-day functional regulation in the hands of the states; however, as expected, a limited number of very large insurers (eg. AIG) deemed a risk to the overall financial markets may be subject to additional financial supervision by a new systemic risk regulator. Like the House legislation, insurance-specific provisions include the creation of an insurance information office at the federal level with no regulatory power and state-based surplus lines and reinsurance reform.

Major issues likely to be raised during debate revolve around the Bureau of Consumer Protection (a new federal regulator for banking and securities products with insurance specifically excluded), a systemic risk fund to unwind failing financial institutions deemed systemically risky and increased regulation of derivatives. Once the Senate concludes debate and consideration of amendments on these and other issues, a vote will occur on the final bill. The next step would be to reconcile the House and Senate versions of reform before another vote by each chamber on a final package.

Lauren Cialone (lauren.cialone@iiaba.net) is Big “I” senior director of federal government affairs.





On the Hill
House Financial Services Committee Passes NFIP Extension
Legislation includes higher maximum coverage limits with option for additional living expenses and business interruption.

Yesterday, the U.S. House of Representatives Committee on Financial Services passed, by voice vote, H.R. 5114, the “Flood Insurance Reform Priorities Act of 2010.”  The legislation, introduced by Subcommittee on Housing and Community Opportunity Chairwoman Maxine Waters (D-Calif.) and Ranking Member Shelley Moore Capito (R-W.V.), would extend the National Flood Insurance Program (NFIP) for five years and provide necessary reforms such as increasing the maximum coverage limits for flood insurance policies.

The Big “I” strongly supports the long term extension of the NFIP, as the program has experienced a litany of short term extensions over the last year and a half. There have been seven short-term extensions in the last 18 months, and the program is once again scheduled to expire on May 31, 2010 unless Congress approves an eighth extension or acts on a long-term bill. These short-term extensions have unfortunately led to two expirations of the program in just the last few months.

In addition to the long term extension, the Big “I” worked to ensure the legislation also contained needed modernizations of the NFIP.  The bill contains a provision that would raise the maximum coverage limits for residential and commercial properties, which the Big “I” strongly supports.  Under current law, the coverage limits ($250,000 for residential properties and $500,000 for commercial) are stuck at levels set in the early 1990’s and do not reflect today’s real estate prices. The legislation proposes to increase these coverage limits to $335,000 for residential properties and $670,000 for commercial.

While the original version of the legislation included increased coverage limits, it did not contain two other important provisions that the Big “I” strongly supports: additional living expenses and optional business interruption coverage. The Big “I” worked with the Committee, and in particular with Reps. Suzanne Kosmas (D-Fla.) and Shelley Moore Capito (R-W.V.), to add these provisions to the final version adopted by the Committee. Giving consumers the option to purchase business interruption insurance and additional living expenses coverage, as can be done in the private market for other perils, will make the program more attractive to consumers and more actuarially sound.

The Big “I” is encouraged that the House Financial Services Committee approved this long-term extension and a modernization of the NFIP and is hopeful that the full House of Representatives will act on the legislation in next few months.

John Prible (john.prible@iiaba.net) is Big “I” vice president of federal government affairs.


P-C Trends
Lessons from Hulk Hogan
Agents professional liability makes headline news; “Watch your E&O exposure, brother!”

Last week, Terry Bollea, aka professional wrestler Hulk Hogan, sued his insurance agent because there was no umbrella liability policy in place to protect his assets from liability arising out of his son’s car crash. The story has been widely reported, from local news in Tampa Bay, Fla. to ABC, E! and other national outlets. Previously, Bollea had sued his attorney for failing to sufficiently protect his personal interests, but that was dismissed. Failing that, Bollea turned to suing his insurance agent for failure to offer the coverage. Damages alleged are unspecified in media accounts but reports point to exposure of his estimated $30 million in net worth and what Bollea was “unnecessarily required to pay to settle a lawsuit for injuries caused by his son,” according to his attorney, Wil Florin.

For agents, there are three critically important lessons from this situation. First, “failure to procure” and “failure to recommend” drive nearly one-third of all E&O claims and agents and CSRs need to be aware of this, especially with respect to offering personal umbrella policies. Second, depending on where the agency is located, agents need to be aware of duties to recommend. Third, the Big “I” can be huge asset to your agency for E&O risk management.

The Big I Professional Liability Program is widely recognized as the largest one in the United States. That size gives the professional liability committee (PLC) great insight into the causes of agency E&O claims. With the program’s long-time partner, Westport Insurance and Swiss Re, the PLC has carefully tracked E&O claim causes. For example, since 2003, the more than 24% of claims are a result of “failure to procure coverage” and 5% are due to a “failure to recommend” a coverage. E&O education offerings and risk management tools have been adjusted to reflect this.



Source: The E&O Claims Advisor, Copyright Big I Advantage, Inc. and Swiss Re Americas

Just as important as knowing that not procuring or recommending coverage can result in an E&O claim, exposure for getting sued varies by state. Recently, the E&O Claims Advisor reported on states with the highest levels for “duty to advise.” As reported by the article’s author the Hassett Law Firm, agents in Alabama, Arizona, Idaho, Pennsylvania and New Jersey have the greatest duty to advise or recommend on insurance needs with Florida, Louisiana, Maryland, Minnesota, New Hampshire, Ohio, South Carolina, Tennessee, Texas and Washington  close behind. To read the entire article, go to  www.iiaba.net/eohappens or request it from your state’s E&O staff. Given that Florida is in a “duty to advise” state, one would assume the trial attorney will look to establish a special relationship existed between the agent and “The Hulkster.”

Perhaps the most important take-away from the pending claim is that your Big “I” membership provides unique tools to deal with the challenges of running your agency. For example, if agents use a checklist and follow-up process provided as part of the Big I Virtual Risk Consultant when facing a similar situation, the claim might not have occurred. It is very likely Bollea would have been made aware of a high severity loss exposure from automobile accidents and a clear process would have been in place to document his refusal to purchase such coverage. No doubt in the adjudication of this claim, the issue of documentation will be critically important—especially if, as has been reported, the agent did in fact recommend excess or umbrella coverage and Bollea refused. If a member facestrouble finding coverage for a stand-alone umbrella, a call to your state association would have directed the agent to the Big I’s stand-alone personal umbrella program with RLI Insurance Company. If the umbrella was a truly special needs situation, as might have been the case with a celebrity like Hulk Hogan, the agent would have been directed to alternatives available on Big "I" Markets.

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


L-H Trends
To Enjoy Life, Rebalance
Take a page from the investment world to manage your personal and professional life.

Rebalancing: it’s an important term for investors and not just for those seeking inner peace. The technical definition of rebalancing is the bringing an investment portfolio that has deviated away from the original target asset allocation back into line. As time goes on, a portfolio's current asset allocation can move away from an investor's original target asset allocation. If left un-adjusted, the portfolio could either become too risky or too conservative.

The stock market drop in 2008 is a good example of how rebalancing works.  Let’s assume an employee in their mid-50s had a4 01(k) account balance of $100,000 on Sept. 1, 2008invested 50% in stock mutual funds and 50% in bond mutual funds. And let’s assume that he or she rebalances the account annually on January 1t. At the end of 2008, the total value of the 401(k) account was $80,000 comprised of $30,000 stock mutual funds and $50,000 bond mutual funds. Now, asset allocation has moved to approximately one-third in the stock mutual fund and two-thirds in bond mutual fund. But, based on the employee’s retirement objectives and risk tolerance, the account should be50/50 in t asset allocation. The employee then rebalances it on Jan. 1, 2009to $40,000 in the stock mutual fund and $40,000 in the bond mutual fund. As the market rebounded during 2009, the stock mutual funds increased to $55,000 and the bond mutual funds increased to $45,000. At the end of 2009, the employee had recovered most of the investments and then rebalanced the 401(k) account again to 50/50.

The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation. The concept of rebalancing is not limited to investing. Most of us have an idea of how we want our personal and professional lives to be allocated. Of course, when many of us first experience true freedom – that first semester or two of college – we had the “work hard/play hard” part of the equation out of whack until those mid-term grades arrived. In fact, perhaps the best example of trying to have the right balance in college was the students who avoided cramming and had an even approach to their work and study habits (full disclosure: my college professors received term papers that were still warm from the printer).

As an independent insurance agent, there many demands on your time: selling and client service, agency related administration, continuing education and other work related to your business. Of course, most independent insurance agents also are involved in their communities as volunteer coaches, board members, fund raisers and other activities. And, there are also family responsibilities which seem to manifest themselves at some of the most hectic times, not to mention taking care of the pets. When these things are all added together it can seem like an overwhelming burden—even though it can be very rewarding.

Take a lesson from the world of investing and rebalance your life – personally and professionally. Make sure you take the time to allocate your time for the things that are truly important and fulfilling. While it may sound utopian, by prioritizing what you really need to do you may find that you have to discard a few activities in order to find the balance you seek. Make sure you take the time to rebalance your life.

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