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 Big “I” National News

On the Hill
Agents Storm Capitol Hill for Health Care Fly-In
More than 1,000 agents voice support for reform but object to government-run plan.

Yesterday, more than 1,000 professional health insurance advisors, agents, brokers, consultants and employee benefit specialists met with more than 400 Senate and House offices as part of the Health Insurance Agent & Broker Alliance health care reform fly-in on Capitol Hill.

The Big “I” worked with other health producer associations to form the Health Insurance Agent & Broker Alliance, which consists of: the Big “I,” AHIA-NAIFA Health and Employee Benefits (AHIA), The Council of Insurance Agents & Brokers (CIAB), the National Association of Health Underwriters (NAHU) and the National Association of Insurance and Financial Advisors (NAIFA).

Big “I” members came to the Hill representing two viewpoints in the health care debate: as health care advisors to consumers and as small business owners. Fly-in participants had meetings with their representatives in Congress on the critical role professional health insurance agents and brokers play in providing health care to millions of Americans. They emphasized the need to maintain and expand both choice and access, reduce health care costs and improve health care quality.

When the idea of the joint fly-in was conceived, the Alliance hoped to get 400 participants total from the five associations, but expectations were exceeded more than twofold when more than 1,000 agents and brokers from 49 states attended.

Brian Baker, vice president of Bouchard Insurance in Clearwater, Fla., said he thought the fly-in was “great” and “enjoyed meeting so many colleagues.” The enthusiasm and energy at the breakfast hosted by the alliance prior to the pilgrimage to Capitol Hill reflected Baker’s sentiment. Baker said he thought “the members of Congress were impressed with how many people showed up. There was good attendance, and I think that helped.”

Steve Spiro, president of Spiro Risk Management, Inc. in Valley Stream, N.Y. and a member of the Big “I” government affairs committee, met with several offices and emphasized that “there are too many uninsured people, and yes, reforms are needed, but we should not be throwing the baby out with the bathwater.” Spiro stressed the importance of not rushing the process but instead to ensure it’s done correctly.

As the House and Senate debate comprehensive health care reform legislation, the joint grassroots fly-in provided an opportunity for the health insurance agent and broker community to send a strong message to Congress to preserve the private delivery of health insurance and to oppose the creation of a government-run public plan. 

Earlier this week, the House unveiled its version of reform while the Senate continues to move forward on a dual track with bills in both the Committee on Health, Education, Labor and Pensions (HELP) and the Committee on Finance.

In addition to the “Alliance,” whose collective memberships represent more than 500,000 professional health insurance advisors, agents, brokers, consultants and employee benefit specialists, many in the health care and business communities are concerned that a public plan will lead to diminishing quality in health care that leaves taxpayers holding the bag. 

Spencer Houldin, principal of Ericson Insurance in Washington Depot, Conn. and chairman of the Big “I” government affairs committee, said taxpayers will end up paying for a government-run program. “This country is built on capitalism and choice, but a government-run program would end up being subsidized,” says Houldin. He is concerned that the current language in the bill would “force people to go to the government plan.”
 
The grassroots fly-in could not come at a better time with health care reform front and center in both the House and the Senate this week. 

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.

On the Hill
House, Senate HELP Committee Move on Health Care Reform
Attention now turns to Senate Finance Committee for proposal.

This week, while more than 1,000 agents and brokers boarded planes, trains and automobiles to converge in Washington for an unprecedented fly-in on health care reform, both the House and Senate had major reform developments.

Yesterday, the House Democrats unveiled their version of reform while the Senate Committee on Health, Education, Labor and Pensions (HELP) concluded its consideration (“mark-up”) of the “the Affordable Health Choices Act” introduced by Chairman Edward M. Kennedy (D-Mass.).

Senate: The HELP Committee mark-up included consideration of more than 100 amendments and is now pending before the full Senate. The biggest victory for the Big “I” in the mark-up was an amendment by Sen. Orrin Hatch (R-Utah) that negated an unfair provision in the bill regarding the "Navigators" grant program. The program would award grants to public and private entities to conduct public education, distribute information and assist with health insurance enrollment. The original Kennedy language specifically banned health insurance issuers, including agents, from participating in the grant program.

The Senate Finance Committee, the other committee with jurisdiction over health care in the Senate, is expected to introduce its health care reform bill as soon as next week. Following introduction, the Senate Finance Committee will begin marking-up its legislation, which will likely consume much of late July. After the Senate Finance Committee reports its bill out of committee, the Senate HELP and Finance bills will be merged and then considered by the full Senate.

House: The America’s Affordable Health Choices Act (H.R. 3200) was introduced by three House Committee Chairmen this week. Energy & Commerce Committee Chairman Henry Waxman (D-Calif.), Ways & Means Committee Chairman Charlie Rangel (D-N.Y.), and Education and Labor Committee Chairman George Miller (D-Calif.) introduced their “tri-committee” health reform bill and have scheduled mark-ups in their respective committees over the next week. H.R. 3200 contains several provisions that are of great concern to the Big “I”, including the creation of a government-run plan that would pay Medicare rates plus 5% and a tax “surcharge” that will affect many Big “I” members organized as subchapter S corporations. Additionally, employers who do not provide health insurance to their workers would generally have to pay a penalty of up to 8% of wages to the federal government.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.

 

P&C Trends
D&O Marketplace Remains Lucrative
New companies seeking protection after struggles in nonprofit, financial sectors.

Increased scrutiny of financial institutions’ and nonprofit associations’ business and investment practices has recently pushed directors & officers insurance into the limelight. However, with claims mounting and litigation becoming more common, agents and brokers are finding D&O continues to be a lucrative marketplace as more businesses seek coverage.

David Bradford, executive vice president at Advisen, currently sees a D&O marketplace divided between financial institutions and all other businesses. While D&O coverage for financial services has seen rates increase by double and in some cases triple digits, rates in the rest of the marketplace remain soft or are moderating only slightly.

“Interestingly, D&O is one of few lines of business where companies are investing resources and capital,” says Bradford. “Even though prices have been falling for the past five years, rates have held up comparatively better than in other lines of business.”

Bradford attributes the relative stability of D&O markets to skyrocketing rates between 2001 and 2003 as well as a “very good” loss experience generally. Bradford says that although publicly-traded companies outside the financial sector continue to be particularly lucrative to insurers, the nonprofit and privately traded sectors do not have the same market penetration as public companies and present more opportunities for new business.

Even the traditionally quiet, stable nonprofit sector has been shaken up in the past year following the Bernard Madoff investment scandal and reduced funding due to the recession. Janet Gordon Kennedy, a principal at Carnegie Financial, Inc. in Chicago, says employee practices liability is becoming an increasingly important part of D&O coverage for nonprofits as many organizations are being forced to reduce staff or make major changes.

“Nonprofits are dependent on boards and that network of people with influence who they have to protect,” says Gordon Kennedy. “(However), nonprofit organizations are a harder sell because every board member knows an insurance agent and it’s hard to take business away. Because rates are pretty stable, convincing them to get an alternate quote based on rate will be difficult.”

Gordon Kennedy believes the real opportunity to make a sale lies in the increasing number of privately traded, up-and-coming businesses that are seeking D&O coverage. Michael Ferraro, senior vice president and partner at Woodruff Sawyer & Company in San Francisco, agrees and says companies positioned for growth over time are especially lucrative D&O clients.

“Start-ups that haven’t had significant venture-backed financing before may not have had bought D&O before, but as money is raised and operations are expanded, they need increases (in coverage),” he says. “That’s the largest opportunity.”

Ferraro adds that D&O coverages have become much broader since the last hard market. They have grown to commonly include bankruptcy, debtor in possession, order of payment and fraud, as well as broader provisions for severability of application. Larger, public companies often seek coverage for business practices abroad, including the Foreign Corrupt Practices Act or FCPA. In addition, Ferraro sees a growing trend wherein large companies seek admitted coverages in countries where they frequently do business.

Because D&O coverages are so complex and there is no standard form as in the property-casualty sector, Ferraro advises agents to have a clear understanding of the complex litigation environment, what carriers look at when they issue policies and how the contract should be geared toward individual companies. He also says that increasingly, a company director’s needs are somewhat different from an individual officer’s, with the latter’s policy focused more around the company’s balance sheet and financial health. Therefore, agents and brokers need to work with the entire company board to formulate a policy that meets individual directors’ and officers’ needs as well as the larger needs of the company.

“The need to have D&O is heightened, especially for companies that are financially challenged,” says Ferraro. “If a corporation can no longer indemnify (its directors and officers), then their personal liability is truly at risk.”

Editor’s note: This article is third in a series exploring current issues in the commercial lines market. Click here to read the first article in the series and click here to read the second. 

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


P&C Trends
P-C Industry Capitalization Adequate Despite Losses
Agents see heightened concern among customers regarding carrier solvency.

Despite further net losses and declines in surplus in the first quarter of 2009, industry analysts agree that in general, the property-casualty sector is adequately capitalized to meet insureds’ needs and future challenges. However, agents continue to field questions from customers concerned about their carriers’ financial health.

In the first quarter of 2009, insurers withstood a $1.3 billion net loss after taxes, the worst in more than 20 years, according to a recent combined report from ISO, PCI and the Insurance Information Institute (III). The first quarter setback included a $2.3 billion net underwriting loss, as well as a combined ratio that worsened to 102.2% from 99.9% in the first three months of 2008. In addition, insurers’ net investment gains fell 69.9% to $3.7 billion, compared to $12.4 billion in the first quarter of 2008. Despite these dismal numbers, Michael Murray, assistant vice president for financial analysis at ISO, says the p-c sector’s continued conservative investment and risk management strategies will see it through the remainder of the recession and position it well for recovery.

“P-c insurers have continued quietly going about their business, paying claims and servicing policyholders,” says Murray. “The pricing cycle has not benefited profitability recently, (but) on another level, that’s an indication that the industry remains able to maintain risk.”

Murray adds that the industry’s current leverage ratio shows that the industry is operating at a very low level of leverage and demonstrates its overall financial health. At 0.98, the ratio of surplus relative to risk is only slightly greater than the all-time low of 0.84 and well below its high point of 2.75.

“As of the end of quarter one, we’re looking at a (leverage) number well below the historical average,” says Murray. “If industry reserves are inadequate, it will have ample surplus on hand.”

Terry Bichlmeier, president of Bichlmeier Insurance Services in Redondo Beach, Calif., says his customers are much more interested in carriers’ financial health than in the past. He has begun regularly providing customers with their insurers’ A.M. Best ratings, as well as the companies’ annual reports. 

“There has been additional interest in this area by clients and the financial community as we go to meet the hazard insurance requirements of lenders,” says Bichlmeier. “(These days), they tend to go through the requirements with a fine-toothed comb.”

Bichlmeier says the carriers themselves have given him the option of including their A.M. Best ratings with quotes, as well as plenty of ratings booklets and annual reports to build customers’ confidence. In addition, he finds that new customers are generally more educated about companies’ financial stability than in the past, as many conduct their own Internet research prior to requesting a quote. Bichlmeier believes the AIG crisis in particular suddenly fueled customer interest in carrier solvency.

Tom Cotton, president of Hugh Cotton Insurance in Orlando, Fla., says agencies in his state have to address carrier capitalization with customers more than ever before because of state budget problems and the insolvency of the state’s catastrophe fund. Cotton says many homeowners’ mortgage lenders require them to have an insurance carrier with an A.M. Best rating of A or better; however, this rating is hard to come by in Florida because carriers are required to partially fund the state catastrophe fund and also rely on the state’s reinsurance fund. State funds have become insolvent since the budget crisis and have adversely affected individual carriers’ ratings. 

As an alternative to the Best rating, Cotton offers his customers carriers rated favorably under the Demotech rating system, which is a bit less stringent that A.M. Best in determining its ratings. Cotton says he presents customers with literature on carrier ratings, but they often don’t understand the complex system and options available to them until an agent sits down and explains it to them.

“We provide ratings for various carriers right away, but it doesn’t mean anything to the customer,” says Cotton. “All they know is what they’ve heard (in the media). We tell them, ‘This is the best we have to offer, and here’s the price.’”

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


L&H Trends
Making the Most of Retirement Plans
Contributions to retirement plans are one of few available tax deductions for higher-income customers.

One of the most vexing issues of the current health care debate is how to pay for it.  While many proposals have been presented---from placing a "cap" on the value of health insurance an employee can receive income tax-free from an employer to levying an additional surtax on the wealthiest individuals’ incomes---it is fairly likely that by 2011, the total income tax burden on higher-income Americans will substantially increase. When the 2001 tax cuts enacted during the Bush presidency expire, the highest income bracket will revert to 39.6% in addition to any surtaxes that may emerge. For those working in states with high marginal income tax rates, such as California, Hawaii, New York, Oregon, it means high incomes will likely have a combined income tax rate in excess of 50%, which hearkens back to the early 1980s.
 
There is one substantial difference between today’s income tax rates and those of the 1980s: tax shelters. Before the 1986 tax reform, numerous tax deductions were available, ranging from a deduction for personal interest payments to outright tax shelters involving cattle breeding and feeding or oil and gas drilling, which high earners could tap into to reduce their taxable incomes. There were also many instances of abusive tax shelters involving investments that could not otherwise be justified on the basis of business merits. Many life insurance agents may recall utilizing a "minimum deposit" approach to selling and paying for whole life insurance policies, which involved the policyholder paying four of the first seven years of premium payments and then borrowing from the policy to make future policy premiums and deducting the interest payments. When the Reagan administration and Congress reduced marginal income taxes, it was done in concert with eliminating many of avenues for tax write-offs, and government receipts from taxes actually increased. As a result, there are currently not many tax deductions left to high-income people. Itemized deductions are also subject to the alternative minimum tax (AMT), which reduces the value of high itemized deductions such as payments on mortgage interest and property taxes.
 
One substantial tax deduction is left for business owners and employees: contributions to retirement plans. With higher marginal income and payroll taxes, there is no doubt that in the coming years there will be more interest in retirement plans as the after-tax cost decreases correspondingly with increases to retirement plans. Assuming that there are no dramatic changes to the rules for retirement plans, business owners will be conferring with their advisors to utilize retirement plans such as SEPs, profit sharing/401(k) plans and other variations to lower their tax bite. Defined benefit plans, which have greatly diminished in use, may also make a comeback, including 412i plans which typically use life insurance to provide guaranteed income to fund the plan. 

Independent insurance agents are well positioned to offer retirement services or to partner with experts to solve their clients' needs. With many retirement savings plans limping along following the stock market meltdown of the past year, there is already a renewed interested in saving for retirement. Agents should determine what services too offer and then develop a strategy for communicating their agencies' services to their clients. 

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