T H U R S D A Y ,  J U L Y   2 3 ,  2 0 0 9 

 Big “I” National News

P&C Trends
Observers Predict Turnaround for Insurance Industry, Economy
Agents are beginning to see signs of improvement.

Although many parts of the country continue to suffer from the effects of high unemployment, a struggling housing market and other economic woes, some agents are starting to see small signs of recovery.

The U.S. economy and the insurance industry are heading for a slow but steady turnaround, according to a new report from Conning Research & Consulting. And while Conning anticipates continued negative premium growth for 2009, it also anticipates 1.8% real GDP growth and firming prices for personal and commercial lines in 2010.

In 2011, Conning predicts further GDP growth of 3% and continued price firming that will temper the effects of inflation on loss severity. Clint Harris, vice president of insurance research at Conning, says insurers are reaching a point where price increases are necessary to maintain operations and predicts the clear beginning of a pricing turnaround in late 2009 for personal lines and in early 2010 for commercial lines.

“The question is, how long can you tread water?” says Harris. “The longer (the delay) continues, the more pressure there will be on insurers to get rate adequacy. The difficulty is that there has been a deflationary impact on some loss exposures, (such as) the cost of construction.”

Conning predicts the homeowners market will be among the slowest to improve, with both the economy and accumulated inventory holding down home prices and limiting exposure growth. While the sector’s growth will be slow but positive in 2009, it is projected to pick up in 2010 and 2011. Commercial multi-peril will also experience further premium decreases in 2009 before growing more than 5% in 2010 and 8% in 2011. Small business exposures are also expected to increase as the economy eases out of recession in 2010, according to Conning.

Meanwhile, some agents are already seeing indications of improvement in the construction sector, in some cases due to the impact of government stimulus money. John Harbottle, vice president of The Rowley Agency in Concord, N.H., says his agency and the contractors it insures have been able to benefit from projects funded by the stimulus package such as road paving and energy efficient home upgrades.

“Most (contractors) that have gone to the energy efficient starter home market are doing well due to the first-time home buyer initiatives offered by the (government),” says Harbottle.

Larry Joyner continues to hear that stimulus money is on its way to his clients, but nothing has been confirmed. However, Joyner, president of CWS Insurance Agency in Spartanburg, S.C., does expect to see some funds flowing in for new construction projects in the fourth quarter.

“We have seen a few projects that are looking a little more promising, but contractors tell us that competition is fierce when work is available,” Joyner says. “One mechanical contractor did tell us that he’s re-hired everyone he laid off a few months ago.”

Harris says the stimulus package may have also contributed to the easing of tight credit markets in the last few months, which brought with it a resurgence of investments in catastrophe bonds. Although the flow of capital is a positive sign for the industry, Harris adds that the downside to the investment surge is the potential for less premium price firming for catastrophe exposures than predicted in January.

Rich Kretzmer, a broker at Premier Agency, Inc. DBA Placer Insurance DBA Cal-Pro Insurance in Roseville, Calif., has yet to see any signs of easing credit in his area and says many of his insureds, who are primarily small, artisan contractors, are having trouble obtaining bonds. The soft market for contractors’ liability coverage is not easing either, although Kretzmer senses a desire to raise rates among underwriters.

“It’s still a very soft market for a lot of contractors who are paying under $1,000 for liability premiums,” says Kretzmer. “There are still (close to) 10 markets that will provide quotes at $1,000 or less.”

Kretzmer’s observations are on par with Conning’s outlook for general liability premiums, which are expected to contract 1.1% in 2009 before growing by a slight 2.5% in 2010 and 5% in 2011. However, the sector’s combined ratio is expected to increase in the next few years due to a more plaintiff-friendly environment and fewer reserve releases. Until the market turns around, Kretzmer plans to focus on placing his current insureds in the best possible markets to meet their needs.

“Our goal is to maintain clients we do have,” says Kretzmer. “We have to have great access to the best markets and place them well, especially for the next couple of years as the soft market continues.”

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



P&C Trends
Obama Administration Regulatory Plan Addresses Intermediary Compensation
Reward for product performance to play a critical role in restructuring mortgage origination.

Independent agents won a tremendous victory when President Barack Obama’s administration decided to exclude optional federal regulation of insurance from its financial services regulatory reform proposal. But there was another, perhaps overlooked component to the overhaul plan---the Obama administration recognized the importance of not just up-front sales and underwriting compensation or commissions, but also the need to base financial incentives on the performance of the financial product sold.

Specifically, the Obama administration’s plan for regulatory reform calls for intermediaries selling mortgages to retain an economic interest in the performance of the financial product. The president specifically highlighted this facet of the plan in recent remarks.

“And we will require the originator of a loan to retain an economic interest in that loan, so that the lender---and not just the holder of a security, for example---has an interest in ensuring that a loan is actually paid back,” Obama said. 

In 2004 when then New York Attorney General Eliot Spitzer sued Marsh & McLennan, the Big “I” advocated that insurance companies should be able to structure agency compensation as it had been for many decades. That is, the risk-taking insurance company should have the option to provide incentives for agents to not only find prospects and sell but also to manage the risk after the sale. In essence, abuse by a few should not stop a legitimate practice for all agencies. Contingent compensation provides incentives and rewards agents for effectively aiding insureds in loss control and risk management. It also provides incentives to engage in “front-line” underwriting. (To read an Insurance News & Views article from 2004, click here).

Based on industry data, it appears the fallout from the Spitzer efforts in 2004 have affected the entire industry. The graph below shows that the strong correlation between industry loss ratios and contingency compensation present before 2004 has been lost.Contingent compensation is down dramatically, rather than stable to increasing payments as expected.  It will be interesting to see the 2008 contingent compensation figures when they become available in the next several months. We know industry loss ratios increased by about 10 percentage points. The question is how much further will contingency commissions fall?



Editor’s note: In coming weeks, IN&V will cover developments in agent compensation as several states are debating agent/broker disclosure of contingent and other compensation. Also, watch IN&V this fall for an update on 2008 contingent commission figures. 

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


 

On the Hill
Big “I” Grassroots Campaign Targets House Blue Dog and Moderate Democrats
Agents oppose House Democrat Tri-Committee Health Care Reform bill.

The Big “I” has launched a grassroots phone campaign targeting 60 Democrats in the U.S. House of Representatives as part of its continuing efforts to send a strong message to Congress opposing a government-run health care plan, and highlighting the importance of preserving the private delivery of health insurance. Initial reports indicate thousands of independent insurance agents have already heeded the call to action and are flooding congressional offices with phone calls.

Most of the targeted representatives serve on the Energy and Commerce, Ways and Means or Education and Labor committees. The majority are also members of the Blue Dog Coalition, an organization of Democrats known for its fiscally conservative views. Last week, House Democratic leaders introduced a bill designed to move through the three committees simultaneously. The House Ways and Means and the Education and Labor Committees each reported the bill out of their respective committees last week, while the Energy and Commerce Committee’s debate on the bill has continued into this week.

Although the Big “I” supports efforts to enact substantive private market reform to provide all Americans with access to affordable health care and to lower health insurance costs, the House Democrat Tri-Committee Health Care Reform bill is not the right solution.

The legislation in question includes a government-run health insurance plan that would unfairly compete with the private insurance marketplace, limit consumer choice and increase the taxpayer burden. To finance the government-run health insurance plan, the bill would impose 5.4% surtax on small businesses, which would force thousands of small business to cut jobs or close their doors. The bill also includes an employer mandate to offer health insurance that would shrink small business output and force small businesses to cut jobs. The Big “I” believes a tax increase coupled with such a mandate would put many small businesses in the undesirable position of deciding between job cuts or shutting their doors.

Additionally, the nonpartisan Congressional Budget Office estimated last week that the bill would increase the nation’s already ballooning deficit by $240 billion over the next 10 years.

This week’s grassroots initiative is timely given that the House is tentatively scheduled to vote on its health care reform bill next week. As the health care reform debate continues over the next few months, the Big “I” government affairs team will be calling on independent agents and brokers to participate in Big “I” grassroots initiatives. Please be on the lookout for Big “I” grassroots action alerts.

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


Tech Trends
Agency E&O and Social Media: Getting Started
Agents should understand sites’ user agreements before registering.

Whether used for business contacts, maintaining contact with friends and family or to reconnect with former acquaintances, the use of social networking sites is rapidly increasing. According to one Internet research firm, social networking users outnumbered e-mail users around the world for the first time in 2008.

There has been a lot of discussion on how to best harness the power of social networking to benefit insurance agencies. The Big “I” Agents Council for Technology (ACT) and other organizations have written extensively on the power of social media to enhance agency online marketing and to generate “virtual” referrals. However, it’s equally important for agencies to understand the errors & omissions risks of these opportunities, and to take steps to mitigate those risks.
 
Most social networking sites offer the ability to create a homepage following a template provided by the site. Depending on the site being accessed, the profile template may be limited to key information along with an uploaded photo, or it can be as robust as a site containing multiple photos, videos and links to other sections of the site. Users typically invite others to join their community and the invitee is free to accept or decline. Most sites also offer blogs, chat rooms, forums and search capabilities to help locate other users based on your chosen search filters.
 
Rules of the Site
Posted privacy statements and user agreements are standard on social networking sites and most also include a list of “do's and don'ts” to follow when using the site. Although the statements contain lengthy legal terminology, users should fully read a site's user agreements and privacy statements before agreeing to the terms. User agreements tend to be very broad in favor of the site owner, commonly allowing the site to use all content posted by users and retaining the right to remove, discard or withhold user-posted information at any time. User agreements usually state that the site assumes no responsibility for monitoring disputes between users. The agreements also contain hold harmless/indemnification agreements in favor of the site for damages suffered by the site as a result of content posted by a user, or as a result of any actions by the user while accessing the site.  
 
Finally, before hitting the “submit” button, agents should consider what type of E&O exposures their agency may face by using the site.

Overview of E&O Exposures
The E&O exposures for social networking sites can range from advertising, contractual liability and defamation, to offering erroneous recommendations and may even extend to antitrust issues. These are not new exposures for agencies, but the nature of social networking sites does impact E&O exposures in several ways. Information entered on social networking sites can achieve instantaneous worldwide distribution in a matter of seconds. An electronic record is also created which can survive indefinitely. In addition, discussions taking place on these sites tend to be more casual and fasterthan even e-mail communication, making it easier for a statement to be taken out of context.

This article is the first in a series exploring E&O exposures for agencies using social networking sites. Next week’s article will examine specific exposures in depth.

Sabrena Sally (sabrena_sally@swissre.com) is senior vice president of Westport Insurance Corporation, a Swiss Re company, who manages the Big “I” Agency Professional Liability Program.


Forms & Substance
Non-Compete and Non-Solicitation Agreements: What Agents Need to Know
Contracts currently in place may be unenforceable.

Every agency should have a contract with every producer, and every contract should include a clause that governs the solicitation of accounts if the producer leaves the agency. Unfortunately, too many agencies either don't have such contract provisions or the ones in place are legally unenforceable. Often, the terms "non-compete," "non-solicitation" and "non-piracy" are used interchangeably. In some ways, it's a matter of semantics, but as drafted, contracts can fall into one of these categories and courts have viewed their enforceability differently.

A non-compete is just that. One cannot be in the same business in the territory designated by the agreement for the period of time stipulated. In other words, if an agent is selling insurance in Bowling Green, Ohio and has a non-compete for three years following termination of employment, he cannot sell insurance in Bowling Green for three years and is more or less relegated to finding another line of work.

A non-piracy agreement is an agreement not to "steal" accounts under any circumstances for a prescribed period of time. Using the same Bowling Green scenario, if termination of employment occurs, the agent can go to another agency and continue selling insurance---just not to clients, and sometimes prospects, of his former employer.

Rarely is a true non-compete agreement enforceable these days. Agents should check court cases in their states to see what precedence is being followed. Most states won't enforce a non-compete because it can deprive a person of his or her livelihood. A non-compete is sometimes enforceable, however, when it involves the sale of a business. It is a good idea to check with a good agency management consultant when drafting such agreements.

Some agencies may be aware that non-competes are unenforceable in some jurisdictions but have their staff members sign them anyway. The Wall Street Journal reported on one such non-insurance case where an employee sued his former employer, alleging that he was fired because he refused to sign a non-compete agreement. The employer argued that the company couldn't be held liable because, under the state’s "unfair business practices" law, the agreement would be unenforceable anyway. The state court of appeals didn't buy that argument.

According to an article in The Industry Standard, courts are increasingly reluctant to enforce non-compete agreements, even where they are legal. Citing SmartAgreements.com, the article indicates that courts focus on three aspects of a non-compete agreement: Does the employer have a legitimate need for the covenant; Are any geographical restrictions realistic and reasonable; and is the duration reasonable? In addition, courts are more likely to find a non-compete agreement unenforceable if it is issued after a person's employment begins.

To read the entire article, including a sample agreement download, click here.

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