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T H U R S D A Y , N O V E M B E R 1 3 , 2 0 0 8 Big “I” National News
On the Hill
Impact of Financial Crisis on Insurance Industry Expands
U.S. Treasury Department grants some insurers access to rescue program.
The U.S. Department of the Treasury announced this week an updated plan to rescue the American International Group (AIG). The new plan increases the amount of federal taxpayer assistance to a total of approximately $150 billion, lengthens the term of the federal loan to the troubled company and reduces the interest AIG will pay.
The Treasury Department also recently announced that its Capital Purchase Program (CPP), which was authorized by the bipartisan Emergency Economic Stabilization Act (EESA), will be made available to certain insurers. In order to qualify, insurance company applicants must already be federally regulated through “bank holding companies, financial holding companies, insured depository institutions and savings and loan holding companies that engage solely or predominately in activities that are permissible for financial holding companies under relevant law.” CPP candidates must also be established and operating in the United States and not controlled by a foreign bank or company. While a number of life insurance companies have sought access to the program, most property-casualty insurers have declined to participate.
As Congress, President George W. Bush and President-elect Barack Obama address the current financial crisis in the coming months, it is likely that their efforts will continue to bring more attention to the insurance market. Additional taxpayer exposure to the insurance industry is sure to influence the debate over federal regulation. The Big “I” will continue to advocate on behalf of its members during this unprecedented time in the nation’s financial system.
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
P&C Trends
Commercial Lines Competition
Agents have an edge when it comes to niche products.
While independent agents are uniquely positioned to address small businesses’ insurance needs, large brokers are starting to compete by venturing into the agency market and selling commercial lines products. Agents’ opinions vary on what this trend means for competition, however, most believe the independent agency system will maintain its edge in the marketplace.
Marsh is the most recent company to announce its foray into the agency arena with the launch of the Marsh & McLennan Agency LLC. The agency is designed to meet the needs of small and emerging growth businesses in the U.S., according to Jack Butcher, president and CEO of the new agency.
“Customers enjoy Marsh Inc.’s content, but they want a more nimble buying experience,” Butcher says. “We’re establishing a product which is far more tailored to small organizations.”
The Marsh & McLennan Agency plans to employ several methods for selling its products, including one that hits close to home for independent agents. “One channel is a local market application, with people in the local markets directly serving customers,” he says. “Other channels will be built out of customer demand and convenience.”
Marsh & McLennan Agency plans to serve businesses generating less than $75 million in revenue but Gene Earick, an owner of Roby-Foster-Miller-Earick insurance agency in Mansfield, Ohio, does not believe the new agency will be major competition.
“I don’t think it will have any effect,” he says. “When businesses use Marsh or a specialty carrier, it’s because they’re a high-end business with a larger risk. I don’t see how (Marsh & McLennan Agency) will find a competitive niche in the small business market because every base is covered by independent agents.”
Bill Evans, profit center manager at the Pinellas division of Brown & Brown Insurance in Clearwater, Fla., sees a similar edge for agents.
“It’s about making the client aware of trends and availability and customizing their coverage during good and bad times,” he says.
Despite the tough economy, Evans’ agency has seen a rise in small business clients. He believes a personal touch and perseverance spell success in commercial lines.
“(Marsh & McLennan Agency) will have to provide personal service and relationships to their clients to be successful,” he says. “Trends come and go, but our independent agency system keeps trucking along. Competition makes us better at what we do.”
Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.
P&C Trends
Earnings Tea Leaves
An analysis of 18 insurers’ third-quarter reports and what the results mean for the industry.
As this year’s third quarter earnings reports are announced, never has there been more scrutiny from industry watchers and insurance buyers. With “red ink” driven by catastrophe and investments losses piling up, what do the millions and in some cases billions of dollars in losses mean?
To get a better sense, Insurance News & Views gathered a sample of third quarter earnings reports from well-known, publicly-traded insurers. Specifically, 18 insurers’ third quarter earnings reports were reviewed (see source list below). The sample includes well-known insurers often used by independent agents that collectively represent 24.5% of the property-casualty industry’s net written premium and 18.5% of its policyholder surplus/net worth. Total for income, catastrophe and investment losses (with and without AIG), are show in the table below.
*Source: Earnings reports and narrative of 18 publicly-traded insurer including: ACE Limited (NYSE: ACE), Arch Capital Group Ltd (NASDAQ: ACGL), American Financial Group, Inc. Ohio Com (NYSE: AFG), American International Group (NYSE: AIG), Chubb Corp (NYSE: CB), Cincinnati Financial (NASDAQ: CINF), CNA Financial (NYSE: CNA), Fairfax Financial Holdings Limited (NYSE: FFH) , Hartford Financial Services Group (NYSE: HIG), Markel Corp Holding Company (NYSE: MKL), Navigators Group (NASDAQ: NAVG), Onebeacon Insurance (NYSE: OB), Selective Insurance Group (NASDAQ: SIGI), State Auto Financial (NASDAQ: STFC), The Hanover Insurance Group, Inc. (NYSE: THG), Travelers Companies, Inc. (NYSE: TRV), Berkley W R Corp Company (NYSE: WRB), XL Capital Ltd Cl A (NYSE: XL).
The data in the table combined with data from A.M. Best on insurers’ premiums and policyholder surplus, several observations can be made on the impact of the p-c industry’s third quarter results.
Net Income/Loss and Surplus: Of the insurers reviewed, only eight of the 18 had losses in the third quarter, but the losses overwhelmed the gains resulting in a net income loss of about $28 billion. It’s a dramatic figure but if AIG is removed from the sample the figure falls to $3.7 billion. While negative income is always a cause for concern due to its impact on industry’s surplus and its ability to absorb shock losses, the losses are coming at a time of historically high industry rates of capitalization (“cushion”) with about $1.5 of surplus for every p-c premium dollar written. With an average capitalization ratio since is 1931 of $.83 of surplus to $1 of premium, and with 2007’s year-end p-c industry surplus of more than $650 billion, it will take more than $100 billion in year-end p-c industry negative net income (loss) to bring the industry to the historic p-c capitalization ratio of .83 to 1.0.
Catastrophes: The reported catastrophes of the 18 insurers are, not surprisingly, showing a year headed toward record levels. Every insurer reported significant losses and no one was spared. Projecting the losses across the entire p-c industry by using a ratio of the group’s net written premiums to the industry’s results in $14.7 billion in catastrophe losses. This matches with projections of total catastrophe losses for the p-c industry of $25 billion for the entire year and, perhaps, indicates totals may rise even higher with the hurricane season just barely over and three months still remaining in 2008.
Investment Losses: The biggest surprises in third quarter results is coming from insurers not only recognizing losses in balance sheet items from both fixed income and equities, but also in changes in fair values of derivative financial instruments. Losses reported in the changes in values of these items were $23.8 billion for the 18 insurers. Excluding AIG from the sample and projecting the $5.2 billion loss across the industry is a much more speculative exercise as balance sheet losses of the 18 insurers are often attributable to investments stemming from non p-c operations. However, with that caveat, if done the quarterly losses would be about negative $31 billion in investment-related losses for the third quarter.
Clearly the last quarter of 2008 will prove to be one worth watching as insurers wrestle with catastrophes and the balance sheet risks of previously thought to be safe investments. The good news is this comes at time of high p-c surplus.
Paul Buse (paul.buse@iiaba.net) is president of Big I AdvantageSM and a licensed p-c agent.
L&H Trends
Counting Down to 2009
It’s time for agents to get back to the selling basics.
The elections are over. Now there is less than two months until the end of the year and independent agents who sell life insurance and other financial products have a lot of work to do. The difficult economic times are making many agents uncomfortable generating sales to meet their 2008 production goals. However, agents need to remind themselves that the first rule of selling is solving the customers’ needs.
The good news is agents have a lot of tools to help customers. For example, for someone who needs to provide replacement income in the event of their premature death – yet has budgetary constraints – offering inexpensive term life insurance provides the opportunity (as a rider) to convert the policy into a permanent policy without evidence of insurability. This enables the insured to minimize their cash outlay, yet have the comfort of knowing that they can obtain permanent insurance based on their obtained age once they convert the policy. Also, selecting a disability rider can safeguard against the possibility of disability preventing the insured from making premium payments. The cost of a disability feature (waiver of premium) is very reasonable.
For business owners concerned about heirs/surviving partners being unable to pay estate taxes (beginning in 2011) without putting strains on the business or selling it at a discount, now is the time to purchase permanent insurance and to establish an irrevocable life insurance trust. Using life insurance is a much more effective way to meet estate taxes and shift the risk of paying estate taxes to the insurance company.
Keeping in mind how life insurance can solve these common financial planning needs, it’s time for agents to boost their efforts in discussing these types of situations with customers. Don’t let the waning weeks of the year slip by.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
Tech Update
Amplifying Agency Productivity and Profitability
Balancing growth and operational improvement starts with best practices.
A steady stream of sustained growth and increasing sales should certainly be a part of every agency’s plan. But the best agencies—those achieving sustained growth today—also implement best practices in their operations to maximize productivity,. Providing a balance between growth and continued process improvement guarantees the agency minimizes the cost associated with increasing revenues and frees up employees to focus on more productive, client-oriented activities.
The Best Practices Guide to Agency Business Processes and Information Management provides agencies with a resource to improve agency operations. (Click here to download the guide.) This tool was developed by IIABA’s Agents Council for Technology and Council for Best Practices and the Nettles Consulting Network.
Today most agencies have the tools and technology needed to operate at peak efficiency. This includes agency/benefits management systems, document management systems and connectivity to the carriers for real-time transaction processing. However, an agency is only as good as its implementations.
The Best Practices Guide provides a self-assessment questionnaire that anyone from a manager to customer service representatives can take. The results will vary desk-to-desk, but typically the manager has a much higher expectation as to what has been implemented than what actually has.
Once you assess your current level of technology and workflow implementation and obtain your scores, the guide places you into a specific operational environment. The four environments—manually automated, process, service and client—let you know how the energy in the office is being spent. In the manually automated and process environments, all the energy is being spent on internal tasks. The agency can most likely use the technology it already has to streamline, workflows, processes and procedures to move it into the service environment where the focus is on serving the customer, not just processing transactions.
Most agencies will have staff scattered among three environments—manually automated, process and service. This useful information can help managers put staff on the same page in order to operate at peak efficiency.
For those agencies below the curve, the guide provides some practical, back to the basics tools to quickly get staff up to speed. Included are a feature implementation checklist, training checklist, database audit guidelines and monitoring and managing backlog suggestions.
Editor’s note: This is part one in a two-part series highlighting the Best Practices Guide to Agency Business Processes and Information Management. Next week’s edition of Insurance News & Views will include more on the guide and how it can help your agency maximize its operations and ensure greater productivity.
Laura Nettles (lnettles@nettlesconsulting.com) is president of Nettles Consulting Network which specializes in agency workflows and organization.
This article was written for the Agents Council for Technology (ACT), part of the Independent Insurance Agents & Brokers of America, www.independentagent.com/act. This article reflects the views of the author and should not be construed as an official statement by ACT.
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