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 Big “I” National News

P&C Trends
Consumers Unaware of Holiday Liabilities
New survey highlights misperception of homeowner responsibility for alcohol, other risks.

As millions of Americans host and attend holiday parties across the street or across the country, many are unaware of the risks they may be taking, according to a new national survey on homeowner’s insurance issues by Trusted Choice^® and the Independent Insurance Agents & Brokers of America. Do your insureds know their risk?

The Trusted Choice^® survey found that about one-third of homeowners did not think or did not know if they could be held responsible in the event of an alcohol-related accident. In fact, in many states, individuals hosting holiday parties can be held liable. Many courts have found hosts liable for the damages their party guests cause as a result of consuming alcohol at their social gatherings and then driving motor vehicles. Many states have also enacted statutes that can be interpreted as mandating non-commercial social host liability. In these situations, if a guest or third party is injured in an accident that is related to alcohol consumption and the drinking can be linked to you, you could be held responsible for the payment of medical bills, vehicle repair costs, lost time from work and — in the worst case — claims for wrongful death resulting in huge monetary settlements.

The Trusted Choice^® survey found that more than 46% of homeowners thought they weren’t liable in the event that a guest became seriously ill from catered food consumed at the host’s home, and more than 22% didn’t think they could be held responsible if a guest was injured on the sidewalk in front of their property. One-third of homeowners either didn’t think they could be held responsible or admitted they didn’t know if they destroyed another home with a careless act.   The bottom line is that homeowners could, in fact, be held responsible in any of these scenarios or accidental incidents.

For risk management tips to share with your insureds on social host liability and other holiday-related topics, click here.

The survey was conducted for Trusted Choice^® via telephone by International Communications Research (ICR), an independent research company in Media, Pa. Interviews of a nationally representative sample of 809 homeowners were conducted in November 2008.

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







L&H Trends
SEC Votes on Rule 151A
Financial crisis, licensing reform among the key items discussed.

The nation’sYesterday’s vote could have significant impact on agents who sell indexed annuities and insurance regulation debate.
Against a backdrop of a worsening economy and the alleged “Ponzi” scheme perpetrated by Bernard Madoff, a significant meeting took place yesterday in Washington, D.C.  The U.S. Securities and Exchange Commissioners voted 4-1 yesterday in support of Ruling 151A, which will go into effect for Equity Index Annuities issued after Jan. 12, 2011.  This could ultimately create a dilemma for independent insurance agents who sell indexed annuities and don’t want to become securities registered.

Since last summer, the SEC has said it may regulate indexed annuities as a security. This has generated significant controversy and concern among independent insurance agents who offer these products and are not or do not wish to be regulated as a registered representative. Becoming a registered rep involves a myriad of considerations—the least of which involve licensing and compliance.
The SEC knew this action would prompt passionate feedback from life insurance and annuity producers, and allowed for an extended comment period from the industry. If the comments received were a barometer, agents were overwhelmingly opposed to the proposed SEC action.  "We are extremely disappointed by today's SEC decision," said NAIC Vice President and Iowa Insurance Commissioner Susan Voss. "State insurance commissioners have taken active steps to protect consumers of equity-indexed annuities — and will continue to do so."

The only dissenting commissioner was Troy Paredes, whose remarks in the Federal Register said he felt the nature of indexed annuities did fall within the scope of the exemption to the Securities Act of 1933.  He stated, "In our effort to protect investors, we cannot extend our reach past the statutory stopping point. Section 3(a)(8) of the Securities Act of 1933 ('33 Act) provides a list of securities that are exempt from the '33 Act and thus, by design of the statute, fall beyond the commission's reach. The Section 3(a)(8) exemption includes, in relevant part, ‘[a]ny insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner . . . of any state or territory of the United States or the District of Columbia.’ I am not persuaded that Rule 151A represents merely an attempt to provide clarification to the scope of exempted securities falling within Section 3(a)(8). Instead, by defining indexed annuities in the manner done in Rule 151A, I believe the SEC will be entering into a realm that Congress prohibited us from entering. Therefore, I cannot vote in favor of the rule and respectfully dissent."

His other comments are also relevant to independent agents who believe that state regulation of insurance is best for consumers. Commissioner Paredes stated, "First, a range of state insurance laws govern indexed annuities. I am disappointed that the rule and adopting release make an implicit judgment that state insurance regulators are inadequate to regulate these products. Such a judgment is beyond our mandate or our expertise. In any event, Section 3(a)(8) does not call upon the commission to determine whether state insurance regulators are up to the task; rather, the section exempts annuity contracts subject to state insurance regulation.

Second, as a result of Rule 151A, insurers will have to bear various costs and burdens, which, importantly, could disproportionately impact small businesses. Some even have predicted that companies may be forced out of business if Rule 151A is adopted. Such an outcome causes me concern, especially during these difficult economic times. Even when the economy is not strained, such an outcome is disconcerting because it can lead to less competition, ultimately to the detriment of consumers.

Third, the commission received several thousand comment letters since Rule 151A was proposed in June 2008. Consistent with comments we have received, I believe that there are more effective and appropriate ways to address the concerns underlying this rulemaking. One possible alternative to Rule 151A would be amending Rule 151 to establish a more precise safe harbor in light of all the relevant facts and circumstances attendant to indexed annuities and how they are marketed. A more precise safe harbor would provide better clarity and certainty in this area — regulatory goals the commission has identified — and would preserve the ability of insurers to find an exemption outside the safe harbor by relying directly on Section 3(a)(8) and the cases interpreting it. I believe further exploration of alternative approaches is warranted, as is continued engagement with interested parties, including state regulators."

The Big “I” will continue to monitor the feedback and actions taken by the life insurance industry and state regulators, which might include a court challenge. To read the letter the Big “I” government affairs team sent to the SEC regarding Rule 151A, click here.

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







P&C Trends
Agency Model Delivers Happy Customers
Routine interaction and convenience have the biggest impact on customer satisfaction.

Independent agencies edge out call centers and the Internet when it comes to satisfying insurance customers, according to the J.D. Power & Associates 2008 Insurance Customer Contact Study℠.

The inaugural study asked 11,828 home and auto insurance customers to rate their last insurance experience based on key service practices. Agencies ranked highest in overall satisfaction, at 884 points on a 1000-point scale, while the call center model scored 824 points.

The study found that routine service interaction ranks most important when it comes to keeping customers satisfied, and independent agencies benefit most from this interaction, according to Jeremy Bowler, senior director of the insurance practice at J.D. Power & Associates.

“The relationship between customer and agent drives business,” says Bowler. “Customers think of the agent as their primary contact, a person they have a working relationship with.”

J.D. Power also found that customers who resolve their insurance issue through a single channel are much more satisfied than those who make multiple contacts. Brian Hannigan, president of Hannigan Insurance Agency in Clinton Township, Mich., responded to this trend by extending his hours to meet the needs of his customers.

“If you don’t pick up the phone when clients are ready to talk, they get frustrated and you risk losing the account,” Hannigan says. “Extended hours have helped our retention and added new business.”

While the agency channel scored highest overall in the study, its performance was less consistent from category to category than call centers or the Web.  Bowler attributes this variation to the diversity among agencies.

“Call center and Web models are just easier to monitor,” he says. “The silver lining for agencies, though, is in the heightened level of personal touch. Whereas a customer who has a lousy call center experience is quickly dissatisfied, the customer is much more forgiving with the agency.”

One agency has found a way to combine the consistency and speed of a call center with the personal touch of an agent. Kim Brubaker, vice president and chief operating officer at Quorum Insurance, LLC in Tampa, Fla., says her agency recently introduced self-service kiosks to enable customers to pick up a phone and talk to an agent face-to-face via webcam from a remote location.

“We want to have technology available so customers who would like a face-to-face relationship can have that,” says Brubaker. “It’s important to be able to put a face with a name.”

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


P&C Trends
P-E Ratios and Agency Prices Clarified
The relationship between ratios and prices reveals some interesting numbers.

Last week’s Insurance News & Views article on the history of stock price multiples generated an inquiry on the statement “as agents we all have bought stocks, in recent years, at equivalent prices we would never pay for an insurance agency.”  The relationship between  p-e ratios and agency prices may be surprising.

With two mathematical assumptions,, a p-e ratio can be directly compared to the most traditional measure of insurance agency value, the value-to-commissions multiple. If  an agency were publicly traded and selling for a  p-e ratio regularly seen in the stock market, independent agency owners everywhere would be very pleased. For example, as noted last week, the average  p-e ratio for the broader stock market since 1936 is 15.75. On average, this is equivalent of paying 2.0 times commission for an insurance agency’s book of business. This ratio is not unheard of, but is generally quite rare.

To dig deeper, if one assumes a 35% tax rate and an agency pre-tax return on revenues (commission) of 20%, the mathematics becomes:

P-E Ratio x (1-Tax Rate) x (Return on Revenues) = Equivalent Value-to-Commission to Value Multiple. 

The average 15.75 x .65 x 20% = 2.0.

If insurance agencies traded at the equivalent of the S&P 500 p-e ratios, very high prices would regularly be paid for agencies. In 2001 and 2002,  p-e ratios were at about 35. If an agency traded for the equivalent price as publicly traded stocks, one would pay the equivalent of $3 million cash for an agency with $675,000 in commissions or about 60% of the approximate $5 million premium volume of an agency with 13.5% average commissions. 



While value-to-commission ratios were used as a comparison metric for this article, readers should not approach the valuation of an agency using this approach. While this model is convenient to use for comparison, valuation of an agency should take into account actual returns on commissions, projected growth in profits and balance sheet and intangibles that a simple ratio does not consider.

For excellent resources on agency valuation techniques, members can visit www.independentagent.com/vu and search for “Agency Valuation.”

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


Tech Update
Protect Your Clients with Secure E-mail Using TLS
TLS option offers efficiency, security to users.

The nation’sE-mail is now entrenched within business workflows and transacts a significant amount of business between agents and carriers. Messages are often critical to the business relationship and contain sensitive information that could be harmful to both parties if lost or stolen.

Real Time, rather than e-mail, is the best option for moving sensitive client data between the agent and carrier. Real Time is highly efficient and transports the data directly between the agency and carrier systems in an encrypted form.

However, when e-mail must be used to send communications with sensitive client information, it is important for agents and carriers to use secure e-mail. If an unsecured e-mail is intercepted, the agency would face a security breach creating a significant risk to reputation and potential E&O exposure.

Traditional approaches to protecting e-mail have included using tools to encrypt the document attachments or services such as ZIX or Tumbleweed. Encryption of the document attachments suffers from difficulty using the tools and remembering decryption passwords. Services such as ZIX or Tumbleweed insert themselves into the actual transmission process, changing where the e-mail is sent and how the recipient reads it.

There is no shortage of e-mail protection products. While there are market leaders, customers looking for the best solution don’t always follow this metric. As a result, Company A often cannot share encrypted e-mail with Company B since each has implemented different proprietary solutions. This lack of convergence is troubling and can be expensive, since multiple products and services must be implemented by one company to protect its e-mail with other companies.

In a browser analogy, imagine using a different browser for each of the Web sites you visit. The Web site owner would sell you the site browser and instruct you on how to use it whenever you visit. In this scenario you would have to maintain a list of the browsers to use with each site you visit.
 
Now consider having to go to each carrier’s Web site to retrieve secure e-mail, learning the different workflows and functionality of each carrier’s e-mail application and remembering a whole new layer of passwords for each carrier’s e-mail.
 
Such is the world of standard designs, mechanisms and solutions. The benefits of standards are  everywhere. The width of road surfaces, train tracks and the vehicles that travel on them are good examples of where standards are crucial. Similarly, one company’s e-mail safeguard may not be able to communicate with another’s unless a solution such as TLS is used.

TLS (Transport Layer Security) provides an IETF-defined (Internet Engineering Task Force) industry standard protocol to protect e-mails. It is built into most e-mail gateways used today (MS Exchange/IBM Lotus Notes).  TLS requires no changes to the end user (sender or receiver)—they simply benefit from the encryption it provides during transmission.

TLS operates independently of the e-mail user. When an e-mail is sent from one domain (agent or carrier) to another (agent or carrier), the servers controlling the transmission negotiate to determine if TLS is enabled. If it is, then the servers transmit the e-mail within an impervious TLS tunnel that protects all message content including attachments.
 
Carrier and agency e-mail administrators can choose to set the TLS option to use TLS whenever sender and receiver are capable (opportunistic mode), send only if both parties are TLS capable (required mode) and send without protection if TLS is not supported by both.
 
It is important that the agency use an IT professional to set up TLS on its e-mail servers. An IT professional can also tell which carriers are enabled for TLS.  It is also necessary for the agency’s third-party spam/anti-virus service to be configured to send and receive TLS encrypted e-mail. Many third-party hosted e-mail applications have not incorporated TLS, but agents should ask their vendors.
 
TLS requires no work on the part of the end user, yet protects e-mail content. It uses an industry standard protocol that is freely available and implemented on most e-mail platforms. For the agency, TLS is more cost-effective than proprietary vendor e-mail solutions and is already included on most e-mail servers. The added cost for the agent is the fee for the agency’s IT professional to properly enable its e-mail server for TLS and the cost of an e-mail certificate. For individual agency staff, TLS does not require set-up, training or having to remember a password to retrieve every e-mail.

Given today’s focus on security, all e-mail gateways and servers should be configured to use TLS if it is available. Encourage your carriers to provide the TLS option for secure e-mail, since TLS is preferable to  using each carrier’s unique proprietary secure e-mail system.

For more information on TLS, visit www.independentagent.com/act and click on the “Agency Security/Customer Privacy” link.

Jim Rogers (Jim.Rogers2@thehartford.com) is director at The Hartford and is responsible for Distribution Technology Strategy. Rogers also chairs the ACT TLS E-mail Encryption Work Group and produced this article for ACT (www.independentagent.com/act). 

This article reflects the views of the author and should not be construed as an official statement by ACT.