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                                                Big “I” Association News

P-C Trends
Outlook for Small Business Job Growth Remains Uncertain
Independent agents approach hiring with caution.

Many American small business owners are not optimistic about the prospect of job growth in 2010 despite very slight improvements in January hiring, according to several recent surveys. Industry analysts are keeping a close eye on hiring data, as many believe the small business economy has reached a crucial tipping point.

“In January, small businesses were hiring and giving people more hours, but at the same time you have a lot of small business owners sitting there nervous about what will happen with the economy and facing uncertainty about health care, the government and taxes,” says Michael Alter, president of SurePayroll, which publishes a monthly small business scorecard.

Alter sees a dichotomy between small business owners’ lack of optimism about the future of the economy and the small improvements in hiring and payroll numbers. January’s small business scorecard indicates that hiring increased an average of 0.8% and the average small business paycheck increased slightly at 0.1%. However, surveyed business owners' general optimism about the state of the economy fell from 70% to 50% between December 2009 and January. According to Alter, optimism is often an indicator of future small business growth and success.

“Will it be the mind or the technical data that wins out?” Alter asks. “Pessimism could cause the uptick to go away and become negative.”

While David Brush of the Apple Valley Agency in Warwick, R.I., doesn’t plan to hire in the near future, he does see light at the end of the tunnel for independent agents. He has seen many businesses struggling in his area and his agency has experienced some challenges in the past few years, but Brush believes the independent agency system is fundamentally insulated from the brunt of the downturn because customers can’t give up insurance as easily as other goods and services. Because of this optimism, he recently opened a second office branch to “be well positioned” when things turn around. In addition, Brush plans to maximize existing tools and workflows before bringing on new staff.

“I will try to get more out of the technology I have before I hire,” says Brush. “I also wouldn’t hire to have someone grow into the position – I would wait until I really needed to fill it.”

Brush’s caution surrounding hiring aligns with the most recent Small Business Economic Trends report from the National Federation of Independent Business (NFIB). The survey found an overall decline in hiring: while 9% of survey respondents hired an average of three workers per firm, another 19% reduced hiring by an average of 3.9 workers. A net negative one percent of business owners plan to create new jobs, which shows a slight improvement over previous months but indicates continued stalled growth. NFIB Policy Analyst Holly Wade says hiring tends to be the last small business component to improve.

“Small business owners want to fill their capacity with the current workforce before taking on more employees,” she says. “Historically, the first things we see improve are capital expenditures and sales. The hiring and employee pieces probably won’t move until after we see some big gains in capital expenditures.”

Independent agencies are unique in that they must often bring on new staff to drive sales instead of waiting for a revenue increase to hire. Rick Aniello, whose Las Vegas-based Aniello Insurance Agency once sold 90% commercial lines, is expanding into the life-health arena in response to a more than 50% decline in the area’s construction market. Aniello plans to bring on a life-health producer and a property-casualty producer in the coming months as part of his diversification plan, but he’s approaching the new hires with caution.

“We’re a lot more cautious about who we hire because we really don’t have the opportunity to make any mistakes,” he says. “Before, we could give someone a shot if we thought they might make it, but now we have to take our time to make sure we’re positive someone will work out.”

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

In the States
Big Insurance Brokers Freed from Spitzer-Era Settlements
Announcement follows release of controversial disclosure regulation in New York. 

Most independent insurance agents and brokers who reside or sell policies in New York state reacted with dismay last week when the state’s insurance department released the final version of its highly controversial producer disclosure regulation. However, for the world’s three largest insurance brokers – Marsh, Aon, and Willis – the unveiling of the onerous and unprecedented proposal was cause for celebration. 

The reason for the jubilation in the halls of these mega-brokers is that they escaped the regulatory settlements they previously entered into with then-New York Attorney General Eliot Spitzer. In 2005, these global insurance providers resolved allegations of bid-rigging and other improper behavior by agreeing to settlements that prohibited them from receiving or paying nearly every meaningful form of incentive compensation and required other changes to business practices. The lengthy and comprehensive settlements negotiated with Spitzer have now been replaced by simple two-page agreements freeing Marsh, Aon and Willis from most of the requirements imposed five years ago and enabling them to once again receive contingent commissions. 

The new and less stringent agreements merely require the mega-brokers to comply with the terms of Regulation No. 194, the new disclosure regulation produced by the New York Insurance Department, in every state in which they operate. The only other provisions require the brokers to refrain from engaging in certain prohibited activities and to maintain certain compliance and training programs for specified employees. 

Many industry observers suspected the tortured development of the New York regulation was closely tied to certain global brokers’ lobbying efforts to be released from their Spitzer settlements, and it now appears as though the new regulation became an element or condition of that release. The connection between the two events was further revealed when the settlement revisions took effect just one day after the issuance of the new regulation, and the close timing of the two announcements appears to be more a display of chutzpah than coincidence. 

While insurance agents and brokers may view the nature and timing of this announcement as adding insult to the injury imposed by the department’s development of an unnecessary and cumbersome disclosure proposal, there may be reason for optimism. The regulation – which was spearheaded by several of Spitzer’s former employees – is not scheduled to take effect until Jan. 1, 2011, and the Independent Insurance Agents & Brokers of New York is already preparing to challenge the implementation of these costly and burdensome mandates in court. The New York state legislature may also weigh in if necessary and trump the actions of the insurance department. 

Nearly six years after Spitzer uncovered a bid-rigging scheme and used those allegations as the basis for reckless and more sweeping accusations, the insurance industry still finds itself dealing with the fallout. It is ironic, however, that countless New York insurance agents and brokers are preparing to bear the burdens and costs of new governmental mandates as some of the entities at the heart of the initial scandal are freed from their well-publicized settlements. It now seems possible that innocent main street insurance agencies may ultimately be the entities most adversely affected by the past actions and misdeeds of the large brokers. 

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior counsel, government affairs. 



On the Hill
Crop Insurance Program at Risk of $6.9 Billion Cut
Risk Management Agency releases second draft of Standard Reinsurance Agreement. 

Yesterday, the Risk Management Agency (RMA) released its second draft of the Standard Reinsurance Agreement (SRA). The Obama Administration’s original FY2011  budget called for $8.4 billion in cuts to the crop insurance program over 10 years. That number has now been reduced to $6.9 billion — still a significant cut. 

In response to the USDA’s shift, Bob Parkerson of the National Crop Insurance Services said administration officials “have listened to us to some extent.” Regarding the proposal to save $6.9 billion, however, he said, “We aren’t there yet.” 

In addition to the size of the reduction, the Big “I” is concerned that the pending SRA draft includes a “soft cap” set on agent commissions. According to this draft, a cap of 80% of the government subsidy will be allowed to go to the companies’ administrative and operating (A&O) expenses for agent commissions; companies will also offer agents a profit-sharing deal. The Big “I” is concerned that by placing any sort of cap on agent commissions, RMA is not providing agents an incentive to write policies in high-risk parts of the country. Rather than allow the sound principles of a free market economy to play out, the cap could remove marketplace competition and force companies to set a standard commission rate.

The Big “I” believes that this proposal undermines one of the major goals of the crop insurance program – the widespread availability of crop insurance for all farmers. From 1938 to 1981, the USDA was solely responsible for delivering the crop insurance program, and the program unfortunately never achieved lasting success because not enough farmers considered the product worthwhile or convenient to purchase. In 1981, Congress mandated that the program be transitioned to the private sector, including insurance agents. In fact, Congress stated that “the sales talents and experience of the private sector commissioned agents . . . are essential to fulfilling the goal of nationwide, generally accepted all-risk insurance protection.” By placing arbitrary caps on agent commissions, RMA is contradicting Congress’ intent and undermining one of the program’s key goals.  

Additionally, this proposal introduces a high level of risk and uncertainty to crop insurance agents. Agents’ once reliable income is now dependent upon the risky variables of extreme weather and an uncertain economy. According to the proposal, a company is only required to pay profit shares if it has achieved a certain profit income for that specific year.
 
The Big “I” believes that any reforms made to the crop program should promote private sector delivery mechanisms and leverage the expertise of independent agents. Crop insurance agents have proven instrumental in achieving the goal of helping farmers make well-informed risk assessments and choices about the coverage that they purchase. The association is concerned about the second draft of the SRA because it compromises the sound principles of the crop program.
 
Jen McPhillips (jen.mcphillips@iiaba.net) is Big “I” senior director of political affairs.


L-H Trends
Agents Must Assess Inflation’s Impact
Customers’ retirement plans should incorporate long-term rate of return.

This week, the economic data from the United Kingdom indicated that the annual consumer price inflation rose sharply in January. The Office for National Statistics said consumer price inflation rose 3.5% from a year ago, representing the highest rate since November 2008. This begs the question, if inflation is returning to England, what are the possibilities that it will start to increase in the United States given the massive budget deficits and liquidity pumped into the U.S. economy to help mitigate the recession over the past 18 months?  However, for the past few weeks, the U.S. dollar has been strengthening against the Euro due in particular to the anxiety concerning Greece's fiscal problems and whether they will spread to Spain and other Euro-based countries. 
 
In fact, some may wonder why so-called "inflation hawks" are obsessed with the effects of inflation. Students of history know hyperinflation’s impact on Germany following World War I and South American countries’ decades-long struggles with high inflation. Independent insurance agents would do well to remind their customers of inflation's impact, since inflation causes debtors to win and creditors to lose as debtors repay loans with depreciated dollars. And, during periods of deflation, creditors win and debtors lose since debts have to be repaid with appreciated dollars. Of course, investors must deal with uncertainty surrounding an investment’s future purchasing power, and those who purchase immediate lifetime annuities bear that risk. 
 
Agents and customers must especially consider inflation’s impact when planning for retirement. In fact, in determining how much an individual needs to save for retirement, it is important to first determine the present value of the total income needed for anticipated retirement. Financial planners recommend focusing on inflation-adjusted earnings returns, so if an individual believes inflation will be at 3% during their retirement and that their long-term rate of return will be 6%, they will experience a 3% real rate of return. Assuming a retiree was planning on a 30- year time span  using the 3% real return,  he or she will need a lump sum of $20,500 for every $1,000 of annual income to maintain the purchasing power of their spending. For example, if a couple retiring in 2010 needed $50,000 per year in today's dollars in addition to Social Security to maintain their desired standard of living, they will need to have saved $1,025,000 based on a 3% real rate of return and a 30 year time horizon to accomplish their goal. 
 
However, most people saving for retirement don't factor inflation into the equation and therefore underestimate the true amount they need to save to meet their desired target. While some investment vehicles such as Treasury Inflation Protection Securities (TIPs) and indexed annuities account for increases in inflation, in reality, inflation erodes the value of most investments. Further, since the U.S. income tax system is not indexed for inflation, increases in assets that are later sold are subject to capital gains taxes even though the inflation-adjusted values may not have increased or may have declined.  Agents should explain the impact of inflation to their customers so they can adequately plan for its impact on their long-term savings goals and use investment vehicles to offset its impacts.

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


On the Hill
Republican Sen. Richard Burr and Democrat Rep. Joe Crowley to Address Big “I” Legislative Conference Breakfast
North Carolina’s Burr serves at the Senate Republican Chief Deputy Whip; New York’s Crowley serves as House Democrat Chief Deputy Whip.

U.S. Senate Republican Chief Deputy Whip Richard Burr (R-N.C.) and House Democrat Chief Deputy Whip Joe Crowley (D-N.Y.) will address the Big “I” membership on March 4.

Burr and Crowley will be featured at the legislative conference breakfast which occurs just before the association’s membership heads out for the annual Big “I” Day on Capitol Hill. Every year more than a thousand agents visit Capitol Hill offices to lobby members of the House, Senate and their staffs on issues that directly impact independent agents and consumers.

Burr is a senior member of the Senate Health, Education, Labor and Pensions Committee which shares health care jurisdiction in the Senate with the Finance Committee. He also serves as ranking member of the Senate Veterans Affairs Committee where his commitment to veterans and health care reform continues as he works to improve the quality of health care and service for veterans. Burr also serves on the Senate Intelligence Committee; the Energy and Natural Resources Committee; and the Indian Affairs Committee. Burr is in his first term representing the Tar Heel State and was previously in the wholesale commercial products industry.

Crowley is chairman of the New Democrat Coalition, a group of moderate Democrats who are seen as business-friendly on a number of issues (like the Blue Dog Coalition). He is a member of the House Ways & Means Committee, which also has jurisdiction over health care. Crowley is vice chair of the Democratic Congressional Campaign Committee (DCCC) and serves as chairman of the DCCC Business Council. He is in his sixth term serving New York’s seventh congressional district, which includes parts of the Bronx and Queens.

Other highlights of the Big “I” Legislative Conference & Convention, which will take place March 3-5 at the Marriott Wardman Park Hotel in Washington, D.C., include an in-depth issues briefing; appearances by numerous high-profile speakers discussing important insurance and national issues confronting lawmakers as well as agents and brokers and a CEO panel comprised of top carrier presidents & CEOs (CNA, The Hartford, Fireman’s Fund and Safeco will participate).

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