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                                                Big “I” Association News

         

P-C Trends
CEOs Question Commercial Lines Pricing Discipline, Praise Personal Lines
Industry analysts corroborate discrepancy between two sectors.

Personal lines pricing discipline has improved, but the commercial lines market requires more attention and responsibility on the part of industry leaders and companies—that was the consensus of CEO Panel at the Big “I” Legislative Conference & Convention last week.
 
“If you look at the current cycle, we’re about seven years into it, if you (consider) 2002 or 2003 as the beginning of the soft market,” said Tom Motamed, Chairman & CEO of CNA. “Most cycles are 10 to 12 years in length, so we have a ways to go.”

Motamed added that a combined ratio of 110 is usually the “threshold of pain” when most companies opt to turn pricing around. Currently, he said most insurers are running an accident year combined ratio of around 103 or 104. A year-end report from Fitch Ratings projected a p-c industry combined ratio of 101 for 2009 and an accident-year combined ratio estimated at 103.

Mike LaRocco, President & CEO of Fireman’s Fund, said erratic pricing cycles should not occur, particularly in commercial lines where the effects of the soft market have hit hardest.

“We have to be honest that these cycles are the fault of insurance companies,” he said. “In what other industry would we accept such huge swings? In reality it’s bad behavior on the part of insurance companies that causes these cycles. We should price products based on underwriting profits, and we’re starting to see we need to take rates up.”

A.M. Best, takes a slightly more positive view and maintained its stable outlook for commercial lines. However, the ratings company acknowledged that commercial lines insurers have major decisions to make.

“While some of the storm clouds have cleared in 2009, Best believes that commercial lines insurers are now at a crossroad,” the company said in a statement. “Depending on which direction this segment moves will set the tone for this segment for years to come. If competition intensifies in 2010, there's little doubt that this segment will suffer the consequences. Thus far, key indicators and behavior among most insurers does not suggest that this is the case.”

A.M. Best analysts also said that while profit margins will remain solid in the commercial lines segment, they will be lower than in prior years and will be affected by recent loss-reserve releases and higher initial loss ratio selections.
 
On the other hand, CEO panel participants agreed that pricing discipline in personal lines has largely been effective and should serve as a model to commercial lines insurers. LaRocco said more commercial lines insurers should look to personal lines for guidance in how to match a rate to a risk while maintaining profit margins. According to a recent report from Moody’s investors service, the outlook for the personal lines sector also remains stable and the sector owes its success to its capital strength and underwriting earnings power.
 
“The personal lines insurance sector is in a uniquely stable position compared to harder-hit industry sectors (e.g. life insurance, commercial property & casualty), because of its good risk-adjusted capitalization, shorter duration investment portfolios and modest impact from a weak U.S. economy,” the report said.

Liam McGee, Chairman & CEO of The Hartford, said he expects to see more stability across the board as the economy improves and exposures creep up. However, he acknowledged insurers must be responsible when chasing business.

“I can’t go back over the last 25 years and find a time when chasing business solely on the basis of rate and increasing risk tolerance has had a good outcome,” he said.

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



P-C Trends
Solvency II and You
Agents can capitalize on opportunities presented by new regulatory initiative.

Last week, Insurance News & Views examined what Solvency II is, where it came from and what its impact has been and will be. It was predicted that while the European Union’s regulatory initiative is not specifically required of insurers operating in the U.S., the U.S. market will still be affected. This begs the question: What opportunities might arise for independent agents as a result of Solvency II’s role in the U.S. insurance marketplace?

As noted in last week’s article, a key component of Solvency II is its core tenet, or pillar, of trusting actuaries over accountants. Practically, this means insurers will be judged quantitatively, with more straightforward, traditional measures of loss ratio, expenses and risk/variability. Two other tenets of Solvency II are emphasizing insurer-wide risk management and insurer transparency.  If these pillars do, in fact, impact the U.S. marketplace, three things will occur:

First, insurers will set aside more capital on more volatile or riskier lines of business and programs. Next, insurers will more proactively manage their reputations with respect to solvency and highly rated insurers will exploit any advantage over competitors in this area.

Finally, there will be a greater emphasis on risk management in general and that emphasis will trickle down to each line or discrete area of an insurer’s business.

In preparing for the transition, independent agents need to think about the insurers they access and how to capitalize on it. For example, if insurers react by setting aside more capital for riskier lines of business, independent agents need to be ready. When more capital is required, insurers tend to become more selective in underwriting and/or may charge higher prices to compensate for the increased capital burden. While this may be intuitive to agents, it may not be as obvious to clients.

Insurers writing riskier lines need to hold more capital for each dollar of premium than do similar insurers writing less volatile lines. If insurers charge higher prices, then even more capital is required to maintain a given ratio, and this can amplify and create hard market conditions. As Solvency II’s influence reaches the U.S., agents must consider which insurers are the long-term players and are least likely to back away from certain lines of business. Therefore, the next year or two might not be the right time move clients to a newer player in the market.

 
Source: Author’s estimates of capital required for each dollar of premium.  PL = Personal Lines, CL= Commercial Lines.  A.M Best. Aggregates and Averages shows 2008 average policy holder’s surplus (capital) to direct written premiums was $.97 to $1.00. 

If insurers pay more attention to solvency reputation, the outcomes are again predictable. Insurers that garner strong ratings will advertise their strength to agents and clients. These insurers will also be lessless flexible on prices or coverages. Negative attention on insurers with less financial strength may result more flexible underwriting or lower prices. Agents need to anticipate this and prepare their insureds. As they say, there is “no free lunch,” and an insurer with stronger financials and more capital should be able to command higher prices and demand cleaner submissions.

Finally, the pillar of increasing insurers’ emphasis on risk management will result in a greater concentration on the financials of each book of business managed by a carrier. In Europe, it is already evident that an insurer’s risk will be recognized as a sum of all its component lines or books of business. Key metrics for evaluating each book have not changed: loss ratio, expense ratio and investment income. However, increased emphasis should be placed on the predictability of results.  It is safe to assume the lines of business with the most volatility will require more insurer capital and will result in higher prices for those lines.

A less obvious facet of the final pillar is the fact that the same type of business is more predictable in larger volume. Agents should expect that the larger a book of business an insurer controls, the lower the prices that insurer will be able to charge. Therefore, insurers might jettison sidetracked books of business as the industry focuses on operations line by line and book by book. Again, if a book of business is less predictable because an insurer has a lower overall volume, more capital will likely be required and prices may go up.

So, Solvency II may well be good for the independent agent as it affects the U.S. marketplace. Direct distribution and single solution providers are simply not as well positioned to manage the changes that Solvency II might bring. Agents should be thinking ahead about the insurers they represent and how they will be viewed under the lens of the three pillars of Solvency II. Educate clients on the coming changes and agents can position themselves to take advantage of Sovency II’s influence when it arrives.

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

On the Hill
House Subcommittee Holds Hearing on Natural Disaster Legislation
Big “I” submits testimony offering solutions to growing concerns and commending Congress for
exploring the issue.

Yesterday, the Big “I” submitted testimony to a congressional hearing titled “Approaches to Mitigating and Managing Natural Catastrophe Risk: H.R. 2555, The Homeowners’ Defense Act.” The hearing was a joint effort by the U.S. House of Representatives Committee on House Financial Services Subcommittee on Housing and Community Opportunity and the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

H.R. 2555 was introduced last year by Reps. Ron Klein (D-Fla.) and Bill Posey (R-Fla.) in an attempt to address concerns regarding the affordability and availability of natural disaster insurance and other problems homeowners face in the aftermath of natural disasters.

The Big “I” testimony highlights the association’s support of Congress finding a solution to the rising prices and continued lack of availability for both homeowners’ and commercial insurance in some parts of the country due to the continued threat of natural disasters.

The bill’s four main provisions each create a program intended to help prevent potential insolvencies and make the private insurance market more stable, ultimately making catastrophe insurance more available before and after a major disaster. The Big “I” supports the goals of each of the following programs, but also encourages Congress to consider some modifications including changes to the reinsurance title of the legislation.

The National Catastrophe Risk Consortium would allow multiple states to pool their catastrophic risk, with the goal of achieving an economy of scale and risk diversity that will lead to a lower cost of reinsurance than states could achieve independently.

The Catastrophe Obligation Guarantee Program would authorize the federal government to guarantee debt issued by eligible state catastrophe programs to assist in the financial recovery from natural catastrophes.

The Federal Natural Catastrophe Reinsurance Fund would allow the Treasury Department to write reinsurance contracts covering truly catastrophic–level events.

The Mitigation Grant Program would establish a grant program in the Treasury Department to develop, enhance and maintain programs that prevent and mitigate losses from natural catastrophes.  

While the Big “I” applauds Congress’ consideration of a national reinsurance backstop for natural disaster insurance, such a backstop would better encourage private market participation in problematic markets if it allowed insurance company access instead of just state catastrophe funds. Efforts to advocate that Congress consider a solution utilizing the private markets instead of merely state catastrophe funds will remain at the top of the Big “I” agenda on Capitol Hill.

The Big “I” has been a leader in advocating for natural disaster solutions, testifying on several other occasions before the House Financial Services Committee and the Senate Banking Committee on the need for Congress to consider legislation to stabilize the insurance market for natural disaster risk.

To read the full congressional testimony, click here.   

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

L-H Trends
The Tax Man Cometh
Use retirement plans to lessen the blow of 2011 tax hikes.

As the federal government’s budget season begins, the non-partisan Congressional Budget Office (CBO) has provided Congress with its estimates of the impact of President Barack Obama’s proposed budget.

Under the president’s budget, debt held by the public would grow from $7.5 trillion (53% of GDP) at the end of 2009 to $20.3 trillion (90% of GDP) at the end of 2020. As a result, net interest would more than quadruple between 2010 and 2020 in nominal dollars (without an adjustment for inflation); it would expand from 1.4% of GDP in 2010 to 4.1% in 2020.  

Another initiative that would raise revenues would limit the rate at which itemized deductions reduce an individual’s tax liability to 28%, which would increase revenues by $289 billion. Lastly, the CBO notes that under current law, individual income tax receipts are projected to surge by 33% in 2011 and by 14% in 2012.

What are the implications for independent insurance agents? 

First, as business owners, most agency principals are going to see significantly higher income taxes in 2011. Second, their agency’s higher earning customers – both businesses and individuals - will see also see their income taxes go up significantly next year.  As indicated, the value of itemized deductions will decrease and personal exemptions would be reduced as incomes rise. And, as the CBO indicates that individual income tax receipts would jump by 33% if the current tax provisions continue into 2011It will certainly not be palatable so Congress to have to resolve the tax quagmire, including the estate tax, which will reset in 2011 at the much lower 2001 levels. This could trap many taxpayers at the lower $1 million exemption threshold.

Clearly, the best vehicle that business owners can use to lower their income tax bills is a qualified retirement plan. Varying approaches can allow principals to add $54,000 annually to their 401(k) plan while providing a meaningful but significantly lower contribution for their employees. Agents need to sit down with their clients and their clients’ other advisors now to develop a strategy to mitigate the impact of higher income taxes.

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


Tech Trends
Build a Web Presence Worthy of 2010
Insurance information and online transactions attract consumer business.

Auto insurance is one of the most shopped-for products on the Internet, and interest is growing. Seventy-three percent of people use the Internet to search for insurance information, but 67% still prefer to buy from a local agent. Customers are clearly searching for an agency, but if they can’t find what they’re looking for online, they may go elsewhere – maybe even to a direct writer. There are several steps to building a quality Web site and making sure your agency doesn’t miss an online opportunity.

First, a quality site should reflect the agency’s brand, a unique brand that is clearly set apart from other agencies in the area. Logos, local office and team members’ faces and customer testimonials are more effective and unique than generic stock photography.

In addition, customers want to see all the ways they can interact with the agency. These may include real-time online quoting, a phone number, an address with a map, an e-mail address and/or a short contact form. Many companies offer a real-time online quoting banner agents can place on their site. Some comparative rating vendors offer tools to enable consumers to get multiple quotes online that then feed into the agency rater.

Customers want ways to make self-service changes. This can be as easy as providing a link to carriers’ online self-service sites or a form for customers to fill out that is automatically routed to the agency.

Next, make it easy for customers to find your agency online by incorporating search engine optimization (SEO). SEO is the technical term for moving a listing up the ladder on search engine sites like Google, Yahoo, Bing and others. The higher a listing appears on the page when someone inputs a search term, the more likely it is that link will be clicked. The next section of this article will discuss SEO more in depth.

A key element of Web site success is being able to measure who finds the site and how they use it. Google Analytics, a free service, can tells how people arrived to a site, what pages received the most attention, the key words people typed in search engines to find the site and other valuable information. A professional Web development partner can help link Google Analytics to the agency’s site, or agents can do it themselves by visiting www.google.com/analytics.

Once the site is up and running, update it regularly. No prospect or customer wants to visit an outdated Web site, and search engine rankings reward sites that are frequently updated. Try to post new content to the site at least once a month. Better yet, start a blog on the site to answer common insurance questions, describe the agency’s involvement in the community or share local news and events.

Finally, keeping the site personal and local is a good way to provide a hometown resource to neighbors and customers.   An agency’s site should have links to other local businesses and organizations – this is a good way to show the areas the agency serves and demonstrate a commitment to the community.

Matthew Marko (matthew_marko@progressive.com) is a marketing process manager for Progressive Insurance.  He works to provide local marketing strategies, tools and co-branded collateral to help independent agencies grow their businesses.

Editor’s note: This article is the first in a series about optimizing the independent agency’s Web presence. For information about using online social media tools effectively, read “Social Selling” in the March issue of IA magazine.