THURSDAY, APRIL 22, 2010 

                                                Big “I” National News

P-C Trends
2011 or Bust
Firm predicts insurance industry turnaround will only begin next year.

Ringing in the New Year will hopefully ring in an insurance industry turnaround—that’s what Conning Research & Consulting reported in its property-casualty forecast released this week.

The pace of the economic recovery, a return to modest inflation and larger underwriting losses in 2010 will lead to a rate firming in 2011. But Clint Harris, vice president of property-casualty insurance research for Conning is quick to point out that it will be a rate firming—not hardening.

“Workers’ comp, which normally is one of lines that lead industry out of soft market, does not show indications of premium rate change,” Harris says. “It is now among the softest of the general lines of business. Without workers’ comp leading us out, we have to look to other lines to do so.”

Harris points to a few commercial lines that will most likely lead the market turnaround: commercial general liability and commercial multi-peril. From an economic standpoint, he notes that receipts are the driver for CGL and that the U.S. has experienced multiple months of sales increases.  And some carriers reported flat renewal rates in the third and fourth quarters of 2009, giving Harris reason to believe reason to believe CMP moving out of the recessionary impact on exposure growth and firming.

For independent agents looking to diversify and position their books of business for market recovery, Harris says to look to small commercial. “If you’re looking for where the growth is most likely to come early, look to small business,” he says. “It’s one of the areas where we have already seen some rate firming.”

Harris says that firming is part of the “soft landing” out of the soft market that industry analysts have been talking about for more than two years. But now with eroding underwriting results and low bond yields, the exact impact on the overall yield will depend on underwriting performance.

“The question always comes ‘When will underwriting discipline kick in?’” Harris says. “We pushed it out until 2011 partly because the industry in general has sound financials. Only a significant amount of pain causes change in the marketplace.” But, he cautions, a severe catastrophe could change the landscape and cause pain more quickly, moving up the 2011 timeframe.

Katie Butler (katie.butler@iiaba.net) is editor in chief of IA.

On the Hill
Big “I” Submits Congressional Testimony on National Flood Insurance Program
Association highlights flood program’s importance and urgency; calls for a long term extension and modernization of coverages.

Yesterday, the Big “I” submitted official testimony to the U.S. House of Representatives Committee on Financial Services Subcommittee on Housing and Community Opportunity hearing titled, “Legislative Proposals to Reform the National Flood Insurance Program.”

The Big “I” supports draft legislation, called the Flood Insurance Reform Priorities Act of 2010, by Subcommittee on Housing and Community Opportunity Chairwoman Maxine Waters (D-Calif.) and Ranking Member Shelley Moore Capito (R-W.V.) which would extend the program for five years and provide necessary reforms. In yesterday’s testimony, the Big “I” praised the bill in general saying, “Though IIABA has some recommended improvements to the draft legislation, the underlying long term extension is vital to provide stability and security to consumers.”

The Big “I” is greatly concerned about the series of short term extensions the NFIP has experienced over the last year and a half. In 2009 and the first few months of 2010, Congress was forced to pass seven short term extensions of the program.  This problem has been exacerbated recently as flood insurance has been included in extensions of unemployment insurance and COBRA subsidies that last for only one or two months.  In fact, twice during the last few months Congress failed to extend the flood insurance program before its expiration and the program was allowed to lapse, most recently in the beginning of April when the program was expired for nearly three weeks.  Congress acted last week to extend the program and to make it retroactive to March 28, when the expiration started.  However, this extension is again only temporary and the program may expire again on May 31 unless Congress approves an eighth such extension or acts on a long term bill. The Big “I” congressional testimony noted that the lack of a long term extension is “of paramount concern.” 

In addition to a long term extension, the Big “I” also called for the draft flood insurance legislation to be amended before Financial Services Committee consideration to modernize the NFIP by including optional business interruption and optional additional living expenses coverages on an actuarial basis.

The association noted that NFIP has been a successful program for consumers for more than 40 years; however it is time to modernize some aspects of the program for the 21st century. Allowing consumers the option to purchase business interruption insurance and additional living expenses, as can be done in the private market for other perils, will make the program more attractive to consumers and more actuarially sound.

The Flood Insurance Reform Priorities Act of 2010 is scheduled to be considered by the House Financial Services Committee next week.

To read the full testimony, click here. 

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

L-H Trends
Employee Stock is Rising
Work with commercial clients to implement benefits that improve retention.

Recent economic signs seem to point to an uptick in economic activity. As consumers begin to spend more, corporate earnings are increasing for many industries—but the recovery is still sluggish. One of the chief reasons is the fact that unemployment stubbornly hovers just below 10%. What can independent agents learn from this environment about commercial clients? How can you capitalize on it? 

First, businesses have increased use of temporary workers to help meet demand as inventories that were built up during the recession have now been drawn down and businesses need to replenish them. There have been accompanying gains in productivity as businesses have pushed their existing work force—in some cases a reduced work force—to maintain production levels.
 
The second lesson is that as businesses have trimmed their workforces, they have increasingly become more dependent on current employees. Beginning in 2009, businesses looked to reduce payroll and benefits cost by instituting wage freezes, cutting pay across the board, suspending  401(k) plan matching contributions and other measures. While many businesses are still feeling stressed, they are also planning for future sales growth and realize that these same employees are expecting a lift with the rising tide. Independent agents should meet with their commercial clients and discuss what steps they have had to take during "The Great Recession.” Then ask clients what their forecast is for future business activities. While the recently passed health care reform is a factor that will have to be reviewed and analyzed for its impact on an organization's ability to tailor its health insurance program, other components of a wage and benefit program should be also be part of the review.
 
Third, businesses will still be reticent about more committing to future benefits costs, but agents can help look to core benefits that the company can provide and then offer voluntary benefits that employees can purchase to fit their specific needs. Good examples are group term life insurance and disability insurance. Organizations might define their base benefit as two times an employee’s salary, allowing employees to purchase an additional two or three times on a simplified underwriting basis. Disability insurance can also be targeted to provide 60% of pay on a non-contributory basis. However, employers can give employees an opportunity to purchase up to 70% or 75% to provide more coverage on a simplified underwriting basis. In this way, the employer is defining an amount it can afford and provide meaningful coverage, yet allow employees to purchase additional coverage through the convenience of payroll deduction. Another voluntary benefit that an employer can provide is Long-Term Care insurance (LTCi). Even if the employer cannot provide funding, it can help get affordable coverage with features that employees may not be able to procure on their own, again through the convenience of payroll deduction.
 
Now is an opportune time for independent agents to discuss ways for employers to leverage their size and the ease of payroll deduction to assist employees in meeting their financial needs. Providing these benefits demonstrates that employers value their employees' contributions to the success of their businesses. Have the conversation with your client before your competition does.

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

Pulse on the P-C Markets
Environmental Liability Coverage Becoming Mainstream
Marketplace is more competitive and coverage is easier to obtain.

The market for environmental liability coverage, often seen as a discretionary expense, is heating up thanks to ease in securing the coverage and the ability to bundle environmental with more common coverages such as general liability. The environmental liability marketplace is also growing increasingly competitive as more companies offer the coverage and more entities require it.

“The biggest thing I have seen for the small to midsize buyer would be this trend toward much more comprehensive solutions being available,” says Paul Kinni, vice president of environmental at Zurich. “There are a number of different products in the marketplace that would combine a general liability policy with a site-specific pollution and environmental liability policy.”

Kinni adds that he has never seen such an abundance of cross-selling opportunities surrounding environmental liability, since the coverage can also be combined with auto, workers’ compensation and excess & surplus insurance, among others. While the first environmental liability coverages were designed to address regulations from the Environmental Protection Agency (EPA), Kinni says today’s policy offerings are largely crafted out of customers’ needs and requests.

“Environmental coverage can be provided to just about any type of customer,” he says. “The premium could range from few hundred dollars to seven figures, and anyone who generates a waste product needs it. We also write coverage for real estate and commercial property because while they don’t generate waste, they could have an exposure like the existence of mold.”

Because most environmental liability coverage is sold on a non-admitted basis, companies typically shape policy endorsements around popular customer needs and requests. In addition, particularly in the current economic environment, many insureds only purchase environmental liability coverage because it’s required by a city or government entity. According to Taylor Elliott, an environmental underwriter at the Environmental Insurance Agency, Inc. in Portland, Ore., there have been some premium increases in coverage areas that are required by law.

“If a coverage is mandated by state and federal law, it changes (pricing) dramatically, and there we’re seeing premium increases,” he says. “Dry cleaners and pollution liability are two examples.”

Elliott adds that because contractors’ business has slowed down, sales of mandatory environmental liability policies have slowed as well. That change, combined with new carriers entering the mix, has made the environmental liability arena extremely competitive. Elliott advises agents who are considering writing the coverage to work directly with an environmental liability underwriter to make sure they have full knowledge of the products available and receive the best deal.

“I would advocate talking to a market wholesaler or specialist,” Elliott says. “You need someone who understands the new markets and policy forms, because there can be form differences. Agents also have to think outside the box because pollution coverage may be required for things they don’t think.”

Bill Pritchard, president of Beacon Hill Insurance, has seen the environmental liability marketplace develop from its infancy several decades ago and says coverage has never been cheaper or easier to obtain. However, he emphasizes that policy language varies greatly because there is no standard environmental liability coverage form and, generally, “you get what you pay for.”

“The reality is, every company’s policy is different,” he says. “It’s important for agents to look really closely at the products and either deal with a professional or pick one or two carriers where you really understand the policy and stick with them. There are some big exclusions that some policies have and some don’t.”

Despite these differences, Pritchard says almost all environmental liability policies are more user-friendly than they used to be and generally have several standard service-driven enhancements. These include blanket additional insured, blanket waiver of subrogation, blanket primary and noncontributory, blanket TPL and temporary on-site storage of contaminated material, among others.

“When an insured has a job that specifically calls for something, most policies have it built in,” says Pritchard. “It’s nice to see a softer market response from carriers and that they’re trying to provide ease in securing (environmental liability) coverage.”

Veronica DeVore most recently served as Big “I” writer/editor.

Editor’s note: This article is part of an ongoing series detailing trends in specific market areas. Click here for updates on products in the environmental liability market.

Legal Advocacy
Enforcement of ‘Red Flags Rule’ to Begin on June 1
FTC appealing court ruling that lawyers are not subject to the Rule.

After several postponements – and amid continuing litigation – the Federal Trade Commission (FTC) is scheduled to begin enforcement of the Red Flags Rule (Rule) on June 1, 2010. The Rule is designed to fight identity theft by requiring creditors with certain kinds of accounts, and financial institutions, to implement compliance programs to detect and prevent identity theft.

As the enforcement date nears, the FTC is pursuing an appeal of a strongly worded decision against it and in favor of the American Bar Association (ABA), in which the U.S. District Court for the District of Columbia ruled that lawyers are not “creditors” subject to the Rule. The FTC recently filed a notice of appeal, signaling its intent to seek enforcement of the Rule broadly, and industries well beyond the legal community will be monitoring the outcome when a decision is issued. The lawsuit filed against the FTC by the American Institute of Certified Public Accountants (AICPA), arguing that accountants are not “creditors” subject to the Rule for similar reasons to those in the ABA case, is on hold by the court pending the outcome of the appeal in the ABA case, according to the FTC.

As noted in previous IN&V articles, the similarities insurance agents have to lawyers and accountants make the arguments in the ABA and AICPA lawsuits of interest to insurance agents concerned about whether the FTC will attempt to apply the Rule to their activities. Although the FTC has not created a list of everyone it considers subject to the Rule, it has stated on its Web site that the definition of “creditor” covers all entities that regularly permit deferred payments for goods or services, and it specifically mentions lawyers, in addition to accountants, health care providers, utilities and telecommunications companies.

Each insurance agency operates differently and thus needs to assess the definitions under the Rule carefully to determine if it must comply with the Rule. Local counsel knowledgeable in this area, as well as information on the FTC’s Web site at http://ftc.gov/redflagsrule, can provide valuable assistance to insurance agencies that want help developing a program to satisfy the requirements of the Rule.

The Big “I” will continue to monitor developments in the ABA and AICPA cases, as well as any other lawsuits/regulatory actions that may be filed about the application of the Rule, and report on anything that may affect its potential application to independent insurance agencies.

The Big “I” summary of the Rule is in a memo titled, “Overview of the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, and the Drivers Privacy Protection Act,” starting on page 10 at letter G. This memo is available to Big “I” members who log in to www.independentagent.com and select Legal Advocacy, under Memoranda and FAQs. Additional information on the Rule is available from the FTC at http://www.ftc.gov/bcp/edu/pubs/business/alerts/alt050.shtm.

Scott Kneeland (scott.kneeland@iiaba.net) is Big “I” counsel.