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T H U R S D A Y , F E B R U A R Y 1 4 , 2 0 0 8 Big “I” National News 
 VIEW: P&C Trends
Super Tuesday Tornados’ Effect on the Industry
Last week’s storms could have national impact.
On Feb. 5, dozens of tornados wrought damage in Tennessee, Arkansas, Mississippi, Kentucky and Alabama. The Associated Press reported 57 deaths as a result of the storms. President Bush has declared counties in Tennessee and Arkansas disaster areas and eligible for federal disaster assistance. Early reports say last week’s storm ranks as one of the costliest in the United States and by looking at the most costly tornado-related events, it’s possible to estimate the storm’s impact on the p-c industry’s 2008 finances.
Total storm damage estimates are still taking shape, but with the damage at Union University in Jackson, Ten. already estimated at $40 million, the tally could quickly rise. Smaller concentrations of damages stretch from Arkansas in the West, north to Kentucky, east to mid-Tennessee and south to Alabama and Mississippi. Some reports put total homes lost at 700. Overall, State Farm is reported to have received claims from 2,500 policyholders in Tennessee and Kentucky alone and is expecting about 12,500 homeowners and related claims in just those two states.
In evaluating the storm’s impact on the p-c industry, it is useful to look at the impact of past tornados. By several measures, last Tuesday’s tornados look worse than the industry’s most costly storm, which occurred May 3, 1999 near Oklahoma City and caused more than $1 billion in damages. Last weeks tornados resulted in 57 deaths --- in 1999 there were 36. Also, last Tuesday’s storms resulted in 40 reported tornados, versus 14 in 1999.
Still other measures indicate that last week’s storms weren’t as bad as those in 1999. A key difference is that none of last week’s tornados had the demolishing wind speed of the Oklahoma tornados --- the most damaging of which touched town near Moore, Okla. with winds estimated in excess of 260 mph. So far, maximum speeds cited in last week’s tornados are closer to 180 mph, according to the Weather Channel. The biggest driver of losses --- totally destroyed and damaged homes and apartments--is still too new to meaningfully compare the two storms. The damages reported during the next two weeks, will drive the total loss dollars. As those figures are reported, watch for last Tuesday’s storm to approach the 1999 storm total: 10,783 damaged or destroyed homes and apartments, according to the National Weather Service Norman, Okla. Forecast Office.
Looking at state graphs, the impact of the 1999 Oklahoma tornados on the state’s loss history is evident, with a clear and prominent loss ratio spike in 1999. Kansas shows a similar, but less pronounced, spike in its state loss ratio that year. It won’t be surprising if last week’s tornados register notably and unfavorably on at least Tennessee and Arkansas’s loss ratios for the year, but the impact could be seen across all the states.
*Source: A.M. Best Company, Aggregates and Averages
Like member agencies in the five states affected by the tornadoes, Big “I” Advantage will be interested in developments with respect to the recent storms. The various Big “I” Markets books of business and the Eagle Agency book of business, which includes Arkansas and Tennessee, may incur shock losses. The impact on the association’s national E&O program is also a concern due to agency E&O “echo” or “rebound” claims. Member agents who need help should contact their Big “I” state association or the IIABA national office. Access your state’s contact information on www.independentagent.com/eo, along with other information on the E&O program. The Virtual University is another good place to find answers to questions that may arise and it is available free to member agencies at www.independentagent.com/vu. Also, look for updates in Insurance News & Views.
Paul Buse (paul.buse@iiaba.net) is president of Big “I” AdvantageSM and a licensed p-c agent.
P&C Trends Building a Book of Business
Agencies weigh in on the best methods for attracting new customers.
It used to be that independent agents relied on referrals and word of mouth to increase their books of business, but, over time, agencies and customers have evolved and prospecting methods have followed suit.
Today there are a variety of way agents can expand their client base --- TV, radio and internet advertising, direct mailings, cold calls, emails and even the Yellow Pages are all viable options—but what works best? According to agents, the answer depends on the agency.
Jack Sherrill, owner of Sherrill & Company in Savannah, Ga., the best method for attracting new customers is a combination of TV and the agency’s Web site.
“We’re never sure what works, but we are advertising more and we have a Web site that we try to get people to look at,” he says. “We are adverting Trusted Choice® on the exact same cable channels that national is using…and can’t I tell you that it’s driven business up, but I can tell you a lot of people have said they’ve seen me on TV.”
While TV advertising is a good fit for Sherrill & Company, the medium wasn’t quite as effective at Absolute Insurance Agency, LLC in Clive, Iowa.
“I have done radio and TV in a past life. That form of advertising is hard to track as it’s more for branding,” says Jeffery Eastvold, president of Absolute Insurance Agency. “It was a large expense that did not immediately show results. I am not saying it did not work, but it did not have an immediate result. From some of the marketing articles I have read, they recommend that if you do have a smaller budget that you try to advertise around one show or one time slot rather than be all over the place. That way you can get the attention of that group or audience. If you advertise before and after Leave it to Beaver then at least you will have effectively touched the Beaver fans.”
Instead of using television to attract new business, Eastvold relies on a formula of several other methods --- including developing relationships with other agents who are, essentially, his competition.
“Developing relationships with other agents is always good. I do not represent every company or have expertise in every arena. I get referrals from both captive and independent agents and I also give referrals as well,” he says. “There is enough business out there and I cannot be everyone’s everything, nor do I pretend to be.”
While agencies are using a variety of new methods for prospecting, referrals are far from extinct and still play a vital role in improving an agency’s book --- especially in small towns like Orofino, Idaho where Neal Johnson runs Walrath Insurance Agency, Inc.
“We have tried telephone lead list, and (it) turned out a lot of the clients we already wrote with other carriers,” Johnson says. “Since we are in a rural community and active in community affairs, we work primarily with referrals, from current customers, realtors and mortgage lenders. Service in the rural area is not dead, we still meet with our customers when they have a claim and need that personal attention. We try to have annual contact with all of your clients, either by mail, phone or personal contact on the street.”
Despite the wide array of options available to agencies today, some do still struggle with bring new customers in the door. David Wilgus, owner of Wilgus Associates, Inc. in Bethany Beach, Del., has the following advice for anyone looking to boost their book of business.
“If I were struggling I would get involved in the community,” Wilgus says. “I would become a member of the local chamber of commerce. I would get involved in the local fire company or a church. I would advertise my business in the papers and spend a lot of time knocking on the doors of businesses in the area. My business information would also be posted on the internet. I would also ask the carriers I represent to assist me with these costs and help me pin-point accounts in my area that they want to insure. These are practices I try to do whether I’m struggling or not in this business.”
Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.
On the Hill From the White House to Your Desk
What the economic stimulus package and new requirements for employee benefit plan service providers mean for you.
This week, President Bush signed an economic stimulus package that will put money in the hands of many Americans and provide tax incentives for many businesses. Unfortunately, a negative development from the administration also occurred this week. The Labor Department recently proposed burdensome new requirements on employee benefit plan service providers that negatively impact independent agents. In response, the Big “I” has submitted a formal comment letter with complaints about the proposal and suggestions for improvement.
Economic Stimulus Package
On Wednesday, the President signed into law H.R. 5140, the Economic Stimulus Act of 2008. This economic stimulus package authorizes rebate checks to middle and lower-income individuals and families, provides temporary tax incentives for businesses and increases loan limits on government-backed mortgages. These measures are designed to provide a boost to the economy.
The rebate checks will consist of two parts: a basic rebate and a rebate per qualifying child. The total of these rebates will be reduced for higher income earners. First, qualifying recipients will receive a minimum basic rebate of up to $600 (individuals) or $1,200 (married couples). Those receiving the basic rebate will also receive an additional $300 per child. The total of these two parts of the rebate will be reduced at a rate of 5% of adjusted gross income above $75,000 (individuals) or $150,000 (married couples).
Businesses will also benefit from the stimulus package through temporary increased elective expensing limits and bonus depreciation. Currently, small businesses may elect to expense the cost of qualified assets they purchase in the year when the assets are placed in service, within certain limits. For taxable year 2008 only, the stimulus package increases the expensing limit to $250,000 (up from the current $128,000) and the phase-out threshold to $800,000 (up from the current $510,000). In addition, and also for taxable year 2008 only, the stimulus package allows a trade or business to depreciate an additional 50% of the cost of an asset acquired and placed into service in 2008.
Finally, the stimulus package raises Federal Housing Administration’s (FHA) and the government sponsored enterprises’ (Fannie Mae and Freddie Mac) loan limits (the dollar amount of a mortgage that FHA can insure). This measure is intended to increase credit availability in the mortgage market.
Employee Benefit Plan Service Providers Proposal
The Department of Labor recently proposed an amendment to the requirements of ERISA section 408(b)(2), which would impose significant and burdensome compensation and conflict of interest disclosure requirements on ERISA-covered employee benefit plan service providers, including independent insurance agents and brokers. On Monday, the Big “I” filed a comment letter criticizing the proposal and suggesting improvements.
ERISA’s Prohibited Transaction Rule generally prohibits the furnishing of goods or services between an employee benefit plan and a party in interest to the plan. However, ERISA sec. 408(b)(2) exempts from the Prohibited Transactions Rule service contracts or arrangements between a plan and a party in interest if the contract is reasonable, the services are necessary and the compensation is reasonable. The proposed amendment attempts to clarify the meaning of “reasonable” contract or arrangement in order to provide both plan fiduciaries and service providers with regulatory guidance.
The scope of the proposed amendment would apply to independent insurance agents and brokers who provide services to employee benefit plans and would require, among other things, that the contract or arrangement for service be in writing and disclose the services to be provided to the plan and all compensation to be received. In addition, the service provider would be required to provide numerous disclosures concerning conflicts of interest.
In response to this proposed amendment, the Big “I” filed a comment letter criticizing the proposal as it relates to independent insurance agents and suggesting changes to improve it from the agent perspective. A chief concern was the inappropriate application of the proposed amendment to insurance service providers in light of the clear focus on pension and 401(k) plans. The comment letter also criticized the overly broad and detailed compensation requirements as they relate to independent agents, pointed out the compliance challenges and urged a more distant effective date. For the full text of the letter, click here.
Jason Spence (Jason.spence@iiaba.net) is Big “I” assistant vice president of government affairs.
Legal Advocacy Free Fall from Fame and Fortune
Lerach sentenced for paying kickbacks to “professional plaintiffs.”
William Lerach, a former partner with a well-known New York law firm now known as Milberg Weiss, has been sentenced to two years in federal prison and two years probation, been fined $250,000 and has been ordered to perform 1,000 hours of community service.
Lerach’s law firm litigated in the class action arena, with many lawsuits filed against household name corporate defendants including Prudential Insurance, AT&T, Microsoft and WorldCom. And the insurance industry was affected not only by carriers being named as defendants, but also by virtue of the costs incurred for defense, settlement and judgment costs under policies in place for other corporate defendants targeted by these lawsuits.
Lerach and his partners were alleged to have paid kickbacks to “professional plaintiffs” to serve as lead named parties in these actions. Prosecutors believe the kickbacks totaled more than $11 million, and the law firm is estimated to have made more than $250 million over two decades.
“I pleaded guilty in this case because I was guilty…It was, as they say, felony stupid,” Lerach reportedly said before sentencing.
For many in the legal and business communities, this case represents long-overdue justice. Class action litigation is often perceived as being filed by nominal plaintiffs with little or no real interest at stake against “big business” with deep pockets. This often has been the claim in securities class action litigation where a few shares bought just before a decline in stock price purportedly based on inaccurate information about the financial condition of a company lead to a class action lawsuit. Those types of lawsuits generated millions in fees for plaintiffs’ lawyers and often little for the plaintiffs allegedly harmed by inaccurate information. Many settlements have been reached that included no meaningful reforms in business practices or cash payouts to “injured” plaintiffs, but instead included terms like coupons for reduced or free future services from defendants for those covered by the suits. Thus, to many, these types of class actions appear to be less about real harm to real plaintiffs than big fees to lawyers.
So far, seven have pleased guilty in this investigation, including two other former partners of the firm.
Debra Perkins (debra.perkins@iiaba.net) is IIABA executive vice president and general counsel.
L&H Trends Cutting Taxes with Love
Give an IRA this Valentine's Day and save money on taxes.
Today is Valentine’s Day and another important holiday is just eight weeks away --- April 15 --- tax filing day. How are these two days related? Valentine’s Day, like most American holidays, has been commercialized and is synonymous for gift gifting between soul mates. April 15 brings a different kind of mandatory giving, but there are ways to lessen the tax bite. An opportunity exists to combine both occasions and give the gift that keeps on giving.
What is this opportunity? Why not give your spouse an IRA or, if they work in an agency, a SEP IRA, and lower your tax burden for 2007? Eventually the candy is eaten, but a Valentine’s Day IRA or SEP contribution grows over the years and serves as a reminder of the thoughtful person who started it every time a spouse checks his/her balance online or gets an account statement in the mail. It isn’t too late to open an account. The deadline to set up an IRA contribution for the 2007 tax year is April 15 and up to $4,000 can be contributed for 2007 (plus an additional $1,000 for those who were age 50 by Dec. 31, 2007). There are rules pertaining to establishing a regular IRA, after-tax IRA or ROTH IRA. For more information, click here.
Those who don’t sponsor a retirement plan can set up a SEP for 2007, but it must be established and the contributions completed by the tax-filing due date. Anyone who files for an extension on their tax return has until the due date of the extension to fund the SEP. For a sole-proprietor, the maximum contribution is 20% of net operating income, up to $45,000. If the agency is a C Corporation, the maximum SEP contribution is 25% of compensation, up to $45,000. Please note agency employees who are over the age of 21 and have worked at least three of the five previous years must be covered under the plan. For small agencies, the SEP can be a very flexible tax-savings vehicle that may lower payroll taxes as well as income taxes. And, if your spouse receives income from the agency, he or she will receive a contribution.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
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