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TRIA Renewal on the Horizon |  Marsh Announces New Business Model, More Cuts |  Agent's Words for Those Who 'Saw it Coming' |  FSAs: To Tax or Not to Tax? |  Commercial Producer Compensation...How Much Can You Afford? |  Big "I" National News |

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TRIA Renewal on the Horizon?

The Senate Banking Committee will receive testimony from the Big “I” and other interested parties on renewal of the Terrorism Risk Insurance Act (TRIA). Sen. Chris Dodd (D-Conn.) and Sen. Robert Bennett (R-Utah) introduced a bill to renew the federal backstop, S. 467, on Feb. 18.

The Big “I” has been joined by many of its industry partners in strongly supporting TRIA extension. The bill introduced by Sens. Dodd and Bennett would extend TRIA for two years through the end of 2007, and require terrorism insurance coverage to be made available. The existing TRIA legislation expires Dec, 31, 2005, but action is needed as soon as possible to avoid gaps in coverage for policies with effective dates of Jan. 2, 2005, or later.

“There is a great concern within the industry that catastrophic losses related to terrorist attacks remain uninsurable, and that if TRIA should be allowed to lapse, it could be difficult, if not impossible, for businesses to obtain insurance against losses related to terrorist acts. This could have serious economic consequences in the event that another terrorist attack takes place on American soil,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs.

The Big “I” testimony strongly supports the bill and its aims. “This legislation is crucial to the insurance industry’s ability to cover catastrophic losses related to terrorism and also to preserving confidence in the market,” says Brendan Reilly, Big “I” director of federal government affairs. “This legislation is important because, if enacted, it will help provide certainty in the insurance marketplace. Passing this legislation would be a crucial development for many of the business clients of independent agents and brokers.”

Congress Daily reports that Senate Banking Chairman Richard Shelby (R-Ala.) is expected to hold several hearings this year on TRIA before deciding whether to support its extension. The Big “I” will continue to lobby intensively to make the case for this necessary backstop.

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.  

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Marsh Announces New Business Model, More Cuts

Marsh & McLennan Cos. may have put to bed New York Attorney General Eliot Spitzer’s lawsuit in January with an $850 million settlement, but the company still remains a focal point of both the insurance industry and the media. All eyes were on Marsh as it announced its fourth quarter and year-end results Tuesday and revealed plans to cut as many as 2,500 employees and restructure its rates.

After incurring costs associated with restructuring and regulatory settlements, Marsh had a fourth-quarter net loss of $676 million, compared with net income of $375 million a year earlier. Additionally, consolidated revenues declined 1% to $3 billion. For the year, the company had a net income of $180 million, a sharp decline from 2003’s $1.54 billion.

Marsh also announced that, in an effort to become more transparent, it is going to insurance companies with rate cards to establish fees for the placement of specific coverages, standardizing its charges for all carriers. It further noted that these fees will be disclosed fully to its clients.  Michael Cherkasky, President and CEO of Marsh, explained that the commission rates will be higher than previously “but will still be at the lower end of the market.”  This move is seen by some as an effort to make up for the loss of revenue from contingent compensation that Marsh agreed to discontinue as a result of the Spitzer’s investigation and subsequent settlement.

In addition to upping and standardizing rates, Marsh also says it will let go of unprofitable business, particularly small commercial accounts, that will no longer generate a profit in the absence of contingent commissions.

“The prevalence of unprofitable accounts is in part a product of Marsh’s recent reliance on contingent commissions,” Cherkasky noted during the call. “Before the abandonment of MSA revenue, a break-even or losing account could still be a profitable account because of the back-end (MSA) revenue.”

Also exiting Marsh will be about 2,500 employees, mainly from Marsh, Inc. This is on the heels of cutting about 3,000 jobs last fall. According to a Marsh statement, the job cuts, coupled with the other restructuring efforts, “should lead to annual expense savings exceeding $375 million.”

Marsh was also in the news recently when a former managing director, identified as Kathryn Winter by the Associated Press, plead guilty to a felony count of scheming to defraud.

A statement from Spitzer’s office says she “admitted that during a period from 2001 to 2004, she instructed insurance carriers to submit noncompetitive bids for insurance business, and that such bids were conveyed to Marsh clients under false and fraudulent pretenses. These noncompetitive bids allowed Marsh to control the market, protect incumbent insurance carriers when their business was up for renewal and maximize profits.”

Winter’s guilty plea is the tenth secured by Spitzer’s office in connection with his investigation into the industry.

The New York attorney general continues to expand his investigations. According to the Financial Time (London, England), Spitzer is looking into American International Group’s relationship with Coral Reinsurance and CV Starr, a private specialist insurance company majority-owned by AIG executives. The Times article says this signals “a widening inquiry into corporate governance and accounting practices at the world’s biggest insurer.”

RenaissanceRe Holdings Ltd. received a subpoena this week from the Securities and Exchange Commission seeking information on nontraditional insurance products and the company’s plan to restate previous years’ financial statements to rectify accounting errors, according to the company.

In other Spitzer news, CNA Financial Corp. received subpoenas from Spitzer’s office and from the SEC on Monday, Feb. 28. The new subpoenas deal with non-traditional insurance that regulators say possibly could be used to manipulate earnings, according to the Chicago Tribune.

And insurance brokers continue to address concerns over contingent commissions. Hilb Rogal & Hobbs Co. is the latest, announcing it will no longer accept volume-based contingent commissions, but will still accept profit-based contingent commissions. In 2004, the broker stated that it received $42.2 million in contingent and override commissions.

Finally, the National Association of Insurance Commissioners is still in discussions about its producer compensation model law. It is seeking written comments and input by March 9 on the following questions:

1. What additional requirements or safeguards should be in place to prohibit a producer from placing its own financial or other interests ahead of its customer's interests in an insurance transaction?
2. If a limited number of brokers and insurance companies are prohibited from receiving or paying contingent commissions, what are the potential marketplace implications?
3. Should a producer be required to offer to disclose to the customer all quotes received and anticipated compensation for a placement of insurance?
4. Is current law sufficient to require all producers to respond completely and accurately to customer inquiries?
5. What types of financial or other interests in an insurer or reinsurer should a producer be required to disclose at the time of the transaction?
6. Should insurance companies be required to state all compensation paid to a producer on all quote letters and declaration pages of policies?

Stay tuned to IN&V for updates on NAIC’s next move.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

V I E W :    P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Agent’s Words for Those Who ‘Saw it Coming’

The following letter to the editor is in response to the Feb. 24 IN&V article “Industry Insiders ‘Saw it Coming’:

I usually do not take time to write to editors or respond to articles. In the case of this article I felt compelled. The article states that 21% of the total respondents “saw it coming” or otherwise had some specific knowledge of cheating, bid-rigging and all the other manipulations of their own clients (presumably) who had put their trust and confidence in various “alphabet” brokers. [In a recent Q.Know Technologies, Inc. survey on information transparency, of the 70% of respondents who said they were aware of alleged bid rigging activities, 21% “saw it coming.”]

Nearly one fourth of those respondents admitted to knowing of this dishonesty and self-dealing, and thereby admitted to you that they also had no morals, no honesty and no personal integrity themselves to the extent that none of them came forward and even made a half-hearted attempt to right the wrong....the wrong they knew all about.

How sad a commentary is that about our industry, an industry in which individuals and corporations place their trust in us to protect them and their personal and corporate assets, to the very best of our ability, at the best pricing possible. This is the heart and soul of human interpersonal relationships—trust and honesty. It also is the heart and soul of one’s fiduciary duty to the client: Always, always, always do what is best for the client first, last and always.

The “alphabets” are indeed a sick crowd, and they owe every one of us, independent brokers, underwriters, claims adjusters and everyone else who works in this industry, a very loud and very public apology. Most of all, the “alphabets” should all be required to account for every penny they received as a result of these illegal and dishonest acts, and that money should go back to their clients in triple-penalty form. The money should not go to Mr. Spitzer’s funds, the state of New York, or any other state because it’s not their money. It’s money that has been literally stolen from insured clients of the various firms involved.

Honesty and integrity is really the only thing of any substance, or any real value, any of us have to offer one another.

Regards,
Tom Davis
President, Davis American, Ltd.
Oak Brook, Ill.

L & H   T R E N D S
FSAs: To Tax or Not to Tax?

Social Security reform is all over the news lately. Among the debates: Should the ceiling on the amount of earnings subject to Social Security taxes (FICA) be increased from the current $90,000? In theory, raising the ceiling cap brings in more revenue. At the same time, it creates a significant tax increase on self-employed individuals or owner-employees of closely held corporations.

Regardless of your opinion, there is a troubling development buried in the budget. Currently, an employee’s contributes to a 401(k) plan are not included in federal and state income taxation but are included in FICA contributions. When the employer makes the contribution to a retirement plan, the contribution is not included for FICA purposes. This is very important in tax planning for small businesses and helps encourage all employees to contribute to their retirement plans.

Due to the rising cost of health care, in the 1980s “cafeteria plans” were developed to allow employees to choose from several medical plan options and to contribute to Flexible Spending Accounts (FSAs). These FSAs allowed employees to pay for deductibles, co-pays, dental, vision and other eligible un-reimbursed health care expenses on a pre-tax basis for federal, state and FICA taxes. While the largest companies established FSAs for their employees (dependent care accounts were usually offered to pay for daycare expenses), over the years, medium-sized and smaller employers have implemented FSAs to help employees pay for gaps in their health insurance plans. For many employees, having a FSA allows them to pay for these health expenses with tax subsidized dollars—as much as 40% of the cost. The use-it-or-lose it requirement tempers abuse of these accounts.

As a revenue-raising measure, the latest budget proposal would subject employee contributions to a FSA to FICA taxes. The justification for this is to achieve “parity” with 401(k) plan contributions. Should this provision be adopted, it will increase taxes on the middle class and further add to the cost of health care. It also will discourage individual responsibility. This change is being considered regardless of whether broad changes will be made to the Social Security system. This means that the revenues will be used for any purpose, not necessarily to fund future Social Security benefits.

There has not been any public debate on this aspect of the budget. However, for independent agents that help their clients with their health insurance programs, it is a siren call to let your clients know that this could happen. Independent agents who are not happy with this development need to tell their elected federal representatives the potential impact on businesses and middle class taxpayers. The Big “I” is working with other coalitions to stop this initiative. Stay tuned in the coming weeks.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine.

P & C   T R E N D S
Commercial Producer Compensation...How Much Can You Afford?

Unfortunately, there is no magic to setting up producer compensation programs for commercial lines. As many agencies as exist is just about how many different types of compensation plans are in place. Each agency owner or manager asks fellow agents to describe how they handle commercial compensation and invariably add their own twist to it. There are however, three things to keep in mind:

• Are producers also owners?
• Do producers have a vested interest/ownership in their book of business?
• Do you have a star producer (more than $350,000 in commission produced)?

Each of these probably will require that you make some adjustments to any standard compensation plan.

First of all, it is not just what you pay producers; it has to be what you can afford to pay producers. So any plan you design should take into consideration a profit percentage for the agency.

The first step is to figure out what it costs to handle the producer’s business. We like to tell our clients to take 15% right off the top as profit directly to the agency’s bottom line. Take into consideration a percentage of operating expense, management expense and sales expense. Take provide employee benefits, retirement plans, a matching 401(k), auto allowance and/or expense money for entertainment into consideration when developing the compensation plan.

In addition to that, you may need to consider your market area. Are producers difficult to retain? Do they move from agency to agency? This will also need to be considered in the overall package.

Once you determine the expenses related to handling the producer’s book of business and take your profit off the top, you have the realistic number you can pay this person. You may say, “This only comes to a 15% cut of commission for the producer. No one will work for that!” You are right. So there are a couple of things that you must take into consideration. What expenses did you load that would not really apply? What percentage of the commission dollar does the producer receive in non-direct commission split?

Now it makes sense why most large brokers see fit to pay producers 20% of the commission they generate. If they meet or exceed their goals, they usually receive a bonus because they have, after all, made a major contribution to the continuing success of the organization. On the other hand, if they fail to meet goal, they are penalized with a lesser commission rate or told to seek employment elsewhere.

It is equally important to tie the compensation plan to the agency’s bottom line and to take into consideration the producer's needs. Consider also the agency’s growth goals. Is the producer key to achieving these? Then you may want to consider higher percentages for new business and a lower amount for renewal. This will cost the agency in the first year if the producer actually brings in the new business, but then there is a price to pay for most anything worthwhile.

To read the complete article, available on the VU Web site, click here.

Judith H. Newman (JudiNewman@aol.com) is president of Phaze II Consulting, Inc. and the owner of the Master Agency Manager.