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Big “I” National News

P&C Trends
Online Auto Insurance Sales Revving Up
Internet sales are rising, but agents are still preferred by customers.

The Internet has become one of the most popular research channels for customers shopping for insurance and in 2007, the online auto insurance industry achieved record levels of success with customers requesting more than 32 million auto insurance quotes and purchasing more than two million policies online. This represents a 15% annual growth in online quotes and a 37% growth in online policy purchases, according to the latest comScore Online Automobile Insurance Report.

ComScore surveyed more than 2,000 U.S. Internet users nationwide for the report, which analyzes the online auto insurance market and includes insights on overall auto insurance industry trends, its competitive landscape and key factors influencing customers’ decision-making process.

The survey found a total of 15% of those surveyed purchased their current auto insurance policy online in 2007, a three-point increase from the previous year. And when purchasers were divided by the length of time with their current insurers, the trend was even more striking with 28% of policies purchase in the last year attributed to online sales. According to comScore, one of the key reason customers are flocking online to research and buy insurance is because of the amount of advertising in the industry. 

“When asked what they would most likely do if they wanted more information after seeing an auto insurance ad, three-quarters of respondents said they would go online for more information,” the report says.

While online auto insurance sales are on the upswing,  it is important to note that the competitive set for auto insurance online differs from the competitive set for auto insurance overall, comScore says. Some of the large, agent-based companies such as Farmers, Liberty Mutual and American Family, generate very little quote volume online relative to their overall written insurance premiums. While Esurance, a strong player in the online space, accounts for less than 1% of total auto insurance premiums written.




ComScore’s survey also examined consumers’ preferences toward various auto insurance features and found the most important was low deductibles (55%), a well-known, trusted brand was a close second (51%), followed by full replacement value for a new car that gets totaled (45%). However, when asked what feature would increase their likelihood of purchasing online, respondents were less likely this year than last to select one specific option, according to comScore, which could indicate that consumers are becoming more comfortable with buying insurance online.

While the trend of online auto insurance sales continues to grow, comScore found customers still prefer to use an agent over other methods when buying their policies. More than two-thirds of those surveyed purchased their policies through an agent and nearly 80% of those consumers considered having an agent to be a valuable incentive.

“Despite the migration to online quoting and purchasing, local agents are still the most common channel through which consumers purchase auto insurance,” the report says. “When asked why they used a local agent, respondents most frequently cited that they like having a person who they can visit with or call.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




L&H Trends
Fixed Immediate Annuities Rise Dramatically
Agents should look at closely at  contracts and carriers when writing immediate annuities.

Sales of the immediate portion of fixed annuities are up dramatically, even while the sales of fixed annuities overall have been decreasing each year by one to eight percentage points.

According to Mike Gallo, senior vice president of retirement income at New York Life (NYL), sales are up an even more dramatic 50% year over year at his company. He attributes the dynamic sales growth to a compelling product for baby boomers concerned about longer retirements; less confidence in traditional retirement income sources like defined benefit plans and Social Security coupled with a sales force that is trained and ready to capture every opportunity. Traditional, defined benefit retirement plans provide a benefit in the form of a life annuity to the retiree (a joint and survivor annuity if they are married), but they have been replaced in many companies by 401(k) plans because of the inherent flexibility for the plan sponsor and employee.



* Source: 2008 LIMRA International, Inc. as quoted by A.M. Best’s BestDay Audio on May 21. To hear the entire podcast, go to www.bestdayaudio.com.

Fixed income, immediate annuities are sold by insurance agents and investment advisors and they require a life insurance license. A fixed income, immediate life annuity is a contract where, in exchange for the payment of premium, the insurer guarantees to provide the purchaser with an income stream for life. For example, a 65 year old could purchase such a contract for $100,000 and receive about 8% annually (about $8,000) for as long as the purchaser lives. Commissions on fixed, immediate annuities vary but 2 to 3% is common.

Since an immediate annuity is a contractual promise to pay future benefits for a period that could be for as long as 40 years, it is important that agents look to the financial stability of the carriers they are considering. Immediate annuities enable the purchaser to tailor the terms to meet their needs, such as a term certain and life (e.g. 10-year certain and life annuity, which guarantees payments for at least 10 years to a beneficiary) or a 50% joint and survivor life annuity, which provides a life annuity to the annuitant and a 50% life annuity to his/her beneficiary in the event of the annuitant’s death.

While immediate life annuities may seem simple, they can actually be a component of sophisticated asset allocation strategy because it allows the investor the opportunity to aggressively invest their remaining funds.

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

IIABA members interested in sharing any insights on this topic are invited to email Paul Buse at Paul.Buse@iiaba.net. 




L&H Trends
Consider All Investment Risks
Differentiating between systematic and unsystematic risk makes all the difference.

For almost a year, the economic news has seemed to mirror the serial cliffhangers --- those old television shows that would leave the hero facing some seemingly impossible challenge at the end of each episode. First, there was the subprime meltdown which at first only seemed to affect banks and their investors. However, it turned out that the impact was broader and affected the financial statements of indirect investors. Next, with the subprime crisis came higher interest payments, which led some homeowners into default.  With more homes flooding the market, values dropped in the hot markets of Las Vegas, Phoenix and Florida, leading a number of homeowners to walk away from their mortgages and triggering a massive downsizing of Wall Street portfolios. As the Federal Reserve lowered the Federal Funds rate, it resulted in a weakening dollar, higher energy prices and an increase in inflation causing consumer malaise. In the last few weeks housing stats and job reports have been more positive and the stock market experienced a modest rebound. Yet, the economic climate is going to remain cloudy unless energy and food prices stabilize or retreat.

What is the lesson for independent insurance agents and their financial services customers? In the investment world, a central theme is managing risk. But what exactly does managing risk mean? First, it’s important to understand the type of risks that exist for investors. There are two basic types of risk --- systematic risk, which is also referred to as non-diversifiable risk, and unsystematic risk, which is also referred to as diversifiable risk. Systematic risk is the risk associated with general economic factors and since any individual investment is influenced by economic factors, systematic risk will have an impact on all investments and cannot be diversified away by purchasing more securities. Examples of systematic risk are:

Market risk - The risk that an individual security is influenced by the general increase or decrease of the stock market.

Interest rate risk - The value of stocks and bonds are affected by changes in interest rates. Bond prices move inversely with changes in interest rates and stocks generally decrease when interest rates increase.

Reinvestment risk - The risk that interest rates may have decreased when payments are received from an investment. This is particularly an issue for CD rates that renew and bonds whose principal comes due.

Inflation risk - This risk is a very real one for people who receive fixed payments as they fear their purchasing power will decrease.

Exchange rate risk - When investors own foreign securities they run the risk of having the value of the security being diminished by changes in the relative value of the United States currency. 

All investors need to be concerned about systematic risk.  Unsystematic risk relates to the individual risk of any particular security. A recent example would be a Bear Stearns stockholder who saw the value of their holdings reduced to pennies on the dollar versus the value of the stock just a year earlier.  Accordingly, investments in any single company (or asset) are subject to the business risk (the risk that the business will fall in value), and the financial, default and liquidity risk of the particular company’s ability to meet their financial obligations to pay their creditors and that their customers pay them on time.

Investors can reduce unsystematic risk easily by purchasing additional stocks and securities or other companies in the same industry. Or, they can purchase companies in different sectors or industries and by purchasing different types of securities --- stocks, bonds, real estate, annuities, commodities, etc. --- they diversify the individual risk of a single company. 

Independent agents should take a moment to explain the types of risks investors face and what type of risk can and cannot be diversified away. Given the volatile nature of the economy, diversification is an important concept for investors to fully understand.

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




Technical Affairs Update
Fixing Onerous Policy Language
The Big "I" announces new initiative to support MATC.

Consider this claim scenario: Your insured is mowing a strip of land between his and his neighbor’s driveway. Their property line runs right down the middle. While mowing, your insured runs over an object that is thrown by his mower, injuring another neighbor who requires medical treatment. When the claim goes in to the homeowner’s insurer, the adjuster denies it because the policy says it covers the use of a riding lawn mower only if it is solely used to service the insured’s premises. Because he cut a small strip of grass owned by his neighbor, the adjuster says he has no coverage under his homeowners policy.

Or consider this coverage scenario: Your insured is about to sign a triple net lease requiring him to insure the building, a very common (if ill-advised) request. However, your insured is also required by the lease to name the landlord as an additional insured on his commercial property insurance and business income insurance. The insurers you represent have no way to provide this coverage or additional insured status.

So, as an individual agent, how do you rectify these problems? The answer is, you probably can’t. However, collectively as an association, the Big “I” can. The way we accomplish this is through a network of technical affairs committees and conferences. Many state associations have standing technical affairs committees that examine coverage and market problems presented by ISO, AAIS, NCCI, ACORD and other policy and processing forms. At the regional level, coverage issues are addressed most successfully by the two-day Mid America Technical Conference (MATC), which is held every November in St. Louis. About one-third of all Big “I” state associations belong to the MATC and send one or more representatives to the annual meeting, along with a number of technical agenda items.

At the national level, IIABA’s Technical Affairs Committee stays in close contact with ISO and other industry organizations. The committee often reviews ISO filings and acts as a sounding board for future programs that ISO is considering. Like the MTAC, ISO solicits input from independent agents on how their products affect our constituency and our customers. Every May, the national committee meets with ISO in their home office in New Jersey for a day of technical discussions.

Just two weeks ago, this committee met with ISO to discuss 40 agenda items involving homeowners, personal auto, commercial property, business auto, farm and CGL issues. The process is not always fast, but it is often effective. Of the 40 agenda items, 11 were brand new. Of the remaining 29 items, 12 were resolved as requested by the committee and the remaining 17 are still in various stages of consideration by ISO. Here is a short list of coverage enhancements that MATC and/or the national committee negotiated that will be reflected in a current commercial property filing, an upcoming homeowners filing and a recent farm filing:

*  ISO has introduced a similar endorsement (CP 15 03) that extends business income coverage to a landlord as an additional insured if required by the lease.
*  ISO will provide seven-day, temporary coverage for damage to rented facilities under the garage policy just as the current CGL policy provides.
*  ISO will be providing a more effective means for covering the use of motorized scooters, “Barbie” cars and similar vehicles in the HO program.
*  ISO will be modifying the wording in the HO policies so that a covered vehicle does not have to be used solely to service the premises.
*  ISO will be modifying the “vermin” exclusion in HO policies to remove the current ambiguity of what constitutes a “vermin.”
*  ISO will be adding a special limit in HO policies for electronic equipment, CDs, etc.
*  ISO will be expanding replacement cost coverage for swimming pools, hot tubs and similar structures.
*  ISO will be expanding the period of unoccupancy at school for theft coverage from 60 to 90 days in the HO program.
*  ISO has introduced a new commercial property additional insured endorsement (CP 12 19) for tenants to cover landlords when required by a triple net lease.
*  ISO has introduced a farm endorsement (FP 00 30) that provides coverage for collision damage to agricultural equipment tires.

When a new filing is introduced by ISO, there is a high probability that the “positive” changes in the filing began as recommendations by the Mid American Technical Conference and/or the National Technical Affairs Committee. In the coming months, the Big “I” will be initiating a formal program to encourage states to more actively support the MATC and to establish one or more liaisons at the state level to feed technical coverage issues to the national technical affairs committee in order to address them with ISO, AAIS, NCCI, ACORD and other organizations.

For more information or suggestions, please contact Bill Wilson at bill.wilson@iiaba.net.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. Virtual University's “Ask an Expert” service continues to serve as a viable informal vehicle for submitting technical coverage issues.




Forms & Substance
Helping Customers Choose the Right Deductible
Tailoring an insured’s deductible to their specific needs and risks.

With increasing premium costs, many insureds want to reduce their premiums. One way to do that is through the use of deductibles. But, how large of a deductible is appropriate for your insureds? The Virtual University “Ask an Expert” service recently received the following question:

“As property rates rise, many of our customers are looking to us for advice on larger deductibles. Is there any model or formula to advise clients when these larger deductibles make sense?”

Not only are larger deductibles a good idea from a cost savings perspective, increasingly insurers are looking to nonrenew accounts with a “frequency” problem. Therefore, it can be critical, from both a coverage and pricing standpoint, to carry the highest deductible one can afford. The $64,000 question, though, is how much can I afford?

This is a question faced perpetually by professional risk managers. So the VU faculty ran this question by some risk managers and discovered  that, on a smaller scale, the savings have to be amortizable in the difference of deductible in three to five years. And as the risks get larger, the rules change a bit. It works more off the cost of risk rather than the cost of insurance in larger property risks. So, if you are going from a $500 deductible to $1,000, you need to save at least $100 to $150 annually or it does not make sense. 

In other words, it’s not really a formula --- it’s more art than science. The elements of this science include: (1) historical claim data, (2) a meaningful benchmarks that track exposure changes, (3) relevant changes in risk, e.g. operations, protection, safety, management, (4) deductible options and premiums for each and (5) financial condition and ability to meet potential current obligations of a larger deductible. In property lines, the chance and possible effects of a natural disaster must be factored into the process.

Use loss stratification at different deductible levels, with preferably five to seven years of history, to determine the historical frequency of loss and amount of payment in each layer. Consider the information in (2) and (3), then look at the trends. Finally, summarize assumptions and do loss projections.

Advise clients to make their decisions based on a long term commitment to a large deductible program and appropriate steps within their organizations to communicate the financial implications and a commitment to best practices loss prevention and case management. There must be a sufficient premium savings over a period of three to five years to justify assuming the additional risk. 

To read the entire article, click here. 

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.