THURSDAY, AUGUST 19, 2010  

                                                Big “I” Association News





P-C Trends
Asbestos-Related T.V. Commercials on the Rise, but Who’s Footing the Bill?
Cost of lawyer advertising equals more than 50 Super Bowl commercials.

Recently while on some business travel, the break in routine exposed me to more daytime television than I typically see.  Right away, I noticed the regular cadence of attorney-sponsored commercials about mesothelioma, a rare form of cancer usually caused by exposure to asbestos. How much money is being spent on these advertisements and who is footing the bill.

In turns out that the expenditures by law firms in asbestos-related advertising are equal to 50 to100 Super Bowl commercials, or Super Bowl units. How? Required insurer reports to regulators show property-casualty carriers pay out $3 billion each year in asbestos-related claims. From there, add an approximation of how much is being funded by firms outside of insurance coverage and then use typical ratios of attorney contingency fees and usual “advertising to sales ratios” for similar high profit, direct-to-consumer advertising. Perhaps the trickiest assumption is how much companies like the bankrupt Johns-Manville are funding on average each year outside of insurance coverage. Using a ratio of self-funding to insurance of 50% to 133% creates the table below. Cost estimates for asbestos-related ads range from $125 to $315 million per year, or 37 to 105 Super Bowl units.

The question that follows naturally for the insurance agent is, if $3 billion of the settlement is being provided by p-c insurers, which carriers are footing the bill?  As it turns out, about 30 insurer groups are paying most of the cost of asbestos damages. A.M. Best Company, Inc. has been tracking the impact of the both asbestos and environmental/pollution liability on the insurance industry; its U.S. Asbestos & Environmental Liabilities Special Report finds that the top 30 insurers are covering about 95% of the A&E losses and asbestos is responsible for 80% (or about $3 billion) in payouts in 2008. Best’s looks at the impact of total A&E losses on insurers and the top 30 range from an average impact of less than 1.2 percentage points to a high of nearly 13.8 percentage points. Judging from news reports in 2009, the trend evidenced in 2008 will continue and more dollars will be paid out and more reserves set aside by the insurers will be exposed.  Best expects to have an update to the 2008 report, covering 2009 data, sometime this fall. The full 2008 report is available from the A.M. Best website here.

U.S. Asbestos and Environmental Liabilities—Combined Ratio Impact (2004-2008)
Insurers identified with “heavy” drag (>3 points) and Asbestos Mix



Source: Best’s Special Report, “U.S. Asbestos & Environmental Liabilities,” December 7, 2009.  Note “asbestos mix” is defined as the net asbestos and environmental reserve share attributable to asbestos.

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





On the Hill
Insurance Regulators Tackle Health Care, Other Issues at National Meeting
NAIC adopts resolution highlighting role agents play in health insurance delivery.

The National Association of Insurance Commissioners (NAIC) concluded a week-long series of meetings in Seattle on Tuesday, and discussions concerning the implementation of the “Patient Protection and Affordable Care Act” (PPACA) and the future role of the agent in the health care delivery system were featured items on a full and comprehensive agenda.

Perhaps the most notable health insurance action taken by the regulators was the NAIC’s adoption of a “Resolution to Protect the Ability of Licensed Insurance Professionals to Continue to Serve the Public.” The Big “I”-supported resolution highlights the wide range of important advisory and advocacy services that agents and brokers provide to consumers and small businesses, recognizes the expertise and skill of licensed insurance professionals and observes that the purchasers will need insurance producers more than ever following the passage of the federal reform law. The document also states that both federal officials and insurance regulators need to acknowledge the critical role played by agents and brokers as health care reform is implemented and to establish standards and requirements to ensure that qualified insurance professionals “continue to be adequately compensated for the services they provide."

In addition to its call for preserving the role of health insurance agents, the resolution also urges caution as officials develop state insurance exchanges and determine the parameters and restrictions that apply to so-called “Navigators.” As the statement correctly notes, the Navigators program could provide an avenue for untrained individuals to evade licensing requirements and expose consumers to harm unless their compensation and activities are properly defined and restricted. The resolution—which was adopted by voice vote and is available online—was sponsored by Maine Insurance Supervisor Mila Kofman and cosponsored by 23 additional commissioners.

On a related note, the NAIC’s Health Insurance and Managed Care Committee also expressed its support for protecting the role of the insurance agent in the health care arena with the adoption of a new charge on Monday. Specifically, the charge calls on the committee to assess what actions are necessary to ensure that producers may continue to assist individuals and small businesses with health insurance needs inside and/or outside of the state exchanges. The ommittee’s Exchanges Subgroup also met over two days to discuss the development of health insurance exchanges, which must be operational by 2014. State officials in many jurisdictions are expected to seek the legislative authorization necessary to establish the exchanges in 2011, and the NAIC subgroup is quickly working to identify issues that must be addressed and perhaps offer specific recommendations in certain key areas. States will have some degree of discretion to determine the structure and operation of the exchanges, and the manner in which this occurs will be of considerable interest to the agent and broker community.

The NAIC also continued its consideration of implementation issues related to PPACA’s medical loss ratio provisions. These mandates take effect in 2011 and will require health carriers to spend a certain percentage of total premium revenue (85% for the large group market and 80% for small group and individual markets) on claims costs and activities that improve health care quality. The health care reform law tasks the NAIC with developing a proposed process for the calculation of the loss ratios, and the NAIC’s recommendations must ultimately be certified by the Department of Health and Human Services. In Seattle, the regulators approved the form—the blanks form—that will be used by health insurers to report their financial data for purposes of the MLR calculations, and the regulators will continue their work on other elements of their recommendations in the weeks to come. The NAIC must consider how federal taxes are to be treated under these calculations and which activities constitute those that improve health care quality, and the regulators have yet to clarify with certainty how agent compensation should be treated.

The emphasis on health care issues at this particular NAIC meeting drew considerable media attention – as well as public protests from organizations expressing opposition to industry lobbyists and support for a government-run health care system. An already eventful meeting became chaotic when it was announced late last week that President Barack Obama would be addressing the attendees on Tuesday morning. However, after many regulators and private sector participants changed travel plans and extended their hotel stays in order to be on hand for his remarks, the appearance was cancelled.

Health care reform dominated the recently concluded meeting, but many other subjects were also examined. Several are highlighted below:

• The NAIC is also dealing with the fallout and repercussions of the recently enacted “Dodd-Frank Wall Street Reform and Consumer Protection Act,” and there was much discussion in Seattle concerning the new law’s surplus lines provisions. The act embraces a single-state regulatory approach and only permits an insured’s home state to collect premium tax payments from surplus lines transactions. The NAIC established a senior-level task force to examine the various implementation issues that will affect state insurance departments. Most of the new law’s surplus lines reforms take effect in 11 months, so state regulators will need to respond quickly.
  
• The NAIC also established a new working group to examine the controversial use of retained asset accounts by life insurers and held a two-hour hearing on the subject Sunday afternoon. The increased attention on these accounts follows a highly critical national magazine article and public calls for greater oversight and enhanced disclosure requirements. The NAIC released a consumer bulletin concerning these accounts and may implement other measures. The National Conference of Insurance Legislators has announced its intention to issue a model law later this year.
  
• The NAIC’s Producer Licensing Task Force explored ways to streamline and simplify the licensing and appointment requirements that apply to insurance agencies and business entities. Reform in this area has been an IIABA priority for many years, and the Big “I” presented and urged the adoption of a series of proposed reforms to the task force on Monday. The eight proposed standards were developed in cooperation with other industry organizations and would eliminate many unnecessary requirements (such as licensing by line of authority, the licensing of branches and the redundant filing of organizational and similar documents). The Big “I” is urging the NAIC to approve the standards in time for state-level consideration in 2011.
  
  Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.
  
  
  
  
  
  L-H Trends
  New Study Validates Investment Expenses Matter
  Clients need a “quarterback” in their corner to help coordinate their finances.
  
  Can consumers skip the recommendations of investment advisors and judge mutual funds solely on the cost of investment fees? According to a study released last week by Morningstar, the answer is yes. But does it tell the whole story?
  
  Over the past 30 years there has been an evolution in the mutual fund industry. Mutual funds became popular with consumers as a way to save efficiently instead of buying individual stocks; they offered the opportunity for diversification, professional management and a way to accumulate shares over time by dollar-cost averaging the purchases and aggregating purchases to lower sales charges. And, major mutual fund supermarkets like Schwab enabled investors to purchase mutual funds on a “no-load” basis.
  
  As the number of mutual funds proliferated, investors started to become overwhelmed by the number of offerings. At the same time that the mutual fund industry was exploding, the advent of 401(k) plans among U.S. corporations, coupled with legislation that had negative impacts on defined benefits, provided a huge avenue for investor inflows. During the 1980s, the trend was for investors to flock to successful retail mutual funds like Fidelity Investments’ Magellan Fund run by sage stock picker Peter Lynch—one of the first mutual fund superstars—and Magellan’s assets under management swelled. As investors’ focus changed from picking successful companies to invest in to mutual fund manager selection, it was inevitable that a firm like Morningstar would be born. Morningstar, known for its “five star” rating system provided investors with an apples-to-apples way to compare risk related returns. The volatility of the stock market produced large negative return years like 1987, 1989, 1999 and 2008 and demonstrated that some investment managers had strayed away from their fund’s investment objectives, resulting in large cap growth funds owning small value stocks and vice versa. This became known as “style drift,” and the outcome has been a growth of the Exchange Traded Funds (ETFs) and sector mutual funds to cater to people who want to hold funds of specific industries and market capitalization and price-to-earnings (P/E) ratios.
  
  Against this backdrop, Morningstar released a study last week that indicates that low investment fees are likely to be the best predictor of a mutual fund’s future success.  While this may sound intuitive, it is significant because the study’s results would seem to contradict the value proposition of a risk-adjusted return ranking—Morningstar’s wheelhouse—for mutual fund selection.  Rather, fees “have proven to be the sternest predictor out there,” says Russel Kinnel, director of the fund research and author of the study.  “The stars system, as a measure of past risk-adjusted performance, is going to be a little more limited.”
  
  So, what is the message for financial planners and other providers of financial advice? Is the conclusion that there is less need for their services and investors should just focus on fees? To the contrary, it means that the investment advice should focus on asset allocation, as pointed out in the seminal study on the returns of 91 large pension funds from 1974 to 1983, performed by Gary Brinson in 1986. A similar study was again performed by Brinson in 1991, and both times the results indicated that more than 90% of the returns could be attributed to asset allocation instead of individual stock selection.
  
  Agents should also note that there is still a significant role for them to help their clients focus on their objectives—like when they want to retire, their retirement savings, projected Social Security benefits, long term care, income and estate tax considerations, etc. Clients need a quarterback to help them address a number of related topics and to coordinate assistance from their other advisors. And advisors need to adapt their practices to incorporate new services that solve their customers’ needs.
  
  Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.
  
  
  On the Hill
  Big “I” Signs U.S. Chamber of Commerce Letter Urging 1099 Mandate Repeal
  Provision in new health care law requires additional IRS Form 1099 filings.
  
  On Tuesday, the U.S. Chamber of Commerce sent a letter to every member of Congress, signed by the Big “I” and more than 1,099 local chambers of commerce, associations and businesses, urging the repeal of the burdensome 1099 reporting mandate recently enacted as part of the health care overhaul law. As outlined in last week’s IN&V, the Big “I” signed onto this letter as part of a multi-pronged strategy to advocate for repeal of this provision. Last week, the Big “I” sent its own letter calling for the repeal of the provision to congressional leaders and also signed onto an American Society of Association Executives (ASAE) letter which will be sent in the coming weeks. Additionally, Big “I” state executives have been asked to send similar letters to their own members of Congress.
  
  The provision in question will go into effect in 2012 and will require all businesses to file a Form 1099 with the IRS for any business-to-business transaction for goods or services over $600 (cumulative throughout the tax year). In order to properly fill out the forms, businesses will be forced to track down and record the name, address and taxpayer identification number of each vendor. New accounting procedures will have to be put into place to ensure compliance, diverting precious resources at a critical point in our economy.
  
  The U.S. Chamber of Commerce letter enumerates the many harmful effects this provision will have such as increased costs for all businesses, stifled job growth and constrained economic output. The letter goes on to say that the heaviest burden will fall on small businesses, as they have fewer resources to put towards compliance. The Big “I” is very concerned about the impact on agents and brokers.
  
  All eyes are looking toward the Senate vote currently scheduled for September 14 on a clean repeal amendment authored by Sen. Mike Johanns (R-Neb.). If that amendment is voted down, a proposal authored by Sen. Bill Nelson (D- Fla.) is expected to be brought up that would modify the 1099 reporting provision by repealing it for businesses with less than 25 employees, and for larger businesses raising the $600 threshold to $2,000.
  
  The Big “I” strongly prefers full repeal and will continue to work toward this outcome.
  
  Ryan Young ( ryan.young@iiaba.net) is Big “I” senior director of federal government affairs.
  
  
  Forms & Substance
  Does Local Board Equal Personally Liable?
  Debate surrounds question of whether homeowners policies cover board-service liability.
  
  An agent writes to the Virtual University, “Under the homeowners policy, is there personal liability for individuals who serve as volunteers on a board? An example would be an insured who is on the board of directors of the local Chamber of Commerce. The insureds are not paid; it is strictly on a volunteer basis. We asked one of our homeowners companies and they said ‘no,’ due to an exclusion for professional services. The exclusion stated that Coverage E does not apply to ‘bodily injury’ or ‘property damage’ arising out of the rendering of or failure to render professional services. I don’t feel volunteering would be considered professional services since there is no consideration involved.”
  
  Most coverage experts consider the HO exclusion broad enough that it doesn’t require remuneration for a specific act in order that the professional services exclusion applies. If a doctor performs an emergency procedure in a non-business situation, that is still the rendering of a professional service within that interpretation. Regardless, claims that arise from someone’s service on a board often are not covered by an HO policy because they don’t constitute “bodily injury” or “property damage” as defined by the policy.
  
  Service on non-remunerative community service organizations is a serious liability issue. The key issues are: (a) injury to people (bodily injury); or (b) libel, slander and defamation of character (personal injury). Personal liability, automobile and personal umbrellas can be called to respond for community service exposures to some extent. For example, the HO policy can be endorsed to include personal injury like libel and slander. But many community service organizations have exposures beyond the scope of BI/PD/PI coverage under either a homeowners, personal automobile or personal umbrella policy. A chamber board actively involved in economic development or major community service activities may have serious D&O exposures. Unless the member is a genuine professional and engaged in providing professional services as part of their duties for the chamber board, the HO policy should apply as long as the liability insuring agreement is triggered.
  
  Prior to the 2000 edition, the homeowners policy did exclude all liability for any “business” which was defined as “trade, occupation or profession.” Some might think that volunteering for the Chamber of Commerce arose out of a person’s “trade, occupation or profession,” but most courts didn’t think so. The new HO 2000 specifically exempts “volunteer activities” from the definition of business, appearing to provide coverage for cases like this. But, it still excludes liability for any “trade, occupation or profession, full or part-time,” making coverage less than crystal clear. The courts haven’t weighed in on the new language yet.
  
  Bill Wilson (bill.wilson@iiaba.net) is Big “I” director of the Virtual University. For more information, click here.
  
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