T H U R S D A Y ,  A U G U S T   2 8 ,  2 0 0 8 

 Big “I” National News

P-C Trends
Hurricane Katrina Three Years Later
Looking back at lessons learned and what comes next.

Tomorrow marks the three-year anniversary of the single largest natural disaster loss in the history of the insurance industry --- Hurricane Katrina. And with Gustav getting ready to make landfall, the memory of Katrina still haunts the Gulf Coast.

When Katrina hit the Gulf Coast on Aug. 29, 2005 the storm caused more than $40 billion in damages from 1.7 million claims and irrevocably changed the face of the insurance industry. Years later, the hurricane’s multi-faceted effect is still being felt by independent agents, brokers and their customers.

Katrina undoubtedly altered the way insurers do business, but in the aftermath the two biggest consequences were availability and affordability. Carriers retreated from hurricane-prone areas and those that stayed raised rates, making it difficult for agents to find affordable coverage for customers.

“Katrina initially had a major impact on the availability and affordability of coverage,” says Angelyn Treutel of Treutel Insurance Agency, Inc. in Bay St. Louis, Miss. “Many major direct carriers chose to pull out of the impacted zones. However, the good news, that never seemed to get much publicity, was that our independent agent Trusted Choice^® companies continued to provide coverage in the affected areas.”

The affordability or pricing of insurance post-Katrina was largely due to the risk that was magnified by the damage caused by the storm. Since Katrina, insurers have faced the imminent threat of another mega-catastrophe and the challenge of projecting future losses ---especially in hurricane-prone states. Prior to the storm, insurers recognized the coast’s vulnerability; however, the risk was quantified in the wake of Katrina. Today many insurance companies are still fighting courtroom battles with state insurance departments over whether risks and the rate increases associated with them are legitimate. And there is likely little reprieve in site as this year’s hurricane season expected to be above average and the frequency and severity of storms is predicted to increase for an indeterminable amount of time. Add to the equation the rising value of coastal property and the quest for determining true risk is far from over.

“While 2005 was by far the worse year ever for insured catastrophe losses in the U.S., future storms could prove even costlier, reaching upwards of $100 billion,” says Robert Hartwig, president of the Insurance Information Institute (III). “Disaster losses along the coast are likely to escalate in the coming years because of huge increases in development and rising building and repair costs.”

Another big lesson learned from Katrina was the need for preparedness. When the storm hit the Gulf Coast many agents weren’t ready to handle a Category 5 hurricane and were left scrambling, not only to help insureds, but also to manage damage at their own agency. 

“The industry was clearly overwhelmed by the magnitude and scope of Katrina,” says Randy Lanoix of the Lanoix Insurance Agency in Lutcher, La. “Hopefully they (the carriers?) learned that they need larger response teams when they have these types of mega-catastrophes. There was clearly a lack of adjuster capacity…they need to be ready with the resources to apply to a big events like this.”

Treutel also stresses the need for agents to be ready for any situation and says technology is a critical component of disaster preparedness.

“I encourage all agencies to take advantage of the wonderful resources available through ACT (www.independentagent.com/ACT),” she says. “My husband, David Treutel, and I have made many trips to share our Katrina experience with state associations, and our message is that disaster preparedness is not a luxury, it is a necessity. Agencies must be prepared to be able to operate their agency from the moon, if needed, to serve their customers.”

While the insurance industry seems to have learned some valuable lessons from Katrina, the true test of whether it’s really put them into practice is yet to be determined, according to Lanoix.

“We won’t know that until the next Katrina hits,” he says.

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





P-C Trends
Staying Strong
The p-c industry remains steadfast amidst a struggling economy.

Property insurance pricing is falling and agents and brokers are feeling the pressure, but the property-casualty industry is fairing well despite the economic downturn, according to a market report from Edison, N.J.-based NAPCO.

“The weak economy and credit crunch, while presenting significant problems for some insurers and particular lines of insurance, do not have as pronounced an effect on the overall property-casualty insurance industry as they do on other segments of the financial services industry,” the report says. “But when poor financial results, largely from write-downs related to subprime mortgages, lead to the ouster of the CEO of one of the world’s largest insurers (and the largest provider of property insurance capacity) – as happened at AIG in mid-June – the pervasive feeling of uncertainty is understandable.”

Profits in 2006 ($65.9 billion) and 2007 ($61.9 billion) brought the market to its “cyclical peak,” according to the Insurance Information Institute (III), however the industry is now on the down-slope of the cycle. And, according to a recent projection from Fitch Ratings, the industry is expected to end its five-year streak of underwriting profitability this year with a 100.4 combined ration, an increase from 95.6 in 2007.

“Some insurance and reinsurance CEOs have suggested that it would take $60 billion in aggregate losses to change the direction of pricing. Whether or not the industry experiences losses of that magnitude, a volatile stock market and low interest rates will increase the pressure on carriers to produce true underwriting profits,” NAPCO says.

While rate reductions over the last year have pricing headed towards pre-Hurricane Katrina levels, there is still apprehension about inadequate pricing stemming from post-Katrina modeling and information systems, and larger capital requirements. Yet despite the tumultuous nature of the current market, the study says agents and brokers need to remain focused on a cornerstone of the independent agency system --- the commitment to maintaining strong relationships with customers.

“We’ve seen a dramatic turn from the hard market challenge of finding carriers to complete an insurance program,” NAPCO says. “The challenge today may look very different, but at the heart of it, it is the same: How to best serve clients by arranging the best quality coverage for the best price. The message for agents and brokers is to treat every renewal like a new account, re-evaluating the risk, and considering new ways to intelligently structure a program that protects their renewal in the event of another capacity crunch.”

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





In the States
Michigan Appeals Court Sides with Credit Scoring Ban
Insurers to challenge the decision in the state’s highest court.

Thanks to a 2-1 decision handed down last week by a Michigan appellate court, the Wolverine State is a step closer to implementing a controversial regulator-imposed ban on the use of credit scoring.

The path to last week’s ruling began in 2005, when the Office of Financial and Insurance Regulation (OFIR) promulgated a series of regulations that would have effectively prohibited insurers from using credit scoring and credit information to help set auto and homeowner insurance premiums. The Insurance Institute of Michigan and others in the industry immediately challenged those rules, and a circuit court judge declared in April 2005 that OFIR’s proposal was invalid and unenforceable. The state appealed that finding, and the Michigan Court of Appeals overturned the circuit court’s decision in its decision last week.

The Court of Appeals decision is complex and cumbersome, and there was little unanimity among the three judges that heard the case. Each judge issued an individual opinion (an uncommon occurrence), and the case turned largely on technical administrative law questions.

Gov. Jennifer Granholm, an outspoken opponent of credit scoring, described the use of credit information in insurance underwriting as an “unfair, illegal practice” and cited the decision as “great news and an important step in lowering insurance costs for many Michigan residents.” In addition, she claimed the decision would “squarely impact the pocketbooks of consumers, who once again can expect their insurance rates to be based on the actions they take, rather than on unreliable and arbitrary credit scores.”

The insurance industry criticized the latest decision and has promised to appeal to the state’s highest court.  Insurer representatives pointed to the benefits of using credit-related information in the underwriting and rating process and maintain that it is an accurate predictor of the risk of loss. The industry argues that using credit information enables insurers to provide lower rates to most consumers and offer policies that may not have been available without the underwriting confidence that credit scoring provides. 

Although the Court of Appeals ruling is a disappointment to the insurance industry, it will have little immediate impact since there is a stay in effect until the Michigan Supreme Court considers the ruling and issues its own determination.  

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.




Forms & Substance
The Shocking Truth about Power Surges
Homeowners policies can offer protection from surges, but there are limitations.

Power surges can cause extensive damage to electronics in businesses and homes, but whether they’re covered by a standard insurance policy depends on if the property is commercial or personal. Most standard commercial insurance policies don’t offer protection from power surges, however a homeowners policy can provide some coverage, but exclusions apply.

A Florida agent recently had the following question regarding power surges:

“My client called saying he received a 'stuffer' in his monthly Florida Power and Light (FP&L) bill offering insurance against power surge and lightning. What coverage does the typical homeowners policy provide for power surge, and should my client take the offer from FP&L?”

FP&L has an arrangement with an admitted carrier to provide this coverage. Of course lightning damage to the building and personal property is covered in all homeowners policies. The standard ISO 1991 HO-3 policy covers personal property for damage caused by “artificially generated electrical current.” In plain speak, that’s a power surge. A limitation though is, “This peril does not include loss to a tube, transistor or similar electronic component.”

In the Homeowners 2000 program, the 2000 HO-3 language adds the following as not covered: “...electronic components or circuitry that are part of appliances, fixtures, computers, home entertainment units or other types of electronic apparatus.” In today’s high tech homes, a large amount of personal property contains these excluded items and damage costs can add up quickly. Keep in mind this limitation of coverage applies to personal property only and not to building property. Thus, items such as a built-in range, central air conditioning system or home alarm system would not be subject to the limitation and would be covered for “power surge” claims.

There is a relatively easy way to avoid the tube, transistor and electronic circuitry problem. By adding the HO 00 15 endorsement (Special Personal Property Coverage) to the 1991 HO-3 form, the limitation for all the electronics is eliminated. In the Homeowners 2000 program, the HO 00 15 will not be supported any longer, but the re-introduced HO-5 form will serve the same purpose.

The additional premium for the HO 00 15 or the HO-5 is typically only 10% or so of the base premium. In the HO-6 form you can use the HO 17 31 and HO 17 32 for “special” coverage to the personal property and building. Under Homeowners 2000, even those with an HO-4 can now get the “special” coverage with the HO 05 24.

As far as whether the client should purchase the coverage, that’s an individual decision. According to the FP&L flyer, the cost for $2,000 of coverage is $5 per month and $5,000 coverage is $12.50 per month, with higher limits available. One advantage of the FP&L coverage is it would cover the homeowners policy deductible (there is no deductible on the FP&L coverage) and it may save a client from ever having to submit a claim under his homeowners policy. Another advantage is those clients who don’t have access to “special” coverage under their homeowners policy (not all companies provide it) would be covered for damage for the tubes, transistors and electronics excluded by the policy. It’s just a matter then of letting the client decide if the additional costs of the FP&L policy are worth the benefits.

To read the entire article, click here.

David Thompson (dthompson@faia.com) is a full-time instructor for the Florida Association of Insurance Agents (FAIA).




Agency Management
Unlocking Power and Potential
Five ways managers can empower employees and become better leaders.

As the boss or manager of your company, do you frequently feel like things are spinning out of control? If the answer is yes, you’re not alone. All too often, employers find themselves struggling to keep pace with day-to-day responsibilities of the job. Yet it’s usually their ownership of these responsibilities — and the fear of letting go of them — that bogs down the workplace and stifles overall success.

If letting go is a challenge, consider the following five ideas for empowering your people and becoming a better leader. Each has the ability to unlock the power and potential of your team, enabling your company to achieve the success it deserves.

1. Find an accountability coach. Just as you would consult an attorney on how to handle your company’s legal issues, find someone who is impartial to assess and improve upon your leadership style, as well as hold you accountable for your own success. Tough as it may be to let someone coach you on your current approach, this person has one key, crucial mission: to help you achieve your full potential as a leader.

2. Become an empowering leader. To become an empowering leader, you must first determine what kind of leader you are today, using what’s called the “empowerment pendulum.” Do you lean toward the control side of managing your employees, or is your management style more on the empowerment side? Ideally, you want to empower others, and that’s accomplished through training, coaching, accountability and supporting employees by providing the resources and opportunities to learn from mistakes. It’s also achieved by trusting your employees and making sure their values align with your company’s values.

3. Establish and maintain fundamental business practices, policies and procedures. In everything you say and do, stay focused on practical solutions. Ask yourself what works and what doesn’t because the answers to these questions will uncover the secrets to running your business effectively. They will also shed light on the six business fundamentals: leadership, mission, vision, values and strategies and goals. Ultimately, you’ll need to define, establish, implement, track and evaluate each of these core fundamentals. If this sounds like a massive undertaking, relax! The good news is you will not be the one doing all the work for a change. Instead, you’ll be training and managing your team to carry out these business fundamentals. Through this effective leadership approach, you’ll be able to relinquish unnecessary control of the company and turn your attention toward developing your business instead.

4. Focus on the company’s vital factors. You know it’s important to monitor your body’s health with regular checkups that measure and evaluate your vital signs. So when it comes to a company’s health, an effective leader should also focus on vital signs or what is called the organization’s “vital factors.” These are the crucial components that must be measured and accomplished for an efficient system. As the boss or manager, it’s your job to define both the company’s and your employees’ vital factors, determine how to impact these vital factors, and then teach your team to do so as well. This is most often done by measuring and creating ways to improve, as well as using a planning checklist that outlines how to fix each part of your company’s system.

5. Create passion with your people. This is the final secret to unlocking your team’s power and potential. Any leader can do this by motivating and inspiring employees, but a truly effective leader goes one step further and implements accountability. As mentioned, accountability is empowerment, and empowerment breeds passion. This boils down to measuring employee performance and taking appropriate, timely action. Many employers fail to implement accountability out of fear or because they view “taking action” as a negative. They believe this means pulling the employee aside to discuss how he or she is not improving, despite training and numerous opportunities to excel. But accountability can also be — and should be — a positive experience. Always be on the lookout for ways to proactively impassion your team. Accountability is the most underused tool on the part of mangers, yet it’s probably the most important. By learning to let go of the reins a little bit and pass on responsibilities to your staff members, you will unlock the power and potential of your organization.

Lee Froschheiser (www.MapConsulting.com) is president and CEO of Map Consulting (MAP) and co-author of the best-selling book, “Vital Factors, The Secret to Transforming Your Business – And Your Life."