THURSDAY, NOVEMBER 18, 2010  

                                                Big “I” Association News




On the Hill
Congress Reconvenes for Lame Duck with Big “To-Do” List
A myriad of tax issues loom.

Congress reconvened this week for a lame duck session following the historic elections earlier this month. Both parties returned to Washington this week essentially to hold leadership elections and organize orientation meetings for the incoming freshmen members of Congress. The real legislative heavy lifting will be done after the Thanksgiving holiday.

The to-do list before the end of the year is long since up until now the 111th Congress has chosen to punt on addressing the expiration of the 2001 and 2003 tax cuts and tax extenders legislation. As previously detailed in the October 2010 issue IA magazine (you must be logged in to read the piece), if Congress fails to act before midnight on Dec. 31, a wave of tax increases will be set off, including hikes in marginal tax rates, capital gains and dividends, as well as a huge hike in the estate tax. Prospects for passing at least a one- or two-year extension in many of these areas seem good, especially regarding the marginal income taxes. The prospects for the estate tax are not as positive, as pressure has been on Congress to pass a fix for more than a year with no results.

Other tax items of concern during the lame duck session are passage of a yearly alternative minimum tax (AMT) patch to prevent millions of middle class tax payers from being subjected to the “stealth tax” and an outside chance of action addressing the 1099 reporting issue. As always, the AMT fix has broad bipartisan support and will most likely pass. The effort to repeal the burdensome 1099 reporting provision got its latest boost when Chairman Max Baucus (D-Mont.) of the Senate Finance Committee recently introduced a repeal bill. Although there’s no word on legislative movement on that bill, its introduction is a very positive sign. The 1099 reporting requirement does not go into effect until 2012, but the Big “I” has been pushing for its repeal as soon as possible.

President Barack Obama is currently scheduled to meet with leaders of both parties from the House and Senate on Nov. 30 to discuss the lame duck agenda. The Big “I” government affairs team will be keeping a close watch on the outcome of this meeting and continue to press for passage of all tax cut extensions, as well as an AMT patch and 1099 repeal.

Ryan Young (ryan.young@iiaba.net) is Big “I” senior director of federal government affairs.





L-H Leads
Rate Actions and Market Withdrawal Causes Agents to Pause on LTC Insurance
Recent announcements from MetLife and John Hancock could affect the overall market.

In the past month, there have been two developments in Long-Term Care insurance (LTCi) that are troubling for independent insurance agents who offer the coverage.

First, MetLife will no longer sell new LTC policies in either the individual or group markets after the end of the year. This decision will not affect coverage for the company’s existing LTCi book.  According to the company, the decision to stop writing new LTC insurance business, effective Dec. 30, came after an “extensive review” of the market. Applications for individual LTCi policies will be accepted until Dec. 30 and for existing group and multi-life LTC insurance plans, it will stop accepting new enrollments throughout 2011, with the timing based “on existing contractual obligations” with employers, MetLife says. Also, current insureds can keep their coverage and, if permitted under the terms of their policy, change benefits such as inflation protection.

In a similar vein, John Hancock Life Insurance Company intends to raise rates for in-force long-term care insurance policies by 40%. Similar to MetLife, Hancock is also suspending sales of group LTC policies as it undertakes a review of claims in that market, says Marianne Harrison, president of John Hancock Long Term Care, a division of Manulife Financial Corp. Both MetLife and Hancock attribute their actions to unanticipated and unfavorable claims patterns. Hancock reviewed their recent study of open and closed claims received from 1990 to 2010 and found that it had twice the number of claims it found in its 2006 study. For older policy holders—ages 80 and up—the block had four times as many. Mortality improvements observed throughout the LTC and life insurance industry have led to more people reaching the age where claims are more likely to occur, Hancock says. Put simply, more people used the insurance than anticipated, reinforcing the value of the product to policyholders, but creating a pricing issue, Hancock says.

These actions present a dilemma for independent agents. While there are other carriers that continue to sell LTCi, the actions taken by MetLife and Hancock—the two largest providers of LTCi—could be viewed as a harbinger for other LTCi carriers. MetLife and Hancock have been in the business for a while and have a great deal of data to draw on, which means that they are in a good position to gauge the future prospects for LTCi from a profitability standpoint. Since LTCi is a “long-tailed” product with claims that will not be paid until for decades later, the low-interest-rate environment coupled with mortality gains—meaning that people are living longer and more likely to use their LTCi policies—makes it more challenging for carriers to make a profit offering it.

For independent insurance agents, having customers receive a 40% rate increase belies the notion that retirees can have relative security in predicting their retirement expenses. While it is still better to have LTCi policies, no doubt some policyholders will let the policies lapse due to the drastic jump in prices. Also, these types of rate actions make potential purchasers shy away because they can’t have confidence in their future premiums. Not all carriers have raised rates, so agents should look at the entire marketplace. Put a premium on a carrier’s financial stability and look to carriers with the highest financial ratings. Focusing on current pricing may be illusory because rates are not guaranteed and can be increased on a class basis as Hancock just announced. No doubt some agents are already searching for other carriers to fill the void.

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





P-C Trends
Multiple Peril Crop Insurance Premiums Explained
A thriving farming business creates demand for coverage with the biggest premium increases in the last five years.

Last week, Insurance News & Views looked at the softest and hardest lines of insurance over the last five years, and the coverage area with the biggest average increase in premiums was multiple peril crop Insurance, or MPCI. The analysis brought a few reader questions. A peculiar facet of the MPCI premium growth is that while premiums grew more than 20% per year from 2005 to 2009, they actually fell by -17% from 2008 to 2009. As one reader asked, “What gives?”

To get some insights into what is happening in the U.S. agricultural sector that would explain the increase of more than 20% and then a one-year drop, IN&V sought insights from Big “I” Iowa State Executive, Bob Skow, CPCU, CAE, and then followed up with agricultural economics observer and farm equipment dealer, Jack Gerhardt of Tri-County Implement in St. James, Minn.  The reality is essentially the opposite of what any agent for a construction contractor could tell you: As goes the business, so goes the premium—only in the case of MPCI, the situation is opposite. The farming business has been very good.

In retrospect, the situation is not surprising. First, ethanol production has created increased demand for corn, and as most food stuffs are substitutes for each other, demand for one increases prices across many agricultural commodities. At the same time, externalities to the U.S., like growth in demand from foreign countries like China, has also increased demand (and upward prices for) coarse grains like corn, soybeans and wheat. Together these explain the growth in MPCI premiums from just $2 billion in 2000 to more than five times that in 2008.  Second, examining the drop in premiums from 2008 to 2009 highlights the correlation of MPCI premiums with the value of what is being insured: crops.  In turns out, 2009 was a banner production year for some of the biggest products in agricultural production, and the bumper harvests across much of the Midwest resulted in a drop in price-per-bushel of many crop prices.



Source: A.M. Best Aggregates & Averages and National Agricultural Statistical Service.

So what can agents with books of multiple peril crop insurance expect in 2010? As you can see from the chart above, there has been a close correlation between corn and soybean prices per bushel, not only with each other, but also with MPCI premiums. You can even see the drop in premiums from 2008 to 2009 was prefaced by a drop in corn and soybean prices from 2007 to 2008.  While the agriculture business is volatile and there are no guarantees, if prices per bushel of corn and soybeans in October are any indication, multiple peril crop insurance premiums should again top $10 billion per year in 2010.

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


Big “I” Flood
FEMA Announces Scientific Resolution Process for Flood Mapping
Panels provide independent, technical experts to resolve flood hazard data.

The Federal Emergency Management Agency (FEMA) has announced a new Scientific Resolution Panel (SRP) with the National Institute of Building Sciences, an independent nonprofit organization, to serve as the panel sponsor. SRP will provide local communities with an additional appeals process when not in agreement with flood insurance rate map (FIRMs) updates.

FEMA has completed a five-year map modernization project in coordination with local communities that affected 99% of the country, with adoption of the revised maps still taking place through 2011. The SRP allows local communities an alternative for resolving dispute over the scientific or technical data when a resolution cannot be reached between the community and FEMA during the regulatory appeal period.

“Our goal has been and always will be the safety of the communities we serve and part of that commitment is providing communities with the best available data about the flood risk they face,” says Ed Connor, acting assistant administrator for Mitigation. “We are proud of the work we do with communities across the country, and these Scientific Resolution Panels will serve as an important step in the rare instances when there is disagreement over the scientific accuracy of the data.”

Communities requesting to bring their technical and scientific data to the panel under this new process must allow at least 60 days of collaborative consultation without a mutual resolution; have submitted an appeal or protest during the 90-day regulatory appeal period; and not have received a letter of final determination. Communities that have already submitted appeals or protests but, have not been issued a letter of final determination as of Nov. 1, 2010, will have until Jan. 15, 2011 to request an SRP. To check a community’s status for letter of final determination, click here.

For each technical dispute, the panel sponsor will identify three or five flood studies experts   having no personal or professional interest in the findings to serve on these panels. The local community will select the simple majority of panel members, and FEMA will select the minority of panel members.

Individual panels will review FEMA’s data, review the data submitted by the community, and render a decision within 150 days of convening. The panel’s decision will become the recommendation to the FEMA administrator for resolution.

With Congressional guidance and direction, FEMA continues to update FIRMs and work closely with communities to ensure that flood maps are based on the best data available.

For more information about the SRP, visit http://floodsrp.org for news, resources and a process explanation.

Linda Mackey (linda.mackey@iiaba.net) is Big “I” Flood program manager.


Agency Management
E&O Extends Beyond English
How should agents handle prospects who speak a foreign language?

An agent asks: “We have an increasing number of potential clients that do not speak or read English. They usually are accompanied by another person, most often younger adults or children, to act as an interpreter. None of the employees of the agency speak or read Spanish (or any other language except English) and all of our forms are in English (we have no plans to stock forms we can’t read).

“What ramifications will we encounter if we decline to quote/write any person who cannot read and speak English? I see a potential lawsuit/E&O claim when it comes to non-English clients...we require the insured to sign an application and other forms (e.g., UM selection); if they cannot read English, they have just signed a document/contract they cannot read and have no idea what it contains. I can just hear the plaintiff’s attorney asking questions with the agent on the stand: ‘If the insured couldn’t read English, why did you have them sign the form?’ ‘Is that a normal business practice to have insureds sign forms they don’t understand?’ ‘How do you expect the insured to have understood what options/coverages/limits were available?,’ etc.

“I see the company pointing the finger at the agent saying we should have known better and the agent being the sole defendant. There is no guarantee the interpreter interpreted either/both sides of the conversation correctly; the interpreter doesn’t sign anything and is not a party to the contract. They may or may not be available when it comes time to go to court and, even if they are, they are usually a relative of the insured, and I would question their ability to remember what happened ‘back when’ the application was done, especially if there is a claim pending against the company and/or agent.

“It is hard enough proving in court the insured knew/understood what they were signing with English-speaking clients. I can just imagine what non-English clients (and their attorneys) could do!”

In the past few months, the Big “I” Virtual University “Ask an Expert” service has received four such inquiries. Excerpted below are some observations from the VU faculty. Keep in mind that these comments do not constitute legal advice of any kind. The intent is to address E&O and procedural issues. Obviously, this situation involves potentially serious legal issues that the VU faculty is not qualified to address.

One VU faculty member responds:

“I am currently acting as an expert witness in a case where the people did not fully understand English. Unless you have a qualified licensed employee who speaks their language very well, I would rather avoid writing the insurance. If you have an opportunity with a group of these folks, maybe you can hire someone who speaks the language.

“In one case, a Japanese couple bought a car at a dealership and bought insurance. They thought it was ‘full coverage,’ but it was only physical damage (stated in big letters on the binder). They called the insurance agent and told him to cover it as of the seven-day expiration date of the dealership binder.

“The agency had Japanese-speaking people help them and faxed them a personal insurance explanation in Japanese. The couple told the agency to bind coverage when the dealership binder expired. The loss was a few days before the binder expired and a few days before the new policy started. The couple is back in Japan and gave their rights to sue under E&O to the injured parties in the other car (to get out of the litigation).

“The allegation is that the insurance agency should have investigated what prior insurance was actually there before taking the word of the prospect. Of course, the Japanese couple never told anyone that they did not fully understand or that they needed help. Because they could somewhat speak English, they acted as if they understood everything.

“Almost all of the E&O cases seem to settle out of court. I hope this doesn’t. I don’t see any agent as having to doubt information given them by prospects or requiring copies of prior coverage before quoting.”

Another faculty member cites a similar court case:

“This is a serious and growing exposure. In Duong v. Salas, La. Ct. App. (2004), the court found that the agency was responsible for UM benefits for an Asian customer who allegedly refused UM coverage. He had even brought his own interpreter to the agency when purchasing auto insurance, but both later denied understanding what they had read and signed. In my opinion, if you don’t have someone fluent in a customer’s language, send them to an agency that does.”

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. For more information, click here. If you do not know your Big “I” website user name and password, e-mail logon@iiaba.net to request your login.