As Spitzer effects fade, merger activity seen gaining momentum

Last year wasn't the busiest year for mergers and acquisitions in the insurance agency and brokerage field but as concerns over various probes of the insurance industry fade, activity is picking up.

Kevin Donoghue, of Mystic Capital Advisors Group, which specializes in mergers and acquisitions in the insurance industry, says there's been a lot of activity in the insurance industry since late 2005 right into this year.

"It's been a pretty exciting time period to be in the mergers and acquisitions field," says Donoghue in an exclusive interview for Insurance Journal's web broadcasting.

Spitzer fading
Donoghue thinks the industry probes spearheaded by New York Attorney General Eliot Spitzer had a dampening effect on mergers but that era is passing.

"I think some of the slowdown just related to the Spitzer investigations and how contingencies would be affected in the industry. That affects mergers and acquisitions pricing naturally, so a lot of money that was being readied to be deployed in the acquisition field pulled back. As those uncertainties seemed to go away towards late '05, the money came off the shelf and is currently being deployed into a number of different acquisition areas, both in the retail and on the managing general agent side of the business."

Driving forces
Certain players continue to be driving forces in mergers and acquisitions. "It's still being driven by growth expectations of the publicly traded brokers. Without acquisitions, most of them aren't even growing organically," the Mystic Capital executive explains. "They're still very active in the marketplace, so there's that supply / demand imbalance with them as well. It's pretty aggressive out there, and the pricing we see is pretty aggressive as well."

He says some banks are still interested in buying insurance operations, although it very much depends on the bank's situation.

"Banks' interest has ebbed and flowed over the past few years," Donoghue said during the interview conducted at the recent Target Markets Program Administrators Association meeting in Baltimore.

"I think the consolidation in the banking industry itself has created opportunities for new bank parent companies to divest opportunities. There still are a number of banks that are interested in buying as well, so different bank holding companies have different opinions on the insurance platform."

It's a good time for sellers who have reasonable expectations of prices. "There's not a shortage of buyers in the industry, so certainly if there's an interested seller, it's a good time from a supply/demand perspective. There's always that effect, do buyers have reasonable pricing expectations? That's really what keeps deals from happening versus anything," according to the merger consultant.

For the complete interview visit the video section at http://www.insurancejournal.com.

Beware of New Jersey!

The ad wars over Massachu-setts auto insurance reform have heated up and the loser appears to be New Jersey.

"If Massachusetts passes the auto insurance reform like they did in New Jersey, they'll be sorry," says Jennifer, one of several drivers from New Jersey out to warn Massachusetts drivers about pending reforms.

"I'm a police officer and I feel like I'm being robbed," says another Garden State insured.

The Massachusetts Coalition for Affordable Auto Insurance for All, led by Commerce and Arbella Mutual, opposes the reform legislation outlined by Gov. Mitt Romney that would clear the way for an assigned risk plan and grant insurers more pricing freedom.

The coalition has a statewide advertising campaign that warns that Romney's plan would turn the Massachusetts system into one like New Jersey's-- and consumers won't like it.

The ads feature testimonials from individuals identified as New Jersey drivers who claim that changes in their state have hurt, not helped, them. Individuals claim their rates went up because of their credit score, occupation or education level.

Romney has said New Jersey, where reforms included an assigned risk plan, should be the model for Massachusetts. But his opponents' ads say New Jersey has the nation's highest premiums.

The advertising campaign can be viewed at www.autoinsurancetruth.com.

The New Jersey ads are intended to counter commercials by another insurance industry-backed group, Fairness for Good Drivers, that decry what the group says is a lack of fairness and choice in the current Massachusetts auto insurance system.

This group advocates changes to the process where the state annually sets the rates for all insurers and it supports implementation of an assigned risk plan.

These pro-legislation ads can be viewed at www.fairnessforgooddrivers.com.

Affinity insurance programs meet computer programs

Like so many other areas of life, the Internet changed the exposures involved in affinity group programs. In fact, e-commerce and e-mail have taken some of the affinity out of affinity groups.

When I first started underwriting and marketing property/casualty programs for associations and franchise groups (just 12 years ago!), the Internet was not really a factor for small businesses. Today, exposures for franchises that appear to be the same can vary widely because they take different approaches to using computers and are connected to the Internet.

Insurance agents must pay close attention to the Internet activities of their clients and remain vigilant if their clients are in franchise programs. The franchise client's approach to e-commerce and e-mail may create unique exposures. The exposures could be in any combination of property, general liability, advertising/personal injury, contractual liability, professional liability, employment practices, or even directors and officers liability. There may even be a need for special Internet coverage that goes beyond the coverages offered as part of the program.

Taking on responsibilities
Consider two similar brick and mortar franchise retailers that sell the same merchandise. One might add a Web site that is just a high-tech advertisement of the business location and products with little additional exposure. If the other franchisee starts to take orders through the Web site, that retailer takes on responsibilities to safeguard customer information. Use credit cards, and the responsibility gets ratcheted up. Allow clients to conduct business, like stock trades, through the Web site and security becomes critical. Exposure questions can even be created if the retailer is selling merchandise that is legal in one country but illegal in another country, adding international exposures.

For a professional office, such as a doctor, professional liability exposures can change radically if medical information is displayed on the doctor's Web site. The information is available worldwide. At what point might the doctor be in danger of violating standards or laws in another state or even country? Consultations for out-of-state doctors over the Internet may complicate professional liability exposures. And don't forget the doctor's responsibility to safeguard patient medical information.

A business can find itself in legal hot water just by being a victim, if it does not use appropriate security precautions for its Internet connection. The business' server might be compromised by a phishing or hacker gang and used to send thousands of phishing or virus-laden e-mails that are traced to the business but not traced all the way back to the ultimate criminals.

Even as a victim, the business could lose reputation and goodwill if it is linked in the press to an Internet criminal scheme. The reputation of a professional firm could also be jeopardized if its Web site is hacked and links are changed to take unsuspecting visitors to offensive Web sites.

From a property standpoint, a business' computers can mean the difference between conducting business and closing, even without Internet complications. Whether the program includes computer-specific coverage or not, an agent will want to evaluate the insured's specific needs and keep up with changes as the insured develops and grows his/her business. For instance, what coverage will respond if a virus or other attack scrambles the insured's hard drive(s)? Normal business interruption coverage might not apply, especially if there is no physical damage.

E-mail: road to trouble
Even if a business does not have a Web site, nearly all use e-mail. E-mail is quick and efficient. It can also be a fast road to trouble. I call the following my "E-mail Is" Checklist:

E-mail is: quick and easy to use, but...

E-mail is: too easy to send to too many people on the spur of the moment with a message that will be misunderstood;

E-mail is: anything but anonymous -- it is traceable back to the sending computer;

E-mail is: forever -- it resides on all servers it visits during its journey to the sender;

E-mail is: discoverable in litigation;

E-mail is: not secure, although good encryption can provide reasonable security until it reaches its destination;

E-mail is: anything but private; and

E-mail is: an employment practices issue, pitting employees' expectations of privacy from managers against the employer's responsibilities to the outside world.

A final thought about e-commerce and e-mail: the one constant in the Internet universe is change. Your insured's exposures can change significantly in just a few months as the business' Internet use and sophistication expands. Ongoing communication with the client is important.

An agent once told me that there are no problems, only opportunities. All of these exposures present local agents with opportunities to add value, while enhancing their own reputations and client relationships. This is a customizing opportunity for both coverage and loss prevention. It could even mean additional, account rounding sales for the agent. E-commerce and e-mail activities provide agents with the ability to enhance their own positions with their insurance clients while taking advantage of affinity group programs.

David Golden is director, commercial lines, for the Property Casualty Insurers Association of America. Prior to joining PCI, his insurance career spanned nearly 20 years in commercial lines underwriting and marketing positions, including affinity group programs and working in agency settings.

Mass. high risk historical drama played out in court, on airwaves

While factions began airing noisy television commercials in hopes of influencing lawmakers considering auto insurance reforms, a quiet discussion on a piece of that reform took place inside the courtroom of the Massachusetts Supreme Judicial Court earlier this month.

Last year, Insurance Commis-sioner Julianne Bowler sought to jumpstart the reform effort by implementing an assigned risk plan for high risks, a method used in most other states to handle involuntary risks but one with a history of controversy in the Bay State dating back to 1973.

Nothing changes in the Massachusetts auto insurance system without a fight. Two top domestic insurers, Commerce and Arbella Mutual, led a coalition that included consumer groups in opposing the ARP. They won the first round last fall when Suffolk Superior Court Justice Ralph Gants halted Bowler's plan. The commissioner's appeal was heard in the Supreme Court on May 4.

This argument actually starts 1973, when the Legislature scrapped the state's last ARP and replaced it with a reinsurance pooling mechanism. In 1983, the Legislature revised that statute to create the current hybrid plan for high risks known as Commonwealth Auto Reinsurers, or CAR.

As CAR has aged, so have problems, most notably its inequitable distribution among insurers of the producers with the highest loss ratios, a condition fostered through various CAR rules and financial incentives over the years. It is a system that appears to favor certain insurers while discouraging others from writing in the state.

Bowler and a number of insurers belonging to the Massachusetts Insurance Federation became convinced that transforming the CAR mechanism into an ARP was a necessary first step in reforming the entire system, Having an ARP would align the state more with other states, a goal of her boss, Gov. Mitt Romney, who has also argued for rating and subsidy reforms designed to attract more national insurers to write in the state.

The appeal before the Supreme Court did not address whether the ARP Bowler approved was a good idea but only whether she was within her authority to impose such a plan.

Bowler and her supporters argued that she was well within her broad statutory powers.

Commerce, Arbella and other opponents argued that Bowler's order exceeded her authority because the Legislature intentionally prohibited an ARP as an option.

During the May 4 court hearing, the Supreme Court justices appeared interested in whether the current statute, as it evolved from 1973 and then was changed in 1983, prohibits the commissioner from moving to an ARP. Under an ARP high risk applicants are randomly assigned to insurers to write; in CAR, insurers share the losses and expenses of all high risks.

The justices first inquired whether there is legislation pending that might render the case moot within a short while. Thomas Barnico, of the Attorney General's office, arguing on behalf of Bowler, acknowledged that the Romney legislation under consideration would clarify the authority of the commissioner to implement an ARP, but told the court that the legislation does not detail what a plan should entail.

Chief Justice Margaret Marshall seemed inclined to agree with Barnico that the state insurance commissioner has broad authority.

But the plaintiffs' lawyers insisted that the Legislature intentionally eliminated an ARP as an option for the commissioner in 1973. Attorney Nelson Apjohn, of the firm Nutter McClennen & Fish LLP, represented lead plaintiff Commerce Insurance Co., and Roberta Fitzpatrick, a Boston attorney, represented plaintiff Arbella.

True, the Legislature banned an ARP in 1973 but then in 1983, it re-opened the door to an ARP when it removed the word "reinsurance" from the statute, according to Barnico.

Not so, Cambridge attorney Stephen J. D'Amato countered on behalf of the consumer group, Center for Insurance Research. The term reinsurance was taken out in 1983 to make the hybrid CAR possible but the statute retained its requirement that any system be a loss sharing system, not an applicant assignment system, according to plaintiffs.

Fitzpatrick further argued that the ARP is inconsistent with other statutes that define the state's complicated auto insurance system, such as a law requiring all servicing carriers to "take all comers" and another prohibiting a so-called "dirty rate" for drivers in the assigned risk plan.

Liberty Mutual to fight N.Y., Conn. charges over contingent pay for agents

The words in support of contingent commissions for independent agents are getting stronger and being turned into action.

Gary R. Gregg, president and chief executive officer, Liberty Mutual Agency Markets, recently expressed the frustration many in the independent agency system share with the portrayal of contingent commissions.

"Even a straight policy is contingent. Getting paid is contingent on selling a policy--it's all contingent," he told agents in late April at the Big "I" National Legislative Conference and Convention in Washington, D.C.

At the same Big "I" conference, another CEO sounded a similarly supportive note for contingencies.

"I believe strongly in the contingency process," said Michael Browne, president and chief executive officer, Harleysville Insurance. "If independent agents continue to stay organized, articulate and keep pushing back, I think they can go a long way to continuing the system."

Barely a week later, Liberty Mutual turned the rhetoric into action. Unlike American International Group, Zurich, ACE and other insurers before it that have settled similar charges, Liberty Mutual Insurance Group announced it would fight allegations of anti-competitive practices that have been brought against it by the attorneys general of New York and Connecticut.

The Boston-based insurer is insisting that charges regarding improper commissions and bid-rigging are untrue and overblown and says it is willing to go to court to defend itself and its practices rather than settle with the two states.

Negotiations fail
After two years of negotiations, Liberty Mutual said it has been unable to reach a resolution and believes the states' settlement demands have been excessive.

"We have tried to reach resolution and can only describe their settlement demands as excessive and unreasonable: both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdictions," the company said in a statement.

"We have declined these demands and are preparing to resolve the issues in court," the statement added.

The insurer took its stand following the filing of complaints by the offices of New York Attorney General Eliot Spitzer and Connecticut Attorney General Richard Blumenthal involving bid-rigging and commission payments.

Bid-rigging allegations
The complaints describe alleged cooperation of Liberty Mutual employees in a bid-rigging scheme in which the employees provided large insurance broker Marsh with so-called "B" quotes for excess casualty accounts. The quotes were intentionally less favorable than other insurers' quotes.

In August 2005, a former Liberty Mutual executive, Kevin Bott, pled guilty to criminal charges in connection with big-rigging conduct while employed at Liberty Mutual.

The complaints also find fault with Liberty Mutual for paying contingent commissions--or what the attorneys general call "kickbacks" and "payoffs" -- to insurance brokers and independent agents to encourage them to place more business with Liberty Mutual.

"Brokers and agents responded to these incentives, steering their clients to Liberty Mutual and in many cases violating their fiduciary duty to assist their clients in finding the best insurance for the lowest price," according to Spitzer.

According to Blumenthal, since at least the mid-1990s, Liberty Mutual has paid tens of millions of dollars in so-called contingent commissions to insurance brokers like Marsh, Aon Corporation, Willis Group Holding Ltd., and Arthur J. Gallagher & Co.

Blumenthal said Liberty Mutual's "anti-competitive conspiracies" violate the Connecticut Unfair Trade Practices Act, as well as the Connecticut Antitrust Act.

In its defense
Liberty Mutual is prepared to defend its contingent commission practices.

"Allegations of wrongdoing regarding commission payments and reinsurance brokering are incorrect. Liberty Mutual's conduct in both areas was appropriate and lawful," the company stated.

As for the bid-rigging charges, Liberty Mutual has not denied that former employees engaged in bid-rigging but insists it is not a common company practice as alleged.

"Unfortunately, two former lower level employees seriously violated our trust and our standards of conduct in their quotation activity," the insurer said.

In pressing similar cases against Zurich, ACE, AIG and other insurers, Spitzer, Blumenthal and several other states obtained settlements worth billions of dollars. A number of those settlements have also required the insurers to alter their commission payment practices, with effects felt in other states.

Ins and outs on Beacon Mutual board

Rhode Island Gov. Donald Carcieri suffered at least a temporary setback in his campaign to fire two Beacon Mutual Insurance Co. board members but has managed to replace one other director who resigned.

Superior Court Judge Steven Forunato has temporarily restrained until further consideration Carcieri's order removing George Nee and Henry Boeniger from the embattled workers' compensation carrier's board of directors.

Carcieri, who has been pressuring to reconstitute the insurer's board and management following an audit that revealed possible mismanagement, wasted no time in expressing his displeasure. "This decision is bad news for Beacon Mutual, its policyholders, and the people of Rhode Island," he claimed.

Nee, a labor representative, and Boeniger, a teachers' union lobbyist and former Democratic state representative, both of whom were appointed to the board by previous governors, have resisted Carcieri's efforts to replace them on the insurer's board.

Carcieri moved to terminate Nee and Boeniger following the release of an audit by the Almond Review Committee that alleged that the company gave favored pricing and treatment to certain policyholders, including some with ties to management and directors.

After release of the Almond report, the chief executive officer and vice president of claims were terminated.

Meanwhile, Carcieri got his wish when another director resigned. John Holmes, who runs a government relations firm and is a past chairman of the state Republican Party, agreed to step down from the Beacon board, despite the fact he was not on the board during most of the period of business practices criticized in a recent audit.

Another board member, Edward Braks, resigned the day the Almond report was released. Also, the former chairman of the board, Sheldon Sollosy, left the company late last year when an anonymous tipster raised questions about his company's account.

Carcieri quickly named the president of Salve Regina University, Sister Therese Antone, Ed. D., to replace Holmes. A native of Rhode Island, Antone has serv-ed on numerous boards, including the Finance Council of the Diocese of Providence, Blue Hen Investment Company, AAA Southern New England, BankNewport and Lifespan Corporation.

"[As] someone who has devoted her life to serving her community as a Catholic nun, Sister Therese's ethics are above question," Carcieri commented.

State law requires that all board members be Beacon Mutual policyholders. Salve Regina holds a Beaconpolicy that currently covers 482 employees.

The insurer's board consists of four members appointed by the governor, three representing policyholders, the director of the Department of Labor and Training, and the company's chief executive officer.

In related news, the Rhode Island Department of Business Regulation is weighing a Beacon Mutual rate filing that would reduce overall loss costs by -27.7 percent from the currently approved level which has been in effect since March, 1999. If approved, the revised loss costs would be effective June 1, 2006.

Senate Republicans fail again in efforts to cap medical malpractice awards

Senate Republican leaders have again failed in their efforts to place limits on medical malpractice pain and suffering awards.

Senate Democrats successfully stymied two Republican bills, one a broad bill affecting medical malpractice claims against all providers and the other, a measure dealing only with obstetricians and gynecologists.

Republicans sought to cap pain and suffering damages at $750,000. Claimants would still have been able to recover for lost wages and medical care.

Both bills fell short of the 60 votes needed for them to be advanced for debate by the full Senate when a handful of Republicans joined Democrats in opposition. The 60 votes were needed to invoke cloture on the Medical Care Access Protection Act and the Healthy Mothers and Healthy Babies Access to Care Acts as the measures were titled.

Senate Majority Leader Sen. Bill Frist (R-Tenn.), himself a physician, lamented the Senate's failure to advance the bills.

"Five times in the last four years, Senate Democrats have obstructed meaningful medical liability reform that would have ensured access to quality, affordable health care," Frist said.

Frist and many Republicans maintain so-called frivolous lawsuits force doctors out of business, drive up medical costs and jeopardize the health of all Americans.

"It's unfortunate that Democrats have chosen to help line the pockets of trial lawyers rather than to help meet the health care needs of this nation," Frist charged. But Democrats and a few Republicans maintain such caps protect insurance company profits more than they do doctors or patients.

"These measures do not represent a serious attempt to improve health care or civil justice in the United States," said Senate Democratic leader Harry Reid of Nevada.

Reid said both bills contain "the same one-size-fits-all cap on damages that this body has rejected time and time again. Both contain the same unjustified protections for hospitals, HMOs and insurance companies from previously discarded bills. In fact, these proposals are virtually identical to legislation we turned aside three times last Congress. These bills are the same old song."

Reid maintained that there is a health care crisis in this country, but it has nothing to do with tort laws. "It is a crisis when 46 million Americans have no health insurance. It is a crisis when health care is too costly for average Americans. It is a crisis when medical errors are the sixth leading cause of death in America," the Democrat stated.

"We should not reward insurance companies making record profits. We should help doctors by reforming the insurance industry rather than undermining the legal rights of seriously injured malpractice victims," Reid added.

Four out of 10 medical malpractice cases are groundless; majority dismissed without payout

About 40 percent of the medical malpractice cases filed in the United States are groundless, according to a Harvard analysis of the hotly debated issue that pits trial lawyers against doctors, with lawmakers in the middle.

Many of the lawsuits analyzed contained no evidence that a medical error was committed or that the patient suffered any injury, the report said.

The vast majority of those dubious cases were dismissed with no payout to the patient. However, groundless lawsuits still accounted for 15 percent of the money paid out in settlements or verdicts.

The study's lead researcher, David Studdert of the Harvard School of Public Health, said the findings challenge the view among tort reform supporters that the legal system is riddled with frivolous claims.

"We found the system did reasonably well in sorting the good claims from the bad ones, but there were problems," he said.

However, the American Medical Association, which favors caps on malpractice awards, called the study proof that a substantial number of meritless claims continue to slip through the cracks, "clogging the courts" and forcing doctors to waste time defending them, association board member Dr. Cecil Wilson said in a statement.

The findings were published in the New England Journal of Medicine this month.

The study found 3 percent of claims analyzed were filed by patients who had no injury. Of the claims that involved injuries, two-thirds were caused by medical error. But the remaining injury claims, or 37 percent, lacked evidence of a medical mistake, and most of those -- 72 percent -- were thrown out or otherwise resolved without a payout to the patient.

Altogether, the Harvard researchers reviewed 1,452 malpractice claims randomly selected from five insurance companies. The cases were resolved -- meaning they ended in a verdict, a settlement or a dismissal -- between 1984 and 2004. The claims resulted in a combined $449 million in verdicts and settlements.

The researchers examined medical records, depositions and court transcripts to determine if the patients were injured and whether the injury was due to a medical error.

The study also confirmed that defending a claim is expensive and long, taking an average of five years to resolve. It also found that for every dollar awarded to patients, about half went to cover lawyers' fees and other expenses.

The report also found that an overwhelming number of malpractice claims (97 percent) involved a severe disability or death. Seventy-three percent of all of the injury claims that were due to medical error were settled with a payment.

Additionally, in about a quarter of cases where a groundless claim was settled, the average payout was lower than that given to a legitimate claim ($313,000 versus $521,000).

Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Insurers should not underestimate next influenza pandemic's severity, risk experts say

Risk experts are warning insurance companies that they may be underestimating their risk if they assume that a new influenza pandemic would be no worse than the 1918 influenza pandemic.

While some published studies have already illustrated the effects of various pandemic scenarios, most commonly a repeat of the 1918 influenza pandemic that had a mortality level of 0.67 percent in the U.S. and even more severe effects in other countries, RMS says its analysis of the virology and epidemiological science shows that more severe pandemics are possible. There is a one in five chance of a pandemic that is more severe than that experienced in 1918.

H5N1, the virus that recently caused avian flu in Asia, has viral characteristics that will increase the likelihood of a virulent pandemic if it provides genetic material for human-to-human influenza transmission, according to RMS. (See related article on N12.)

The RMS probabilistic model assesses the risk of influenza pandemics across multiple countries. The RMS Influenza Pandemic Risk Model is intended to help insurers assess the losses they will experience from pandemics with all of the different permutations of potential characteristics and outcomes. It incorporates over 1,800 pandemic influenza scenarios that take into account such factors as likelihood of the pandemic occurring, infectiousness and lethality of the pandemic, demographic impact, country of outbreak, vaccine production, and national countermeasures.

RMS believes that many companies may be underestimating their risk if they assume that the 1918 pandemic is the worst-case scenario.

"Pandemic influenza could potentially deal insurers a triple whammy, simultaneously causing unprecedented life and health claims losses, investment portfolio downturns at a time when insurers most need liquidity, and reduced staff and management productivity through the spreading of sickness among company personnel," stated Dr. Andrew Coburn, RMS project lead on influenza pandemic risk modeling.

"Moreover, influenza pandemics can last two to three years, making it essential for insurers to put in place a multi-year risk management strategy that considers the reinsurance crunch that will likely occur in the event of a pandemic"

Life and health insurance portfolios are very different than property portfolios. The RMS model enables insurers to incorporate detailed analysis of their own specific portfolio, allowing the characteristics of individual company's policyholders to play an important role in the risk assessment process.

Another potential application of the model involves securitizations of influenza pandemic risk for companies looking to find capacity in the capital markets.

The model will be presented at an RMS Seminar on the Management of Influenza Pandemic Risk being held June 1, 2006 in New York City. The seminar will feature a guest presentation, "Understanding the Threat of Pandemic Influenza," by Professor Marc Lipsitch of the Department of Epidemiology, Harvard School of Public Health. Advanced registration and approval by RMS required. For more information: www.rms.com.

Despite catastrophe losses, soft pricing continues in commercial insurance market, buyers report

Although property and general liability insurance rates increased in the first quarter of 2006, all indications point to a continuing soft commercial insurance market, according to the Risk and Insurance Management Society Bench-mark Survey. The survey, conducted by Advisen Ltd., analyzes current policy renewal prices as reported by corporate risk managers.

In keeping with the soft market conditions evidenced in the past six quarters, directors and officers premiums dropped 3.5 percent in the first quarter of 2006 and workers' compensation rates declined just more than 3 percent.

The property/casualty insurance industry overall turned a profit in 2005, according to survey officials, despite ever-dropping prices and a projected $58 billion in hurricane losses. That could suggest that competition among carriers is providing for a continuing soft market.

The effect of last fall's hurricane season was still evident in property premium renewals as 70 percent of survey respondents reported higher premiums. Average rates rose by nearly 7 percent in the first quarter of this year, although Advisen analysts suggested the market buoyancy was due more to underwriter support than to underlying market conditions. Property premiums increased in the fourth quarter of 2005 after having steadily declined since the third quarter of 2003.

General liability rates experienced an upward swing of 5.1 percent; previous quarter survey data showed steadily falling premiums since the fourth quarter of 2003. Advisen analysts believe that general liability premiums may have been temporarily pulled higher by the spike in property premium levels, but will return to the pervasive softening trend by next quarter.

U.S. insurers withstood record catastrophe losses in 2005

Strong capitalization, sound risk management and efficient global risk sharing enabled the U.S. property/casualty insurance industry to withstand record-setting catastrophe losses in 2005, according to Frank J. Coyne, chairman, president and CEO of ISO.

Coyne also cautioned the industry to keep its eye on emerging risks.

At $57.7 billion, "last year's catastrophe losses dwarf even those from 9/11 and Hurricanes Andrew and Iniki in 1992," Coyne said, at the recent 80th annual meeting of the American Association of Managing General Agents convention in Ka'anapali Beach, Hawaii.

"That insurers have been able to cover those losses is a testament to their strong capitalization prior to last year's storms and their risk management," he said.

The industry's ability to withstand the record losses driven by hurricanes Katrina, Wilma, Rita and others "is also a testament to the efficiency and scale of global risk-sharing mechanisms," Coyne said.

Although catastrophe losses totaled nearly $58 billion, ISO estimates U.S. insurers will be responsible for just $31 billion to $36 billion on a net basis after reinsurance recoveries, according to Coyne.

Rates continue to fall
ISO's chairman reminded more than 300 wholesale property/casualty managing general agents and other insurance professionals that rates on commercial renewals have been dropping, according to ISO MarketWatch and the Council of Insurance Agents and Brokers, with rates declining an average of almost 3 percent for all commercial accounts in the first quarter of 2006.

The only exception, Coyne said, was in commercial property coverage, which rose about 2 percent as a result of increases in catastrophe-prone areas. Coyne cited extraordinary catastrophe losses as the driver for the upswing in commercial property rates.

"Excluding amounts covered by residual market mechanisms, the hurricanes of 2005 caused $25 billion of insured losses on residential and commercial properties in Louisiana alone," Coyne said. "That's $3 billion more than all the premiums insurers charged for property insurance in the state during the 23 years from 1982 to 2004."

Moreover, reinsurance rates are now rising substantially for U.S. risks in catastrophe-prone areas, increasing primary insurers' costs, he added.

"Despite headlines about rate rises in areas devastated by last year's catastrophes, the Consumer Price Index for tenants' and household insurance dropped 2.2 percent in the first quarter of 2006. In sum, insurance markets are softening -- not hardening as the pundits predicted. ... Insurers' rate of return was virtually flat in 2006. That set the state for further market softening. ... Low investment yields have lowered insurers' ability to use investments to offset underwriting losses," he added.

Insurers may flee some markets
Coyne also noted that competition and technology may push out some market players.

"Intensifying competition has taken its toll on underwriting results," he said. "Technology has advanced insurers' ability to hone in on the right price to risk. ... There are powerful models that don't use credit. [The industry can now] operate with scalpels instead of meat cleavers."

As technology improves, Coyne said the "chasm is growing between state-of-the-art technology haves and have nots. The have nots will fall victim to adverse selection, and the haves will prosper," he said.

In his remarks on the state of the property/casualty industry, Coyne cited analyses by ISO's catastrophe modeling subsidiary AIR Worldwide to show how the industry's growing exposure accounts for increasing catastrophe loses. The AIR models adjust for increases in the costs of construction and the number of residential and commercial buildings, plus changes in their characteristics.

"AIR's analysis, indicates catastrophe losses double about every 10 years, just because of exposure growth. AIR modeling indicates Hurricane Katrina was just a one-in-30 year event and catastrophes causing $100 billion or more in insured losses are easy to imagine," he said.

Increased risk along the coastline
Even if weather-related events don't get worse, Coyne said there is potentially more exposure, particularly in coastal areas. Today, there are more homes in risky areas, and those homes are larger and have more amenities than their predecessors, he said. Replacement values, both in residential and commercial property, also are higher because of construction costs. Construction costs have increased 40 percent in the past 10 years, he said.

Furthermore, the insured value in the population on the coast has increased. Coyne noted Florida and Texas are the two states most frequently struck by hurricanes, and the populations also are growing the fastest in those states.

In the near term, ISO expects the industry's strong capacity, with surplus having risen to $427 billion at year-end 2005, to fuel further rate cuts in 2006, Coyne said. He projected industry premium growth for 2006 would be less than 1 percent.

"But despite weak premium growth, we expect insurers' underwriting results to improve as catastrophe losses recede from 2005's record level," he said.

Coyne challenged the managing general agents and the industry at large to "do well by doing good -- seeking opportunities to profit by helping society meet its changing insurance needs."

Highlights of the TMPAA Best Practice Administrator Process:

There are 6 steps:

1 -- Application/Survey

2 -- Confidentiality/Evaluation Waiver

3 -- On-site Evaluation/Consultation

4 -- Evaluation/Consultation Recommendation

5 -- Best Practice Committee Review

6 -- TMPAA Designation

Only the program business functions of agencies are to be evaluated for this designation. The process begins with the completion of the Best Practice Survey. Members who choose to pursue the designation must sign a confidentiality/evaluation waiver, which protects the member applicant and the evaluating entity. All evaluations will be conducted in confidence and no evaluation information will be released without the consent of the member applicant.

The on-site evaluations/consultations are expected to require no more than seven and a half hours. An evaluation checklist is provided beforehand.

Following the on-site evaluation, the evaluating entity reports its findings. If a Best Practice Designation is not being recommended, the evaluation entity will provide specific reasons for the decisions, as well as solutions to remedy the function or process that does not currently meet the standard.

If the evaluating entity recommends the TMPAA Designation, the evaluation summary will be provided to the Best Practice Committee for approval. Once approval is granted, the member agency will be provided with the TMPAA Best Practice logo seal, for inclusion on their agency Web site.

The TMPAA Best Practice Designation remains in effect for two years, with a re-certification paper review after the first completed year.

The certification process will need to be repeated after a period of two years.

The TMPAA Best Practice Designation fee to cover the costs of the evaluation process is $2,000 plus travel.

For more information on the TMPAABest Practice Designation process, visit: www.targetmkts.com.

Auto insurance costs hold steady; industry cites safety, less accidents as the cause

The cost of auto insurance is expected to rise by just 0.5 percent in 2006, the smallest increase in six years, reports the Insurance Information Institute.

A declining number of auto accidents, safer cars and fraud-fighting efforts are some forces contributing to the cost slowdown. However, rising medical care and vehicle repairs continue to put upward pressure on rates, along with hurricane-related claims, the industry group noted.

The average cost for auto insurance nationwide for 2006 is estimated at $867 -- an increase of just $4 per vehicle from last year, according to the I.I.I., despite record vehicle-related losses arising from the 2005 hurricane season. The projected increase represents a continued slowdown from 2005 when auto insurance costs rose by 2.5 percent.

"The cost of auto insurance is increasing by about one-sixth the rate of inflation and little more than a single gallon of gasoline," said Robert Hartwig, senior vice president and chief economist of the I.I.I.

Hartwig cited the declining number of auto accidents, safer cars, new auto theft technology, fraud-fighting efforts and graduated licensing laws for teen drivers as additional key factors contributing to the cost slowdown.

However, he observed that rising costs for medical care and vehicle repairs as well as defense costs and jury awards remain a problem, according to I.I.I.'s analysis.

Restrictions on the use of credit-based insurance scores in several states are also a cost threat to millions of drivers, the I.I.I. said.

Katrina and the auto market
Record catastrophe losses associated with Hurricanes Katrina, Rita, Wilma, Dennis and Ophelia (the five storms that hit the Southeast in 2005) and predictions by leading meteorologists of more of the same for the next 15 to 20 years are putting pressure on the cost of auto insurance in some parts of the country.

Insurers received nearly 674,000 claims for vehicles that were damaged or destroyed by last year's storms. Those claims occurred across a wide swath of southern states and cost insurers some $3.2 billion, said Hartwig.

Florida, Louisiana and Missis-sippi saw the most claims, but large numbers of claims were also filed in Texas, Alabama, Georgia and North Carolina. Even the landlocked states of Arkansas and Tennessee reported significant numbers of claims despite being located hundreds of miles from where the storms made landfall.

Claim severity rises
"Unfortunately, while drivers today are filing fewer claims, those that are filed cost more," Hartwig said. "It costs more to repair cars, particularly following accidents involving sport utility vehicles."

This year insurers will pay between $15 billion and $20 billion in medical claims, the I.I.I. reported. Higher costs for hospitalization and pharmaceuticals, and state regulations that encourage abuse of medical treatments and associated legal costs are also to blame.

"Collectively, these high costs in some states more than offset the decline in accident frequency, pushing overall rates upward," Hartwig observed.

Cost drivers
Medical costs are an important factor in the auto insurance market. More than one in four auto accidents resulted in injury claims in 2003, according to the Insurance Research Council.

Higher jury awards in vehicular liability cases and auto theft are also significant factors that continue to put additional upward pressure on auto insurance rates.

"About 60 percent of auto premiums paid in 2005 -- almost $60 billion -- was for liability coverage," said Hartwig. As we look at 2006 and into 2007, we see this trend continuing."

And according to the FBI, an automobile is stolen every 26 seconds in the United States.