Maryland mulls how to keep property insurers on coast

Alarmed that homeowners on Maryland's coasts may one day be cut off from home insurance, state lawmakers are mulling new rules prohibiting insurers from pulling out of areas they deem risky.

But insurers met with lawmakers recently to tell them there's no need for alarm and that they shouldn't tinker with the market.

Senators were briefed on insurance availability in the wake of the December decision by the state's second-largest home insurer -- Allstate Corp.'s Allstate Insurance Co. -- to stop writing new home policies in many coastal areas in Maryland. Citing projections of more hurricanes, Allstate added Maryland to the states where coastal home policies may no longer be written. Delaware and parts of Virginia also were included.

In Maryland, a House bill under consideration would require home insurers to cover the whole state or none of it.

Allstate's decision in Maryland has coastal residents fearful they won't be able to get insurance, said Republican Sen. E.J. Pipkin, whose district includes Kent Island and miles of Chesapeake Bay coastline. "It looks like they're picking and choosing where they want to do business," Pipkin said.

Several insurers told the senators that Pipkin was correct but that insurers should not be forced to take more risk than they can afford. Insurers cited the possibility of more storms aggravated by more development on the coast.

"The population's moving to the coast," said Jeff Williams, counsel for Allstate, which covers about 300,000 homes in Maryland. "People want to live near the water. People want to retire near the water."

But Williams added, "We cannot ignore what the forecasters ... are telling us. We are looking forward to a lot more hurricanes and a lot bigger hurricanes."

Allstate's decision affects all or part of 11 Maryland counties. The company estimates it will avoid writing 1,600 new policies this year.

The state's largest insurer, State Farm Mutual Insurance Co., testified that it was also going to stop writing some policies. Lynn Dickerson, State Farm's vice president of operations, said the company decided last year to expand its do-not-insure area in Worcester County. Already the company does not insure in Ocean City.

"At some point in time, a hurricane will make a direct hit in the state of Maryland," Dickerson said. Dickerson said there's no shortage of insurers that will keep writing closer to the coast. "The market is working very well," he said.

Steven Orr, the state's insurance commissioner, told lawmakers there's nothing to worry about. He blamed fears about the insurance availability on a media frenzy. "Maryland is in great shape compared to many of our neighbors," Orr said.

Orr urged lawmakers not to force insurers to cover certain areas, saying it's an unneeded check. "This situation is overblown," Orr said. "Maryland is fine."

Sen. Catherine Pugh, D-Baltimore City, worried if coastal insurance would return. "Will you just be forced to write new policies in the center of the country?" she asked Williams.

The Allstate lawyer answered, "I certainly hope it doesn't come to that. But we are reducing our exposure on the coasts."

Koken resigns after 10 years as Pa. regulator

Pennsylvania Governor Edward G. Rendell accepted the resignation of Insurance Commissioner Diane Koken, effective Feb. 19.

Rendell appointed Randolph Rohrbaugh, currently a deputy commissioner, to serve as acting insurance commissioner during the formal search for a permanent successor.

Koken, Pennsylvania's longest-serving commissioner, will serve as a senior advisor to Rendell before returning to the private sector in mid-March.

Koken has served as commissioner since August 1997 and was first confirmed to the post by the Pennsylvania Senate in 1998. She has served in the administrations of three governors. She has been active in the National Association of Insurance Commissioners and served as the group's president.

During Koken's tenure in Pennsylvania, the department conducted more than 7,000 field investigations and market-conduct examinations, which resulted in civil penalties and restitution totaling nearly $317 million. The department also recovered more than $69 million on behalf of consumers as a result of consumer complaints during this period.

Also, under Koken's leadership, the Children's Health Insurance Program (CHIP) is being expanded to make coverage available to all uninsured children and teens up to age 19 that are not eligible for Medical Assistance. The expansion, known as Cover All Kids, is expected to begin in March.

Koken also oversaw implementation of the Mcare assessment abatement program, which has provided almost $1 billion since 2003 to defray health care providers' malpractice insurance expenses and has been credited with helping to keep physicians practicing in Pennsylvania.

New Mass. Commissioner Burnes accustomed to being the judge

Superior Court Justice Burnes is well aware that politics comes into play in Bay State insurance regulation

The new insurance commissioner for Massachusetts thinks her years of experience in a judge's robe will serve her well in her new role, one in which she sees herself as an arbiter of sometimes conflicting facts and information.

"I have a lot of skills for this job. I bring the ability to sort through the facts, to follow where the facts lead. It's what I do, " Judge Nonnie Burnes, Gov. Deval Patrick's pick to be his insurance regulator, told Insurance Journal in a recent interview.

While she has no direct experience in the insurance industry, she maintained that Gov. Patrick wanted someone "not beholden" to one viewpoint or interest group and she meets that requirement.

As a judge, she said she has come to learn that "insurance permeates everything." Many of the cases she has heard from the bench have involved insurance issues, from "garden variety" coverage questions to major industry matters. Among the cases she has participated in are ones involving the Liberty Mutual demutualization and the Savings Bank Life Insurance conversion.

While she does not have one overall philosophy of regulation, she said it is important to recognize the differences in lines of insurance and how they are structured, from auto insurance which the state mandates people buy to life insurance which people may choose to buy or not.

Economics and politics
Gov. Patrick is making economic development a cornerstone of his administration. In the Patrick organizational chart, the Division of Insurance that Burnes will run falls within the Department of Consumer Affairs and Business Regulation, which in turn is under the Cabinet secretariat of the Department of Housing and Economic Development.

Asked if growing the insurance sector of the economy will be part of her mission, Burnes acknowledges it will be: "Absolutely, I see myself part of that. It's a very powerful sector in Massachusetts."

She offered that the insurance industry is important at many levels. "For individuals and for companies, it's incredibly important business and sometimes the agents are caught in the middle," she added.

While economics is a factor in insurance regulation, Burnes is aware that politics also comes into play.

"It comes with the territory," she told Insurance Journal. She hopes that as often happens in legal settlements, her department will be able to forge agreements among conflicting interests so that no party goes away too unhappy. But if decisions have to be made that upset some parties, so be it. "I'm certainly used to making tough decisions," she added.

Among the issues Burnes could encounter is whether insurers should be permitted to use credit scores in rating. Massachusetts currently does not allow this. Burnes is keeping an open mind. She told Insurance Journal she has no view now whether credit scoring is good or bad but appreciates that what may make sense from a business perspective for insurers might be a bit "dicier" from a consumer angle.

For her own insurance needs, Burnes uses an independent agent whom she says she "trusts implicitly" and with whom her family has had a good relationship for years.

Burnes has been a Superior Court justice since 1996, and was a member of the law firm Hill and Barlow prior to her appointment to the bench. Burnes also served as the vice chair of the State Ethics Commission.

She resigned her position as Superior Court justice prior to assuming her new position on Feb. 26.

She replaces Joseph Murphy, first deputy commissioner, who has been serving as acting commissioner since Julianne Bowler, who was appointed by former Republican Gov. Mitt Romney, left in late December.

"Judge Burnes is the right choice at this critical time for the Commonwealth, and will insure that Massachusetts maintains its economic competitive edge by ensuring that insurance products are both affordable and fair for consumers," Housing and Economic Development Secretary Dan O'Connell said.

Burnes is a also member of the visiting committee for Harvard University, Kennedy School of Government.

She received a B.A. from Wellesley College and a J.D. from Northeastern University Law School. She is a resident of Boston.

"Residents of Massachusetts can feel confident that the insurance industry will continue to promote a healthy and responsive marketplace for all consumers who purchase its products," Consumer Affairs Director Daniel Crane said.

Landmark R.I. lead paint case remains in legal limbo

It's been more than a year since Rhode Island won a precedent-setting court victory against three former lead paint manufacturers, but the case has been in legal limbo since then as the companies have challenged the verdict and demanded a new trial.

Both sides are awaiting a judge's order that could specify what the defendants need to do to deal with lead paint contamination. The decision will be significant since lawyers and financial analysts estimate that it could cost billions to clean up the toxic problem.

Superior Court Judge Michael Silverstein has wide discretion, and his options could range from ordering the companies to pay for inspections of some 250,000 older homes to painting over, covering up or removing lead paint in those properties. Before issuing any cleanup order, though, he'll have to rule on the companies' requests for a new trial or to dismiss the case.

Those involved in the case say it's anyone's guess what the judge will do.

Jack McConnell, an attorney representing the state, said he hoped Silverstein would affirm the verdict and issue a decision "that gets the lead out of Rhode Island as quickly and safely as possible."

Whatever the decision, it would be the biggest development in the case since last February when a jury found three companies -- Sherwin-Williams Co., Millennium Holdings LLC and NL Industries Inc. -- liable for creating a public nuisance by manufacturing a toxic product.

The verdict made Rhode Island the first state to successfully sue lead paint makers.

"It's sent shockwaves through the lead paint companies that they may in fact finally be held financially responsible for their bad acts," McConnell said.

The state says it could cost between $1.37 billion and $3.74 billion to remove lead paint or mitigate the problem.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Mass. auto assigned risk plan could be history before it even begins

Massachusetts insurance agents have urged the administration of Gov. Deval Patrick to scrap a proposed auto insurance assigned risk plan that the previous administration championed for four years.

Former Insurance Commissioner Julianne Bowler ordered final implementation of the Massachusetts Assigned Insurance Plan (MAIP) in the waning weeks of the Romney administration but the Patrick administration put the brakes on that, promising further review of its effect on the marketplace.

The influential Massachusetts Association of Insurance Agents, at a public hearing, urged the state to not go forward with the MAIP. Rejecting the MAIP would maintain "the most consumer-friendly automobile residual market in the country," the agents testified.

Instead, MAIA recommended that the Division of Insurance and Commonwealth Auto Reinsurers, which administers the high risk system, continue to modify the current system and encourage insurers to appoint exclusive representative producers (ERPs), who handle only high risk accounts, as voluntary agents.

"An assigned risk plan is not the vehicle to attain necessary residual market reform. The fine-tuning of CAR rules, however, should be initiated by CAR and the DOl, as an alternative in order to maintain the balance of the residual market burden and encourage the appointment of ERPs as voluntary agencies. Again, we urge you to disapprove all CAR rules related to an assigned risk plan and not go forward with the MAIP," the agents testified.

MAIA cited what it said are advantages of the current high risk assignment system including that it allows consumers to choose the agency and company with which they want to do business and it has kept the size of the residual market small at about 5 percent of market.

The proposed assigned risk plan has had a long history -- it has been in the works and the subject of multiple hearings and even a court ruling since 2003. On Dec. 13, 2006, former Gov. Mitt Romney's insurance chief Bowler finally approved rules to activate the new plan starting in April. Bowler said the step would align Massachusetts with other states. She believed that the new plan would more fairly distribute high-risk drivers among insurers.

Massachusetts currently assigns agents representing high-risk drivers to insurers, and then allows them to assign individual drivers into a pool where losses are shared among carriers.

Several key domestic insurers prefer this current assignment system and have steadfastly opposed the MAIP, arguing that the switch is unnecessary and poses risks for consumers and agents. The opponents include Webster-based Commerce Insurance, the state's largest auto insurer, which lost a court challenge last summer to block Bowler's plan.

Opponents also include Arbella Insurance Group, which was represented by John Kittel, senior vice president, at the most recent hearing on Feb. 15. Kittel claimed the switch is unnecessary. "Customers have not been clamoring for change, and carriers have been earning sound profits," he said.

But more than that, according to Kittel, the MAIP would be unfair to consumers and agents. Some drivers would lose discounts and their choice of company under the plan, according to Kittel.

Also, he argued, agents would face an "administrative nightmare" as their business is spread to 19 different companies, each with its own billing and policy service practices.

Kittel recalled a bit of history. "A similar ARP was implemented in 1972 and then reversed in 1973 because of the rampant market disruption it caused. Please don't force us to repeat this history lesson," he testified.

The American Insurance Association represented insurers favoring the MAIP. John Murphy, AIA vice president, cited some history as well, pointing out that the state attorney general concluded several years ago that the current system fails to satisfy the statutory mandate for a fair and equitable sharing of residual market losses.

"The rapid transition to a traditional assigned risk plan will be helpful to the broader auto insurance market. It will address current inequities in the system, which are a critical problem. It also will send an important positive signal that Massachusetts is serious about normalizing its auto insurance system," Murphy added.

Gov. Patrick has named a study group to look into the entire system and make recommendations, which are expected next month.

The Commissioners: Thomas Hampton

D.C. growing its captive market, escaping worst of property pullbacks

Thomas Hampton, commissioner of the District of Columbia Department of Securities, Insurance and Banking. Hampton, who was reappointed to his post by Mayor Adrian M. Fenty in January, discusses the District's campaign to attract captive insurers, the renewal of the federal terrorism reinsurance program, the prospects for a federal backup for natural disasters and the use of credit scoring by insurers in this exclusive interview with Insurance Journal. The interview is part of the series, The Commissioners 2007, Part 1, in which Insurance Journal speaks with 15 state insurance regulators. Hampton's video interview can be viewed in its entirety at www.insurancejournal.com/broadcasts.

The District has become an active captive participant. How is this going and what are your plans to differentiate the District from other states that are looking to grow their captive industry?
Hampton: The captive industry in the District of Columbia has been going very well. In 2000, we initiated our captive law. We didn't get our first captives until 2002. We had two that year. Since that time we've grown from two to 70, which we'll have at the end of this year. That's a big growth spurt for us.

How we differentiate ourselves from other jurisdictions is two-fold. We originally started because the District has all these associations that we are headquarters of, associations in the country. We were trying to focus in on dealing with association captives and risk attention groups that were owned by associations. As we started out with that process, we found out that these types of captives, or these types of organizations, weren't cost effective in terms of how much money we were getting in terms of tax dollars and revenues from these companies as compared to the amount of work it took to regulate these companies.

We've changed our focus somewhat. And we're dealing a lot with the hospital systems and allowing the liability companies that want to do business. We're trying to get more involved with medium sized corporations, corporations with $50 million in capitalization to $100 million in capitalization. Sarbanes-Oxley and other types of corporate governance rules require these companies to deal with the enterprise risk management focus. As they deal with these initiatives, they're using captives as a mechanism to, more or less, control their risk, as well as do these organizational self-funding mechanisms.

What about the availability of property insurance in the District?
Hampton: Availability and affordability of property insurance isn't as bad in Washington as it is in the Gulf Coast and some of the Northeast. We're very fortunate there. We are concerned, though, that our consumers understand their policies and understand the type of risk that they are insuring. ...What we've been doing and trying to focus on is educating consumers on their policies, their homeowners policies, as well as the auto policies.

In terms of the rating process, dealing with these products, we have a competitive rating process. When companies do have a major catastrophe or loss in Washington, they can then go back and readjust their products to deal with the losses that have occurred. We do actuarial reviews of these rates. It's good that we don't have a prior approval process and it's more of a competitive rating process. That way the companies can adjust quickly and still provide coverages to our constituency, which is the most important thing.

Is part of your job to encourage insurers to write in your state?
Hampton: It's a very important part of my job. After we do a market analysis of our different lines of coverages, if we see situations where companies aren't providing like in the case of homeowners aren't providing homeowners coverages, or we don't have a competitive marketplace, that's a major concern to us. We go out and try to encourage that. But beyond that we also try to have them deal with niche markets. In essence, right now in Washington, what we've been trying to do is have companies that provide coverages to small businesses to make sure they understand the small businesses that operate in Washington. It might be unique from some of our surrounding jurisdictions. We try to set up meetings and other types of informational gatherings where we get the small businesses and the companies in the same room, have them discuss some of the issues that they may have, so that we can try to find ways to have coverages provided by these companies.

You oversee banking and securities as well as insurance. What is your opinion of federal versus state regulation?
Hampton: Federal versus state regulation for a securities and banking arena has worked out relatively well. On the banking side, the majority of our companies are federally regulated by the OCC or the FDIC in conjunction with us. We do joint examinations on safety and soundness with the banks that are chartered within the District. We handle complaints in a conjunctive manner. That works out well.

Similarly, the same situation in securities. We work with the SEC on our broker-dealer firms that are doing business in the District as well as our investment advisor and investment advisor reps. We do a lot of issues dealing with consumer complaints, fraud issues; we work in conjunction with the SEC. That's a good thing as well.

Insurance is a little unique because insurance is more parochial. Each state has mandated coverages. There's mandated coverages in auto. We have different issues as far as homeowners are concerned than may have in the Gulf Coast or other places. Nationalizing insurance, especially on a property/casualty side, is going to be a challenge. I think if we do have a national system, this national system will still have to incorporate a lot of the parochial laws and different customs in the states and jurisdictions that are operating in the United States now. You really can't have a one rate fits all process, a one policy form fits all process, in insurance. But you can have that process in banking and securities.

What is the District's policy on the use of credit scoring in personal lines?
Hampton: The District of Columbia permits companies to use credit scoring in developing their underwriting standards. What our auto companies have done is they have used credit scoring to develop rating classes. The more rating classes that are out there, the higher chance that our constituency, our policy holders in Washington, can pay rates that are more reasonable and not excessive. The one thing that we are concerned about and we are going to be working on as one of our agenda items in '07 is to make sure that this credit scoring is not unfairly discriminatory to certain groups of folk. We want to go out into our marketplace to do market analysis to make sure that the under-served communities who may have bad credit ratings aren't ... it's not a de facto way of charging those guys more to do business than people who have great credit rating. That's not the case in what I'm hearing from the companies but we want to verify that.

How important is the federal Terrorism Risk Insurance Act to D.C.?
Hampton: TRIA is very, very important to Washington D.C. Obviously when 9/11 occurred, New York and Washington -- even though it was Northern Virginia -- but New York and Washington were the main two jurisdictions that were being hit. The key to us was after the event occurred, the insurance companies started putting exclusions for terrorism insurance coverages in their commercial property and other types of products. That caused our real estate market and a lot of our construction folks to start having concerns, because the bank said you have to have the terrorism coverage option before we would permit the buildings to keep being built and before we'll sell you the commercial property coverage. These companies needed that. That has been relaxed in the last two or three years after 9/11.

If we have a situation where TRIA isn't extended past Dec. 31, 2007, we believe that the District is going to be adversely affected. A majority of the companies right now, the only reason they are providing the option is because the TRIA extension has moved toward '07. ... I'm not sure TRIA is going to be extended. We're hearing great encouragement from Congress that this may be extended in the new congressional session that's happening in January. Hopefully that will happen.

Do you think that a national catastrophe plan would be a good idea?
Hampton: National catastrophe and TRIA came up through the processes of the NAIC (National Association of Insurance Commissioners) almost simultaneously and people tie the two together. I look at terrorism and terrorism insurance a little bit different from national catastrophes. Most of the terrorists who are attacking America are attacking America and not necessarily the District of Columbia, not necessarily New York, but some of the major trophy buildings that we have in Washington, New York, San Francisco. I think this is something that the nation ... it's an attack on the nation. We all should be a part of this. That's why I believe that TRIA should be extended. ...

The national catastrophe is a little different in the sense that some of the people in certain jurisdictions, especially in the Florida area and others, are staying mostly on the coastline. It causes problems when that happens. These people choose to stay in that very vulnerable area. I know a lot of people in the Midwest and other places who don't have these types of risks would say they need to pay an additional premium for the additional risk that they have in the marketplace.

Chicago Exchange offering futures contracts on '07 hurricanes

The Chicago Mercantile Exchange, the largest derivatives exchange in the U.S., is launching contracts that will allow insurers and others to hedge risk against hurricane damage.

The exchange, a unit of CME Holdings Inc., is teaming up with Carvill Group, a reinsurance intermediary that will calculate the contracts' underlying indexes of hurricane data used to calculate damage. Front contracts will expire when a storm makes landfall, with expiration pegged to the index.

CME said contracts for "CME-Carvill Hurricane Index" futures, and options on futures, will begin trading on the floor and on the Globex electronic platform on March 12.

"Following the 2005 hurricane season that caused an estimated $79 billion in damage, it became apparent that there was limited capacity to insure customer claims," said Felix Carabello, director of alternative investment products at CME, in a release. "With these hurricane contracts, insurers and others will be able to transfer their risk to the capital markets and thereby increase their capacity to insure customers."

CME's announcement follows one by Nymex Holdings Inc., which will list three new catastrophe risk index futures contracts on CME in March. CME currently lists weather contracts based on temperatures in 35 cities worldwide as well as snowfall and frost indexes.

The exchanges' new risk products provide another way to hedge risk in an area that has primarily been the domain of insurers.

In addition to insurers, CME also sees demand from customers such as energy companies, pensions funds, state governments and utility companies.

The new hurricane contracts will be available in five areas defined as the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic Coast and the Eastern United States. Carvill will calculate the underlying indexes using publicly available data from the National Hurricane Center of the National Weather Service.

The Index uses the maximum wind velocity and size, or radius, of each official storm to calculate the potential for damage.

Delaware doctors form insurer

A group of Kent County, Delaware doctors has decided to form a risk retention group to provide malpractice coverage.

According to Insurance Commissioner Matthew Denn, the group is tapping the state's Medical Malpractice Initiative Pilot Program, which loans $500,000 to doctors to set up their own medical malpractice insurance entities.

These doctor-owned groups promise to reduce premiums through lower overhead, the elimination of profits and better self-policing when it comes to managing risks.

Dr. Thomas Barnett, a Dover surgeon, said that an initiative like this to help the state's doctors reduce their medical malpractice costs is badly needed, especially downstate, where he says doctors have left practice due to high insurance premiums.

"We have gone from three neurosurgeons in 1999 at Kent General to zero today. With OB-GYNs, we've gone from 15 a few years ago to eight," Dr. Barnett maintained. "This will help us attract those specialties."

N.J. drunk driver test

A new machine to help determine if drivers are drunk is generally reliable but is not perfect and can only be used with some adjustments and discretion, a New Jersey judge has said.

One of the adjustments may mean that thousands of people previously convicted of drunken driving could be let off the hook legally.

New Jersey has had a years long legal dispute over whether the Alcotest 7110 is a reliable successor to the old Breathalyzer machine. The state Supreme Court appointed retired Judge Michael Patrick King as a special master on the issue and asked him to make a recommendation.

Under state law, judges, not juries, hear all drunken driving cases and they are given practically no leeway: if a driver is determined to have a blood-alcohol level above .08 percent, he or she is guilty. Some defense lawyers contend that it is unfair to have a machine, rather than a person, determine guilt or innocence.

King suggested that judges should be able to consider other evidence on cases where the Alcotest readings are very close to the threshold. If the state Supreme Court accepts his recommendation, it would mean someone with a blood-alcohol reading as high as .085 percent would be found not guilty of driving under the influence.

The Supreme Court must now issue an opinion. Only then can at least 10,000 drunken driving cases be closed. Since January 2006, the sentences of first-time DUI offenders have been put on hold while the Alcotest issue is sorted out.

In the meantime, those people have been allowed to continue driving.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Travelers reopens red umbrella

The St. Paul Travelers Companies Inc. is reacquiring its trademark red umbrella from Citigroup, and changing its name to The Travelers Companies Inc.

After the closing of the transaction, which is expected in mid-March following regulatory approvals, the company will begin trading on the New York Stock Exchange under the new stock symbol "TRV."

Purchase terms were not disclosed however, purchasing the rights to use the red umbrella from Citigroup cost the insurer "millions," said Jay Fishman, chairman and chief executive officer.

"The red umbrella is one of the great American business icons. It's a familiar representation of protection and insurance that is in-synch with our customers' ever-changing needs," Fishman said. "Bringing back the umbrella and changing the company name will further advance the highly-regarded Travelers brand."

Fishman said that the company's branding research indicated that recognition of the red umbrella by its customers was "quite remarkable."

He said reacquiring the red umbrella gives Travelers the opportunity to launch its brand program. "So many people identify with the umbrella," he said.

Fishman noted that the opportunity to reacquire the logo arose after Citigroup decided to pursue a unified global brand identity without using the trademark red umbrella it inherited when it bought Travelers years ago.

According to a Citigroup announcement, net proceeds from the sale of the umbrella will offset the future costs of implementing the Citigroup unified brand.

"What we've paid for it ... I'm hopeful will be more than made up in the increased value," the umbrella will provide to the company, Fishman said.

The umbrella is believed to have first appeared as an illustration of insurance protection in a Travelers ad in 1870, and, as the red umbrella, became the official Travelers trademark in 1959.

Mass. ski area gets lift

The Blue Hills Ski Area in suburban Boston has reopened after the private operator of the state-owned facility found new liability insurance coverage.

"We found a carrier that would work with us," said Al Endriunas, who co-owns Ragged Mountain Resort, the company that operates Blue Hills.

A lawsuit by an injured skier required the ski area's former insurer to put aside $200,000 to meet a possible claim. When a new insurer took over the policy last month, it opted not to renew the liability insurance. But the state would not let the ski area operate without coverage.

Endriunas said a deal with Prime Insurance, of Utah, came after he spent three days talking to insurers. "It was a huge break," he said. "There was a lot of people who tried to come out and help us here."

Congress gets bipartisan bills to repeal insurance antitrust immunity

Sen. Patrick Leahy, D-Vt., chairman of the Judiciary Committee, joined with Senate Democratic and Republican leaders earlier this month to introduce a bipartisan bill that would strip the insurance industry of its limited antitrust exemption.

Leahy introduced the Insurance Industry Competition Act, along with the judiciary panel's ranking member, Sen. Arlen Specter, R-Pa., Senate Majority Leader Harry Reid, D-Nev., and Senate Republican Whip Trent Lott, R-Miss.

Companion, bipartisan legislation has also been introduced in the House by Reps. Peter DeFazio, D-Ore., Gene Taylor, D-Miss., Bobby Jindal, R-La., Charlie Melancon, D-La., Rodney Alexander, R-La., and Walter Jones, R-N.C.

For the last six decades, insurance companies have had limited immunity from federal antitrust investigation and prosecution. The bipartisan bill introduced would give the Department of Justice and the Federal Trade Commission the authority to apply antitrust laws to anti-competitive behavior by insurance companies.

Industry opposed
The proposal has drawn the opposition of insurance company and agent trade groups. The industry maintains that the immunity, among other things, allows insurers of all sizes to benefit from collected loss data. which in turn makes insurance pricing more accurate and lowers costs for all insurers.

But the insurance industry and its practices have come under serious scrutiny along the Gulf Coast in the wake of recent hurricanes, said Leahy. Leahy said there are concerns that insurers have been too often denying claims and delaying payouts along the Gulf Coast.

"Federal oversight would provide confidence that the industry is not engaging in the most egregious forms of anticompetitive conduct -- price fixing, agreements not to pay, and market allocations," Leahy said. "Insurers may object to being subject to the same antitrust laws as everyone else, but if they are operating in an honest and appropriate way, they should have nothing to fear."

Pennsylvania's Specter praised the legislation as a way to bring more competition into the industry.

"It is my hope that this legislation will bring the benefits of competition to the insurance industry and to consumers. Too many consumers are paying too much for insurance due to the collusive atmosphere that exists in the insurance industry. This has become a particular problem along the Gulf Coast, where insurers have shared hurricane loss projections, which may result in double-digit premium increases for Gulf Coast homeowners," stated Specter.

Lott, whose own home was destroyed by Hurricane Katrina, has been a harsh critic of the industry's response to that storm.

"One thing I learned coming out of Katrina is that the insurance industry is not subject to antitrust laws," Lott said. "I've looked at the history, and there's no explanation for why that is -- for why antitrust and price fixing in this industry are not covered by the federal government. Our legislation corrects this exception and applies antitrust restrictions to the insurance industry just as it is applied to most other corporations."

Exemption affords competition
Insurance industry lobbyists shot back, arguing that the antitrust exemption helps small and medium sized insurers compete and its repeal could actually lessen insurance competition.

The Independent Insurance Agents and Brokers of America (Big "I") warned that significant changes to the exemption could have negative implications for consumers.

"We are concerned that an outright repeal of the antitrust exemption in McCarran-Ferguson could have a negative impact on small and medium sized insurers in the marketplace resulting in reduced competition and potentially decreasing the availability and increasing the cost of insurance for consumers," said Charles E. Symington Jr., IIABA senior vice president for government affairs and federal relations.

The Big "I" urged lawmakers to await the report of the Antitrust Modernization Commission, established by Congress two years ago to study a variety of antitrust issues, including the multiplicity of exemptions and privileges currently existing.

"There is little evidence indicating that wholesale changes to the McCarran-Ferguson antitrust exemption are needed or even desirable," said Tom Koonce, Big "I" assistant vice president for federal government affairs.

Rather than boost competition, repeal of the antitrust exemption could "severely damage competition in the marketplace and hurt insurance consumers," according to the Property Casualty Insurers Association of America (PCI).

"The limited antitrust exemption provided by the McCarran-Ferguson Act has proven essential to insurance consumers, in terms of availability, selection and price," said Ben McKay, PCI's senior vice president, federal government affairs. "Its existence promotes competition in the marketplace, and the loss of this important provision would likely damage small companies, prevent new entrants into the insurance industry and diminish the ability of existing insurers, of all sizes, to expand into new markets or new product lines."

It is also likely that repeal will drive up the cost of doing business by providing new fodder for class action lawsuits, meaning consumers will have to pay a cost as well in the form of higher premiums, according to PCI.

Limited, not total, exemption
PCI noted that the McCarran-Ferguson Act provides a limited, not total, anti-trust exemption for insurers. Insurers remain subject to antitrust laws relating to boycott, coercion and intimidation.

Under McCarran, statistical agents can collect and validate data, and insurance companies can pool and use aggregated loss data. Without such loss data, the industry maintains that all but a few insurers would confront increased operating expenses and access to accurate and reliable data could become a barrier to market entry and endanger solvency.

The limited anti-trust exemption also permits insurers to form inter-company pools to provide high-risk coverage or to allow small company participation in writing risks that on an individual basis would be unavailable. The operation of assigned risk plans, such as those for auto and workers' compensation in most states, could be hampered by anti-trust concerns in the absence of the McCarran-Ferguson exemption, according to insurers.

Stock prices mixed; middle market M&As remain active

Stock Prices: Brokers' stock prices were mixed as 2006 came to a close. The two largest brokers did not fare well in 2006 as Marsh & McLennan Company Inc.'s (NYSE:MMC) stock was down 1.2 percent for the year and Aon Corporation (NYSE:AOC) was flat, down 0.1 percent. However, most middle market brokers experienced an exceptional year in terms of stock price performance. Hub International Ltd. (NYSE:HBG) was up a remarkable 22.9 percent; USI Holdings Corporation (Nasdaq:USIH) up 11.5 percent and Hilb Rogal & Hobbs Co. (NYSE:HRH) was up 10.7 percent for the year. Despite record revenues and profits throughout the year, Brown & Brown Inc.'s (NYSE:BRO) stock traded down 7 percent in 2006 after a 41 percent run up in 2005 and 35 percent in 2004.

M&A Activity: A total of fifty-one deals were announced during December 2006 and January 2007. Middle market brokers continue to be active as Arthur J. Gallagher & Co., Hub International Limited, and Hilb Rogal & Hobbs Company all announced acquisitions. USI Holdings Corporation, who has been another middle market serial acquirer, was the one actually being acquired in the largest deal announced during this two month period. USI entered into a definitive agreement to be acquired by GS Capital Partners, a private equity affiliate of Goldman, Sachs & Co., in a transaction valued at approximately $1.4 billion, including repayment of the company's existing debt obligations. USI stockholders will receive $17 in cash for each share of USI common stock they hold, representing a premium of 20.5 percent to the average closing share price for the 30 calendar days prior to Oct. 24, 2006, the day USI announced it had formed a special committee in response to an indication of interest received from a private equity firm in acquiring all of USI's outstanding common stock. Marsh & McLennan announced it signed a definitive agreement to sell Putnam Investments for $3.9 billion. The proceeds from the sale should help Marsh emerge as a formidable acquirer. MMC's President and CEO Michael Cherkasky commented, "The sale of Putnam will enable MMC to focus on strengthening the global leadership positions of our market-leading risk and human capital businesses."

Capital Raising: Brown & Brown announced that the company and Prudential Capital Group, an institutional investment business of Prudential Financial Inc. (NYSE:PRU), have entered into a three-year, uncommitted Master Shelf and Note Purchase Agreement which could allow the company, over the next three years, to borrow up to $200 million for up to a 10-year term at a fixed rate of interest based on the Treasury rates available at the time of borrowing plus an applicable credit spread. Initially, the company is borrowing $25 million represented by unsecured senior notes issued through a private placement. The notes will bear interest at an annual fixed rate of 5.66 percent and will mature in 2016.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. Services include highly qualified, industry-specific advisory relating to mergers & acquisitions, capital raises and valuations. The firm can be contacted at 704-943-2600, by e-mail at Info@LMCCapital.com or visit the firm's Web site at www.LMCCapital.com

A new direction for directors and officers coverage

Changes in attitudes, lawsuits, statutes worldwide force global companies to buy locally-admitted D&O

A company that acquires a new property in a foreign country will usually review its property and casualty insurance to be sure it is in compliance with local laws. Until recently, however, directors and officers liability insurance has not been a part of this assessment.

The standard approach to this line has been for the U.S. parent company to buy insurance in the United States that provides protection worldwide. Underwriters anticipated the global risks of the company, regardless of where the operations were located. And because instances of lawsuits brought against a U.S. company's foreign subsidiaries and their directors or officers were relatively rare, no additional insurance was really needed. But that is beginning to change.

With recent changes in local statutes, as well as suits against directors and officers in countries such as Brazil, China, the United Kingdom and Canada, U.S.-issued contracts may no longer be comprehensive enough to address all of the exposures. To cover these emerging exposures, companies may need to consider purchasing a locally admitted D&O policy in addition to their master policy.

Many countries have admitted requirements for D&O, but until recently, these laws often were interpreted to apply to property and casualty risks only. Even though they may not be compelled by law to buy locally admitted D&O insurance, many companies may find that the global solution they've purchased for years is no longer satisfactory.

The evolving risk
For years, D&O liability was considered a problem primarily for companies based in the United States, where plaintiffs' attorneys are notorious for filing class-action lawsuits. But as more countries begin to adopt U.S. attitudes about litigation, the risk of a lawsuit against a foreign subsidiary and its directors and officers can no longer be discounted.

Changes to local laws, along with an increased awareness of corporate compliance and premium tax issues, are increasing the risk level for companies with operations in foreign countries.

Regulators -- not just in the United States, but internationally as well -- are showing an increasing interest in issues such as corporate transparency, accountability and compliance. This translates into higher expectations and standards for subsidiaries of corporations around the world and the need to comply with local requirements and laws in all ways.

The consequences of a local lawsuit could have serious repercussions for a U.S. parent company as well as its subsidiary. Lawsuits can be long and expensive and can generate significant negative publicity, putting the company's brand and reputation in jeopardy.

Meanwhile, under certain circumstances, senior executives can be jailed and personal assets can be confiscated.

Local D&O policies provide another layer of protection for foreign subsidiaries and their directors and officers. Without locally admitted insurance, these individuals could face the costs of a lawsuit and risk losing their personal assets.

When it comes to claims, countries such as Brazil require a local policy if the local subsidiary expects to protect and receive restoration for D&O suits brought in that country. Other countries require admitted insurance in the event of a claim as well.

There are other strong, practical reasons to have a locally admitted D&O policy, such as currency valuation and tax liabilities in the event of a claim.

For instance, under a standard contract, claims by a U.S. parent company would likely be paid in U.S. dollars, but defense costs often have to be paid by the subsidiary in the local currency. In that case, the U.S. parent company would incur a significant tax liability if it attempted to transfer money to the foreign subsidiary to pay legal fees or other fines or settlements. Conversely, a locally admitted policy would pay claims in the local currency.

Agents and brokers can help
Brokers and agents can play a key role in making sure that their corporate clients have the proper D&O insurance protection.

To start, they should begin by asking their clients about their international operations and future plans. Do they have operations in foreign countries and if so, which ones? Are they planning to expand into other foreign countries? Aside from these basic risk-assessment questions, there are additional items to consider.

Is the client exposed to public scrutiny because of its operations? Is admitted insurance for D&O required? Do laws prohibit claims to be settled outside of the country? Is the client publicly traded in the country? Does the client have bonds, notes, bills or securities in that country? Are there a large number of shareholders in that country? Is this country one with a developed economy?

If a local D&O policy is needed, agents and brokers will need to identify and work with an insurer to provide a global solution.

The program's success will depend on that carrier's ability to execute the local policies in the local language, while also coordinating the insurance program for the parent. It is important to seek out a policy from an insurer with an international presence or an insurer that can provide local protection through an affiliate.

Even though it is possible for businesses to set up operations in a foreign country without a locally admitted D&O policy, the standard U.S.-issued contract often cannot provide truly global protection. Without a local policy, businesses are at risk and may have little or no protection to help them pay for a loss.

Kathleen S. Ellis is a senior vice president of Chubb & Son, and manager of Multinational Risk Group - Global Accounts.