Citizens expects $3.05 B bond issue; appeal made to agents for help

Citizens Property Insurance Co. CFO Terri Slack announced June 23 that a $3.05 billion bond issue, believed to be the largest single bond issue in Florida's history, was expected to be finalized June 29 in Miami.

The bond issue will more than double money available to pay claims this hurricane season, Bruce Douglas, chairman of the Citizens Board of Governors said.

"If you add it all together, we have about $5 billion in liquidity to face the hurricane season," Douglas said. "This puts us in a very strong financial position."

Slack said the bonds will be taxable, auction-rate bonds sold with maturity dates ranging from 2017 to 2026. Issuance costs will be about $47 million. She said Citizens had a similar sale in 2004, when it sold $715 million in bonds.

She also said the money from the Legislature helped Citizens raise its rating from "A" to "A-plus" with Standard & Poor's, a bond rating company.

Investor bids for the bond issue were to be taken June 27 and the note was to be finalized June 29 in Miami, according to Bob Ricker, Citizens president and executive director.

Ricker said he was pleased the money was being made available at a time when Citizens is ready to provide coverage for 320,000 customers from the failed Poe insurance companies.

"This money will give us a very strong base for future claims payment," Ricker said. "The new money will be used, if needed, to pay claims in Citizens' 'high-risk' account."

Taxpayer funds
In addition to the bond money, Citizens also will receive about $715 million from the Legislature soon after July 1. The money was appropriated to help Citizens deal with a $1.7 billion deficit incurred after eight hurricanes struck Florida in two years.

The appropriation prompted Fitch, another rating company, to raise Citizens high-risk account rating from "negative" to "stable" and assign an "A-minus" rating to the bond sale.

Citizens has paid more than $5 billion in claims as a result of hurricanes in 2004 and 2005.

In related news, The Associated Press reported that Florida officials also approved a two percent surcharge on all property insurance policies to help cover outstanding claims for Poe Financial, whose insolvent companies are being liquidated.

2% surcharge
Insurers must obtain permission from the state's Office of Insurance Regulation to pass on the extra cost to policy holders, Michelle Lovern, deputy director of the state's Insurance Guaranty Association told the AP. If that happens, policyholders would pay another $20 for a $1,000 premium and $60 for a $3,000 premium.

The guaranty association, which covers outstanding claims for insolvent insurance companies, approved the surcharge. It is expected to raise $225 million to help cover outstanding claims for Poe Financial's insurance operations.

In May, the Tampa-based Poe handed over the last of its three insurance subsidiaries to the state after not being able to pay outstanding claims from 2004 and 2005 hurricane seasons.

FAIA agents briefed
The Poe situation is clearly on the minds of Citizens' officials. Paul Palumbo, Citizens head actuary, and Suzanne Murphy, vice president, volunteered to field agents' questions and provide a status report on Citizens during the Florida Association of Insurance Agent's Conference in Orlando.

"We are as ready as we are going to be to face the 2006 hurricane season," Palumbo said.

The duo appealed to independent agents to assist the firm with the unprecedented challenge of taking over more than 300,000 property and casualty policies from Poe and its subsidiaries.

Palumbo said Florida's insurer of last resort received 50,000 to 60,000 applications per month.

"We need you to share our story with your customers and provide them with the correct information," Murphy, said. "We are emphasizing partnering in which you, the agent, will be the face and voice of Citizens."

They described Citizens' growth as "explosive." The company has streamlined its systems and crafted an efficient program.

June estimates show Citizens property/casualty policies jumped to more than 500,000. Palumbo predicted the company will have more than 1 million policies by the end of 2006.

Citizens officials said their goal is to work closely with 7,300 agents in Florida who service its customers and communicate better to help streamline the policy administration and claims settling procedures.

Murphy and Palumbo outlined changes they hope will make Citizens' growth more manageable, including:

• Developing new claims tracking and software management to speed processing;


• Adding an agent-only hotline so agents can obtain faster responses;


• Adding 15 employees to beef-up catastrophe management;


• Hiring more than 140 former Poe employees to transitioning their accounts to Citizens;


• Using outside, licensed inspection firms to investigate claims; and


• Requiring its claims outsourcing provider to add new employees and streamline its operations.

Citizen's goal is to complete quotes within five to seven days. Palumbo claimed Florida's insurer of last resort has come "light years in improving its claims process."

Citizens main communications, according to Murphy, is email. She said it is an efficient way to communicate, due to many agents trying to call them.

Agents expressed concerned about possible E&O claims, due to Citizens requiring 30 business days notice to approve a new contract. They said carriers often wait until a few days before a policy is about to lapse to notify them of a cancelation, which means the customer would be uninsured until Citizens completed its paperwork.

Palumbo vowed to provide the agencies with more timely quotes.

Ga. commissioner says abolishing contingency commissions 'a mistake'

Abolishing contingency commissions and making them illegal would be a major mistake, according to Georgia Insurance Commissioner John Oxendine.

Oxendine said he recently told carrier representatives they were "literally crazy" for wanting to abolish contingencies.

The Georgia regulator also criticized insurance companies that force all agents to disclose their commissions, as Zurich Insurance has done.

Speaking at the Independent Insurance Agents of Georgia's Annual Convention in Amelia Island, Fla., Oxendine described a meeting in New York at which representatives of several large insurance companies complained they had been put at a competitive disadvantage because they had agreed not to pay contingency commissions.

According to Oxendine, the carriers suggested all contingency commissions should be abolished in all states. He said they claimed that due to their previous agreement, they were at a competitive disadvantage to small agencies around the country.

"I looked at them and asked, 'Are you serious?'" Oxendine said. "You are telling me that you are at a disadvantage and you can't compete with a mom-and-pop general agency on Main Street America?"

Oxendine said he told the carriers that they were "literally crazy" and to get out of the room.

He maintained that there is no way that his state or a majority of his colleagues in other states would outlaw contingency commissions for insurance agents.

Counselor vs. agent
The commissioner used his forum to outline the requirements to be licensed in Georgia as an insurance counselor, and cautioned those who combine that work with being a licensed agent.

"At present, to obtain an insurance counselor's license, an agent must prove five years of appropriate experience," Oxendine explained. He indicated that new requirements will accept five years of experience in other related fields, not necessarily insurance.

He said it is important for producers to know the difference between an agent's license and a counselor's license. Agents can only accept a fee from a carrier for which they are writing a policy. They can never accept a fee from a client. "If an insurance agent takes a fee, they can get in trouble. Don't do it," Oxendine warned.

A counselor can accept a fee from a client, but only in certain circumstances. Counselors can legitimately charge fees for commercial or general risk assessments, a workplace safety analysis, estate planning or tax planning. "You are charging for your expertise, your planning, to help meet customers needs and get their costs lower," Oxendine explained.

If an agent quotes a fee to perform a counseling service, the client has the right to assume he "owns" you, Oxendine added.

"I paid you, you work 100 percent for me, and no one else," Oxendine said. "Under the law as an agent you are representing the coverage and an agent for the coverage. I know you all think of yourself as agents for the consumer, but realistically, if I felt like my agent was not looking out for me, I would fire him in a heartbeat and look for someone else."

No double-dipping
"You can be a counselor and an agent and be the same person and receive a fee or commission--but you can not take a fee for the same service you are getting a commission for," the commissioner explained.

"You get paid a commission for placing business," he explained. "As a counselor, you can take a fee for placing business if there is no commission, or you can take a fee for something other than placing business if you get a commission. But you can not do both, which is double-dipping."

Georgia law requires producers to take off their counselor hat and replace it with their agent hat when playing both roles. "You have to stop and say, OK, now I am going to offer you some products I sell. I am going to be paid a commission by the company," Oxendine continued. The agent then must disclose how much he will be paid in commission and obtain the customer's consent.

"They have to authorize you to leave your capacity as a counselor representing them and acknowledge that you are representing the company and obtaining a commission," Oxendine explained.

"That is the only time in Georgia that an agent is required by law to disclose how much they are being paid in commission, and I very strongly think that is the only time."

Zurich disclosure
Oxendine criticized the policy adopted by Zurich Insurance under a recent settlement. "Zurich has said they are going to make all agents everywhere disclose how much they are getting paid and how much their commission is in every transaction. I think that is inappropriate and not really necessary. Other people do not always disclose their commissions," he said.

"You have an obligation in general when your client asks, 'How much are you getting paid?'" Oxendyne said. "You can either tell him, or you can say, 'It's none of your business.' If you tell them it's none of their business, they will probably fire you and get someone else.

"If they ask you and you tell them, you have an obligation to be honest and tell them the truth. You can get in trouble for lying to them but you don't have to tell them."

Oxendine concluded by saying he has no intention of changing the rules in Georgia.

Fraud Alerts:

N.C. employee arrested
Tammy Cope of Old Fort, N.C. was arrested in McDowell County and held with an $81,000 bond on six charges of embezzlement according to Insurance Commissioner Jim Long.

Officials have alleged that Cope collected more than $10,000 in insurance premiums from 30 consumers for her own use, instead of remitting the payments to Nationwide Insurance Co.

Cope, a clerk at Nationwide Insurance's Debbie Whitemore Agency, is not a licensed insurance agent. Investigators acted on a tip from the agency's owner.

W. Va. agents indicted
Agent Brenda Valentine of Mountain State Insurance Agency Inc. in Montgomery, W. Va. was indicted on six felony counts of insurance fraud, and Scott Saul of Pipeline Services pled guilty to workers' compensation forgery, according to West Virginia Insurance Commissioner, Jane L. Cline.

Valentine allegedly took money from customers for insurance policies and failed to provide them. She also allegedly forged insurance applications in an attempt to prevent discovery of the stolen premium payments. She was indicted on six felony counts.

Saul pled guilty to one felony count of forgery in attempting to verify workers' comp coverage. He received one to 10 years in prison; but the sentence was suspended as part of his plea agreement.

Unlicensed PA arrested
Luis Gonzalez surrendered in Miami, Fla. to a detective from the Florida Division of Insurance Fraud and was charged with two counts of acting as an unlicensed public adjuster, a third degree felony punishable by up to five years in prison per offense. Gonzalez was booked into Miami-Dade County Jail on a $3,000 bond.

For a 10 percent fee, the suspect entered into agreements with two insureds with claims for mold and roof damage, and a kitchen fire and agreed to represent them as an "attorney-in-fact" dealing with the insurance companies. Gonzalez identified himself as representing the insureds in subsequent communications with Gulfstream Property and Casualty Insurance Co.

Geller, McCarty collaborate on joint national catastrophe plan

The officers of two national insurance policymaking groups have announced they will collaborate to create a joint national catastrophe plan. State Senator Steven Geller, D-Hallandale Beach, and Florida Insurance Commissioner Kevin McCarty will present proposals to their respective organizations and ask them to create and finalize a joint plan for adoption.

Sen. Geller chairs the National Conference of Insurance Legislator's Subcommittee on Natural Disaster Insurance Legislation, and McCarty chairs the National Association of Insurance Commissioner's Property and Casualty Committee.

"I am pleased to see NCOIL and NAIC working together on an issue of such critical importance to people in this country and to Floridians," Sen. Geller said. "The ultimate solution for availability and affordability of insurance in disaster prone areas is to have an effective federal program. We are in need of a plan which recognizes that flooding, hurricanes and other natural disasters don't respect state boundaries."

"While we are seeing increased interest and support for a national catastrophe plan, we recognize we have much more work to do," McCarty said. "Our chances for success will be greater if we work together with one plan and use the unique expertise of both organizations to get a program passed to better protect our country."

The proposals Geller and McCarty will present for joint action include:

• Encouraging states to establish privately funded, tax-exempt catastrophe funds, such as Florida has, and allowing state cat funds to purchase high levels of protection from the federal government for extreme events at actuarially sound prices.


• Allowing insurance companies to accumulate reserves on a tax-deferred basis to respond to natural disasters.


• Establishing a national backstop for mega-catastrophes over $50 million, similar to the federal Terrorism Risk Insurance Act.


• Changing IRS tax policy to allow insurers to accumulate tax deferred reserves to be dedicated solely to paying for catastrophe claims.


• Create a framework for prompt redevelopment after a disaster.


• Instilling a culture-of-preparedness among the U.S. population.

Australian firm selling bogus amusement ride, P/L products in Kentucky

An Australian company, Sinclair Insurance Co. Ltd. is selling bogus amusement ride and professional liability products in Kentucky without a certificate of authority from the state, according to the Kentucky Office of Insurance in Frankfort.

The practice was uncovered due to the recently initiated national "Stop.Call.Confirm." campaign. Investigators received an alert from another state and checked out Sinclair's activities.

Nebraska and Washington have filed cease-and-desist orders against Sinclair. Arkansas, Florida, Nevada and Wisconsin are investigating the company.

Insurance and Department of Agriculture inspectors, worked in conjunction to determine at least two Kentucky businesses have amusement ride/event liability insurance certificates issued by Sinclair.

Sinclair is associated with N.M. SIM Management Ltd., an Internet-based business. Its Web site offers professional liability coverage for architects, engineers, contractors, cosmeticians, hairdressers, dental assistants and hygienists, inspectors, medical technicians, nurses, personal trainers, teachers/educators and therapists.

In addition, Sinclair offers insurance for auto (Australia only), children's health and life, expatriate health and travel.

"This is an example of why we are part of the national Stop. Call. Confirm. campaign," Glenn Jennings, KOI executive director said. "Consumers should contact us to verify the legitimacy of any company before purchasing an insurance product. Our efforts to protect Kentuckians become much more difficult when dealing with one of these unauthorized entities."

Wilbur Frye, executive director of the Kentucky Department of Agriculture's Office of Consumer and Environmental Protection, said, "It is the responsibility of amusement ride operators to make sure companies from which they buy insurance are authorized to do business in Kentucky."

S.C. controversy erupts over raising auto limits

A controversy has erupted in South Carolina due to Gov. Mark Sanford's veto of legislation that would have increased auto insurance bodily injury liability limits from $15,000 to $25,000 for one person, and from $30,000 to $50,000 for all persons injured in an auto accident. As a result of Sanford's veto, the trial bar is pressuring legislators to override the governor, and the Property Casualty Insurers Association of America sides with the governor and is urging lawmakers to reject the trial bar's efforts.

HB 4622 would also increase property damage limits from $10,000 to $25,000.

Both PCI and the governor noted the trial bar's role in promoting this legislation. The increase in the limits was an amendment offered on the Senate floor by the president of the South Carolina Trial Lawyers Association.

Sanford vetoed the measure, saying it would increase auto insurance rates, adversely affect low-income drivers and reverse the trend in the decline of uninsured motorists.

PCI cited similar concerns, agreeing that it would increase premiums for many consumers and potentially increase the number of uninsured motorists, while boosting awards for attorneys through higher fees.

Already an option
"This bill will result in many drivers being forced to buy additional insurance coverage whether they want it or not," said Robert Herlong, PCIvice president and regional manager. "We believe policyholders, not the government, should determine what is an adequate level of coverage. If a motorist wants additional coverage, he or she already has the option to purchase more protection. For some motorist, HB 4622 takes away their ability to make this financial decision and requires them to pay more for their insurance."

"This increase will hit low income people the hardest," Herlong said. "Some drivers that have insurance today will be forced to violate the law and drive without insurance because they can't afford the higher premiums. As the number of uninsured drivers rises, it further increases costs for responsible drivers who have to pay more for uninsured motorist coverage.

"So. although the goal is to protect more people, the end result will be to increase uninsured motorists, put more people at risk, and increase premiums for all drivers," Herlong said.

Supreme Court: Workers' comp premiums not priority in bankruptcy

A workers' compensation insurer does not have a claim against a bankrupt business for unpaid premiums under bankruptcy law, according to the U.S. Supreme Court that insurers are warning could disrupt the insurance marketplace unless Congress acts to reverse it.

In a 6-3 decision, the Supreme Court majority rejected an insurer's argument that an employer's liability to carry workers' compensation coverage fits the employee benefit plan category that would assign it priority in the event of a bankruptcy.

Instead, the high court ruled that workers' compensation premiums are more like liability premiums than employee benefit costs, and as such, do not fall under the section of bankruptcy code (11 U.S.C. section 507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid contributions to an employee benefit plan.

"Weighing against such categorization, workers' compensation does not compensate employees for work performed, but instead, for on-the-job injuries incurred; workers' compensation regimes substitute not for wage payments, but for tort liability," Justice Ruth Bader Ginsburg wrote on behalf of the majority.

In Howard Delivery Service, Inc., et al v. Zurich American Insurance Co., handed down June 15, the high court reversed the Court of Appeals for the Fourth Circuit, which had held that payments for workers' compensation coverage were "contributions to an employee benefit plan ... arising from services rendered" and thus subject to the bankruptcy priority provision.

Zurich had urged the court to borrow the broader definition of employee benefit plan contained in the Employee Retirement Income Security Act of 1974: "[A]ny plan, fund, or program [that provides] its participants ... through the purchase of insurance or otherwise ... benefits in the event of sickness, accident, disability, [or] death."

But the majority noted that federal courts have questioned whether ERISA is appropriately used to fill in blanks in a Bankruptcy Code provision.

The court further noted that workers' compensation also differs from fringe benefits in that while nearly all states require employers to carry workers' compensation, they commonly do not mandate employee benefits.

In the case before the court, Howard contracted with Zurich to provide workers' compensation coverage for its operations in 10 states. After Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured creditor's claim for some $400,000 in premiums, asserting that they qualified as "contributions to an employee benefit plan" entitled to priority under 507(a)(5).

The Bankruptcy Court denied priority status to the claim, reasoning that because overdue premiums do not qualify as bargained-for benefits furnished in lieu of increased wages, they fall outside 507(a)(5)'s compass. The District Court affirmed, similarly determining that unpaid workers' compensation premiums do not share the priority provided for unpaid contributions to employee pension and health plans.

But a Fourth Circuit panel reversed without a rationale, which resulted in the case being brought before the Supreme Court.

Justice Ginsburg was joined in her majority opinion by Chief Justice John Roberts and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas and Stephen Breyer. Justice Anthony Kennedy filed a dissenting opinion, in which Justices David Souter and Samuel Alito joined.

Insurer reaction
Insurers said the decision is flat out wrong and could have serious repercussions in the marketplace.

"The court simply got it wrong. The majority's narrow focus on the priority provisions of the bankruptcy code overlooked that workers' compensation coverage is mandatory, and the consequences of an employer's lapse in coverage," charged Bruce Wood, American Insurance Association assistant general counsel.

Wood also maintained that the decision could undermine the workers' compensation system and benefits for injured workers.

"This decision means that an employer trying to reorganize its business will no longer be required to pay its workers' compensation premiums. This result will jeopardize continued coverage, because an insurer now has no legal authority to compel payment of premiums and doubtful incentive to continue coverage," according to Wood. "Under current law, employers without workers' compensation coverage -- even bankrupt employers -- are subject to huge fines, criminal prosecution and business shutdown."

"At the same time this decision puts worker protections at risk, along with the viability of the employer's business," he added. Employers that self-insure their workers' compensation coverage will face related problems, Wood said.

AIA participated in the case as an amicus in this case. The industry will likely now press lawmakers to a change the bankruptcy law.

In its ruling, the Supreme Court said questions over priority status should be decided with the bankruptcy code's aim of equal distribution in mind.

"Every claim granted priority status reduces the funds available to general unsecured creditors and may diminish the recovery of other claimants qualifying for equal or lesser priorities" the court noted. "To give priority to a claimant not clearly entitled thereto is not only inconsistent with the policy of equality of distribution; it dilutes the value of the priority for those creditors Congress intended to prefer."

Slimmed-down SMART bill to reform surplus lines insurance regulation; brokers pledge their support

In a step to overhaul the current state of insurance regulation, Reps. Ginny Brown-Waite, R-Fla., and Dennis Moore, D-Kan., have introduced legislation that would mandate states to establish a uniform system of regulation for the surplus lines industry.

The new bill, which is a slimmed-down version of the proposed State Modernization and Regulatory Transparency Act (SMART), pulled out incremental pieces of the SMART legislation targeting nonadmitted insurance and reinsurance, in an effort to ease the legislation's path through Congress.

Rep. Richard Baker, R-La., chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, held a hearing on the new bill, the Nonadmitted and Reinsurance Reform Act of 2006, last month.

Several trade groups, including the American Association of Managing General Agencies, the National Association of Surplus Lines Stamping Offices and the Council of Insurance Agents and Brokers testified in support of the legislation at that hearing.

"This is an area where various state regulations are in conflict, and state regulators for decades have been unable to reconcile their differences," said Ken A. Crerar, president of The Council. "With respect to multi-state commercial insurance placements, the current system benefits no one, least of all the policyholders who ultimately pick up the tab."

"We are quite happy with the bill," said Dick Bouhan, executive director of NAPSLO. "A lot of the material in the legislation are issues which we have discussed with the committee and we have publicly supported in the past," he said.

Some of those issues include the requirement that only one state, or the home state of the insured, may require any premium tax payment for nonadmitted insurance. Under the legislation, the amount of any premium tax payment for nonadmitted insurance shall be determined on the basis of any compact or procedures entered for allocation among the states.

The new legislation also calls for no other state, except the home state of the insured to regulate nonadmitted insurance. Additionally, no other state may require the surplus lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance products except the home state of the insured.

"When surplus lines activity is limited to a single state, regulatory problems are minimal," Crerar said.

Bouhan said, "we now have a situation in which surplus lines brokers are getting licensed in a number of these states," because of multi-state risks. "[Brokers] have to comply with virtually every state with which there's an exposure."

The legislation aims to solve those problems by investing regulatory authority in the home state of the insured.

AAMGA's Executive Director Bernd Heinze says he was not really surprised that surplus lines and reinsurance were first on the list for insurance regulatory modernization efforts by federal legislators.

"We have been talking with Congressman Baker and his committee for the past year," Heinze said. "The fact that this is the first part of the marketplace that is looked at for reform is very encouraging," he said.

Heinze says that he expects more reforms and modernization bills to come. "Whether they continue to come after the Fourth of July recess, or prior to mid-term elections, or even in the next Congress," remains to be seen, he said.

CEOs, concerned about capacity and pricing, stress underwriting discipline

Although property casualty insurance capacity still exists in some areas in the U.S.'s East Coast, the rate at which it is vanishing, especially in coastal areas, as well as the steep prices for available capacity, have industry executives concerned about pricing discipline.

"Someone's going to have to blink soon," said Ted Kelly, chairman, president and CEO of Liberty Mutual Group Inc.

Property catastrophe capacity was high on the list of concerns for panelists from the property casualty industry at Standard & Poor's Ratings Services' recent annual insurance conference, "Insurance 2006: Rethinking Risk."

Whether insurers price risk properly is a worry. Although premiums have doubled in the past three to four years, "pricing in primary markets isn't supporting the cost of reinsurance," Kelly said. Reinsurance capacity might still be 20 percent short of demand in the southeastern U.S., he said, and "problems getting insurance in the Gulf region haven't been settled yet."

Companies "should look at their enterprise risk management and what kinds of controls management has on currency and hedging," said Martin Sullivan, president and CEO of American International Group Inc., who also would like to see construction codes improved in the Southeast.

Property casualty industry pricing, looking forward, is a huge question mark, and an additional worry for those CEOs. If 2006's hurricane season is benign, pricing discipline will remain, especially in the catastrophe area, Sullivan said.

Kelly, however, was not so sure. "A pricing bloodbath" could ensue if the hurricane season is moderate, he said. "Watch October renewals -- they will be the first sign of a lack of discipline," he warned.

The role capital markets now play in maintaining financial strength also had panelists, as well as the moderator Standard & Poor's credit analyst Thomas Upton, concerned. Although capital to replace what was lost to the catastrophes of 2005 and 2004 was readily available, it might not be if severe catastrophes hit in 2006.

"I was surprised at the ease of which companies recapitalized after Katrina," said Dinos Iordanou, president and CEO of Arch Capital Group Ltd.

Would companies be better off if they had to replenish capital organically rather than going to the capital markets? Opinions were not uniform. Kelly was emphatic about the industry's need for a free flow of capital, but Sullivan said the industry would be tested if the season were active. Iordanou cited that even if a major hurricane does come, $600 billion to $650 billion of surplus exists in the global marketplace.

Bottom line, underwriting discipline continues to be important, the panelists concurred.

"Clearly, there's room for improvement," Sullivan added.