Currents

Progressive apologies for claims handlers' privacy

The president of Progressive Insurance Co. issued a written apology regarding some over-zealous claims investigators in Georgia.

The Atlanta Journal-Constitution reported about an investigation in 2005 in which two private investigators posing as a couple entered a private support group at Southside Christian Fellowship Church. Their mission was to catch two church members, Bill and Leandra Pitts, in a confession that might discredit them. The pair had been involved in a lawsuit with Progressive over a traffic accident.

"When I read that story I was appalled and, frankly, didn't believe that it could possibly be accurate. I have since learned that the essential facts in the story are correct. What the investigators and Progressive people involved in that case did was wrong -- period. I personally want to apologize to anyone who was affected by this incident," Progressive President and CEO Glenn Renwick said in the written statement.

"The actions of the investigators and Progressive people involved in this situation were incompatible with our values and inappropriate," Renwick added.

According to the Atlanta Journal-Constitution's article, the private investigators tape-recorded the sessions.

The Pitts have since filed a lawsuit seeking unspecified damages for an alleged invasion of privacy and breach of confidentiality against Progressive Northern Insurance Co., the insurers' lawyers and investigators James Purgason Jr. and Paige Weeks of Merlin Investigations.

Georgia Insurance Commissioner John W. Oxendine ordered a market conduct examination and instructed Progressive to preserve claims documents related to the case.

S.C. owner wishes sofa store had sprinklers

The owner of a Charleston, S.C., furniture store where nine firefighters died June 18 said he wished he had put sprinklers in the building.

But Herb Goldstein said they were expensive and not required when he built the massive Sofa Super Store showroom and warehouse in 1992, according to The Post and Courier.

Goldstein said he doesn't know what caused the fire, but he thinks it was an accident. The wreckage of the store has been kept on site on the recommendation of his insurance company, but will likely be moved soon, he said.

"No one said this is a dangerous product and you need sprinklers," Goldstein told the Charleston newspaper.

Authorities have said sprinklers would have at least delayed the spread of the deadly fire.

The families of the late firefighters are set to receive $700,000 each in donations and workers' compensation payments. Relatives could also receive a federal death benefit that could put compensation over $1 million.

The city has made $1.2 million in workers' compensation payments. In addition, the city plans to increase the number of fire department workers and hired a group of fire experts to study fire department operations.

Local and state police agencies, as well as the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, are investigating the fire.

S.C. insurance chief non-renewed

Add the director of the South Carolina Department of Insurance to the thousands of coastal homeowners who have lost property insurance since Hurricane Katrina.

Scott Richardson, who lives on Hilton Head Island, has been notified that his policy is being dropped.

Following Katrina two years ago, premiums rose substantially in hurricane-prone areas, and some insurers stopped writing coverage. Richardson now finds himself among those shopping for insurance. "I guess it just proves nobody's immune. If I'm not immune, then nobody is," said Richardson, who was appointed to head the insurance department in February.

Richardson may have to join the South Carolina Wind and Hail Underwriting Association, known as the wind pool. In July, the department announced rate increases averaging 35 percent.

"I might be in the wind pool before you know it," Richardson said. "I get to try a little of my own medicine."

Brickstreet Mutual could soon face competition in W.Va.

BrickStreet Mutual Insurance Co. may have the lock on West Virginia's workers' compensation insurance business now but that doesn't mean others aren't interested.

State Insurance Commissioner Jane Cline said at least nine major insurers have approached her agency about entering the West Virginia market. By law, BrickStreet has the exclusive rights to provide workers' compensation until next year. After that, companies can seek coverage from other insurers.

The legislature moved in 2005 to privatize West Virginia's workers' compensation system. BrickStreet went into business in January 2006. By law, BrickStreet will continue to be the sole provider of workers' compensation coverage for state and local governments until 2012.

Cline said the insurance companies interested in providing coverage for injured workers are already doing business in West Virginia.

Greg Burton, BrickStreet's president and chief executive officer, said the company is preparing for competition and is taking steps to become more customer friendly. The company has created eight business teams that will focus on particular accounts. One team will focus on the coal industry, another on government and the rest will be assigned to clients based on how much they pay in annual premiums.

Small market

Burton acknowledged some business might be lost when the market opens up, but the market for workers' compensation in West Virginia is small.

"West Virginia is $475 million worth of premiums," he said. "In the scope of things nationwide that is not a very big market.

"When you start peeling all that away, there's probably about a couple hundred million dollars really worth the effort and time," he said.

To control costs in the future, Burton said BrickStreet may have to reduce its staff of 500 employees to trim its $24 million annual payroll.

"We want to retain as many of those employees as we can, but, again, we do not want 100 percent of the market," he said.

Burton also said there are no immediate plans to follow Nevada and make BrickStreet a public company. Any move like that would require legislative approval, he said.

Court to hear suit on state's use of Miss. surplus lines funds

The 5th U.S. Circuit Court of Appeals in Jackson, Miss., will hear arguments Oct. 1 about whether the Mississippi Legislature unconstitutionally raided an insurance fund in 2004 to balance the state budget.

The Mississippi Surplus Lines Association sued the state after the Legislature took $2 million from its surplus. Lawmakers raided several small, fee-funded agencies to pay for large budget items such as schools, roads and prisons.

The MSLA claimed it was a private entity and not subject to legislative appropriation or control by the state.

U.S. District Judge Tom S. Lee ruled for the state in 2006. The MSLA appealed to the 5th Circuit.

Surplus line associations represent insurance companies and agents that specialize in high-risk coverage.

According to the court record, MSLA was created in 1997 by private individuals. From 1997 through 2005, MSLA collected about $5.2 million in examination fees while spending only $1.6 million, resulting in an excess of $3.6 million.

The MSLA argued it was not a state agency, citing a 2004 opinion from state Attorney General Jim Hood. The group also said its money was not subject to legislative action.

Under state law, the Mississippi Insurance Department regulates insurance companies and agents, including in-state and out-of-state companies, and eligible non-admitted insurers, also known as surplus lines insurers.

State law also says the insurance department can rely upon the advice and assistance of an association of surplus lines agents -- in this case, the MSLA -- in carrying out regulations. In return, the MSLA can collect an examination fee of 1 percent of premiums charged by insurers in return for helping the state's insurance department.

Lee, in his ruling, said if the department's duties weren't done by MSLA, the insurance commissioner himself would do them or hand them off to another group.

"Moreover, the examination fees, although paid to MSLA by private entities, are not mere membership dues, but rather are assessed by MSLA pursuant to authority granted by the commissioner, as provided by the Legislature, and are intended to be used by MSLA only for the operation of MSLA," Lee said.

Lee said membership is voluntary to the extent that a surplus lines agency could choose not to write coverage in Mississippi but if it makes a decision to write coverage in the state, its membership in MSLA is mandatory, according to court documents. If a member fails to pay the fee, it can be banned from writing insurance in Mississippi.

"Contrary to MSLA's insinuation, these are not simply membership dues. To be sure, the fee must be paid in order for a surplus lines agent to remain a member; but there is nothing voluntary about this arrangement from the perspective of the state, MSLA or the individual 'members.'

"The excess examination fees held by MSLA are not its private funds but rather are held on behalf of the state, and accordingly, may be claimed by the state without violence to any constitutionally protected interest of MSLA," Lee said.

Alabama realtors call for coastal insurance relief

Owners of thousands of condominiums that line the Alabama Gulf Coast say they're getting burned by soaring insurance premiums and insurance legislation to make coverage available and affordable on the coast couldn't come soon enough for the resort real estate industry.

"It's horrible. Rates have gone through the ceiling," said Fort Morgan builder Greg Miller, who said he paid $22,000 in coverage on four condo units until Katrina struck two years ago. He now pays $108,000 on his units for less coverage: "That's all we could get," he said.

Rates began rising after Hurricane Ivan struck three years ago as insurers moved to avoid huge losses from future storms.

"We actually have some documented 1,000 percent increases. Most are in the 300 to 400 percent range," said longtime insurance agent and former Foley Mayor Tim Russell.

Russell is among those pressing Gov. Bob Riley to call a special session of the Legislature to deal with a coastal insurance crisis Russell blames for a slowdown in building condos planned before Ivan.

Riley has talked with lawmakers about the need for a special session on ethics reforms. If a session is called, insurance measures might be among the issues addressed, Riley spokesman Jeff Emerson said.

State Sen. Ben Brooks, R-Mobile, said he's preparing insurance reform legislation but he wouldn't give details other than that the bill wouldn't require a state subsidy.

Brooks said he's reviewed reforms in South Carolina, Florida and Louisiana and favors the South Carolina model. That state's Legislature passed a bill in June to help stabilize the cost and availability of coastal insurance.

Russell's measure would allow homeowners to put money into tax-deductible hurricane savings accounts, which they could use to offset large deductibles or skip buying insurance and self-insure. Insurers can get tax credits for writing full-coverage policies along the coast.

"I think there's a lot of pressure on the governor to have a special session. I think we need it. We've got to get some help," Russell said.

Coastal coverage is available, but insurance companies have stripped down coverage with higher deductibles and more exclusions. A lack of hurricanes so far this year has helped bring more insurers into the Alabama coastal market.

Gulf Shores real estate broker Bill Bender said insurance firms are "like everyone else, when they see competitors making money then they want a piece of that and will start tiptoeing back."

Bender said there's a "fair amount of pressure from condominium owners to increase rental rates to help offset the sudden increase in cost of ownership, particularly due to insurance costs and property taxes." But he said owners understand they could price themselves out of the rental market if the price gets too high.

The insurance industry opposes having states get involved in its business, saying competition is the way to go.

State Farm, which insures more coastal homes than any other carrier, has been involved in discussions on making insurance available on the Alabama coast, a spokesman said.

Also giving input to the state insurance department is the Property Casualty Insurers Association of America, says the association's regional manager, William Stander of Tallahassee, Fla. "All need to remember the insurance companies are the ones who have and continue to rebuild the coasts after these storms," Stander said.

Building codes

He said if Alabama pursues legislation, it should include tougher building codes that would allow structures to withstand storm winds. Reducing potential losses could bring lower rates, he said.

Brooks met recently with Russell, who is pushing for creation of a "captive" insurance fund that would help participating cities and counties.

"No hurricane is the best thing for all of us. That's not going to solve the problem," Russell said, referring to the population growth on the coast.

He said state legislation also could include tax incentives for the industry to build a catastrophe reserve.

Speaking recently to the Southern Governors Association conference, Riley said that if insurance companies deny coverage to an entire area of the coast, they will force the states to get involved.

Riley, who has owned a condo in Sarasota, Fla., since the early 1980s, said his insurance payment is handled by the condo association and he isn't sure about the premium amount.

State Insurance Commissioner Walter Bell said he agrees with Riley when the governor says that he does not want the state to be in the business of insurance.

"However there are some things that can be done to help, and we have been working with legislators and other interested parties in determining what will work for the citizens in coastal counties and for the marketplace," Bell said.

Miss. candidates vie to fill 32-year veteran Dale's shoes

Whatever the final outcome, this year's race for Mississippi insurance commissioner will result in a new face in office after an unprecedented 32-year run by current officeholder, George Dale.

In the primary elections in August, Mike Chaney, Republican candidate, trounced his opponent 79 percent to 21 percent while Democrat Gary Anderson squeaked by with 51 percent, dethroning longtime incumbent Dale, who ran on the Independent ticket in the Democrat primary.

The general election will be held on Nov. 6.

Republican candidate Chaney has roots in small business and has been a state legislator for a number of years. He chaired the Senate Education Committee for the past four years. He has called the office of insurance commissioner the most significant office in state government, as it directly affects all other aspects of economic operations and public safety.

A Vietnam veteran helicopter pilot, Chaney uses the analogy of the cotter key or "Jesus nut" that holds the blades onto an aircraft to describe the role of insurance commissioner. "If that 'Jesus nut' comes off during flight, you're going to see Jesus," he says.

While he has a 24-point plan that he says he will implement if he is elected in November, he listed increased competition and enforcement of building codes as two main issues that he thinks would ease or eliminate rate hikes.

Chaney advocates a policyholder protection plan where the customer would be required to initial the insurance policy, signifying acknowledgment of no flood loss coverage. "The policies need to be written in plain language that everyone can understand so there will be no confusion," he said.

Chaney supports the concept of a "common adjuster" to help alleviate confusion after catastrophes. In his scenario, the company with the highest financial stake would adjust losses for all parties.

Chaney has endorsed U.S. Rep. Gene Taylor's, D-Miss., Multiple Peril Insurance Act, which allows property owners to purchase wind and flood coverage in a single policy. "I continue to believe that the multi-peril insurance proposal now before Congress is the best hope of providing relief to homeowners and small business owners on the Gulf Coast," Chaney said.

At the 2007 Neshoba County Fair, Chaney said the 50,000 homes lost during Hurricane Katrina "could probably be rebuilt if homeowners could find available and affordable insurance."

Democrat Anderson began his career assisting state and local governments with economic and community development. He has worked in the administrations of five Mississippi governors, primarily on fiscal policy and economic development.

A self-proclaimed fiscal conservative, Anderson served as chief fiscal officer for Gov. Ronnie Musgrove. He was the first African-American to be director of the Mississippi Department of Community Development. Most recently, he has worked as an independent consultant.

Drawing on his experience in finance and economic development, Anderson said if elected he will "work to facilitate the needed changes with all who have a stake in the redevelopment of the Mississippi Gulf Coast." He said development has been slowed because of unresolved insurance claims.

Anderson says thinks the insurance department must maintain its independence. "Increasing competition and lowering insurance premiums can only happen when an insurance commissioner is independent," he has said.

He has pledged not to accept any contributions from insurance companies or their executives.

He has stressed the need for full disclosure in insurance. "I will implement fair, consumer-friendly industry practices while stamping out hidden, vague or misleading clauses in insurance policies that often result in confusion," he vowed.

Anderson promises to make the fight against insurance fraud a priority. He says he will create an investigation unit solely responsible for cracking down on crime. He has vowed to create clear lines of division between the industry and the office that regulates it and eliminate opportunities for collusion.

Florida's no-fault law set to expire Oct. 1

A three-week Florida special legislative session scheduled to begin Sept. 18 has been postponed, meaning lawmakers will probably not act to halt the Oct. 1 expiration of a key no-fault auto insurance law.

The session was to focus on a variety of budget and finance issues, though many predicted the pending expiration of personal injury protection (PIP) in automobile insurance policies would be hashed out as well -- or at least placed on the session agenda.

Industry groups maintain that if the expiration were to be reversed at this stage in the game, it would create confusion for consumers and a lot of additional work for insurers and agents.

Julie Pulliam, spokesperson for the American Insurance Association, said insurance companies have been preparing for the "sunsetting" of personal injury protection for months. "The postponement kind of clears the way for no-fault to sunset. At this point, there would be massive confusion for consumers and insurers if PIP did not expire," Pulliam said.

The situation surrounding PIP has raised questions about what property damage coverage is required after Oct. 1.

Property damage question

According to Jeff Grady, president of the Florida Association of Independent Agents, the biggest question now is if property damage will be separated from PIP and remain as mandatory coverage. He said there have been some rumblings to that effect. A lawyer for the state's motor vehicles department recently said Florida drivers will still need to purchase property damage liability insurance even if the state's no-fault insurance system disappears Oct. 1.

But the department's executive director has questioned whether the state will be able to enforce the law requiring the $10,000 minimum coverage.

"It's a real pickle for agents," said Grady. "Personal injury protection and property damage have always been parceled together. It would be odd now to say that property damage might be considered more important than personal injury."

Sam Miller, president of the Florida Insurance Council, said if the Legislature does not come back until October or November, PIP will expire.

"If they come back in late September, which is what we thought likely to happen, and there is an agreement, PIP is saved," Miller said.

Miller added that it "seems pretty likely" now that PIP will go away and there will be some confusion for insurers, agents and consumers.

But at some point a new auto insurance law could eventually be passed. "It could be during a special session or the regular session next spring. If there is a lot of consumer uproar without PIP and a lot of problems, PIP might be reenacted after a hiatus in some form. If there is no confusion, PIP might be left dead and they might do some clarification of issues and, perhaps, mandate bodily injury liability. It is crazy and confusing right now," according to Miller.

Florida's private insurers try to be heard amid political storm

Florida's property insurance industry is in the middle of the hurricane season -- the political hurricane season.

The state's politicians promised homeowners their insurance premiums would go down after the state enacted reforms in January but the politicians and many homeowners have been disappointed.

Gov. Charlie Crist has charged that some insurers may be deliberately ignoring the reform law known as House Bill 1A requiring them to buy cheaper reinsurance and pass savings along to insureds. Crist said some insurers might be buying more private reinsurance than they need, thereby undermining the state's effort to lower rates.

Florida Insurance Commissioner Kevin McCarty has sounded the same theme in rejecting decreases that he thinks are not big enough. "HB1A made $12 billion of less expensive reinsurance available from the state, and the law requires the insurance companies to pass along that savings to their policyholders in the form of lower rates, not to be invested in extra, duplicative reinsurance contracts or profit margins," McCarty has said.

McCarty's staff says average savings should be around 24 percent. Insurers say they never agreed to that and when their filings started being made, they were for smaller savings, around 12 percent on average. Some insurance companies filed for increased rates.

"It's all about rates," maintains Sam Miller, of the industry's Florida Insurance Council, who was one of the experts at the recent Demotech-Insurance Journal Private Sector Summit on Florida Property Insurance in Orlando. "The savings promised by our governor and other key policy makers following the January special session have materialized for citizens in the subsidized residual market but not for the private market."

Miller said lawmakers rolled back the rates for the residual market, Citizen's Property Insurance Corp., "waiting until the next hurricane to worry about how they're going to pay all those claims, and they will pay those claims through a statewide surcharge or even a tax increase."

But private insurers can't assess surcharges after a storm and have had to "respond to the insurance needs that their [hurricane] models demonstrate." While some insurers have filed for rate cuts, the reductions have not been as deep as regulators want.

"And so now there is a furor. There's even talk about bringing insurance company executives to Tallahassee...and forcing them to testify under oath," noted Miller.

Yet even if the private insurance executives were to go to Tallahassee, would anyone listen to them? Attendees at the Demotech summit were told that many in Tallahassee and across the state have tuned out.

"The legislators aren't listening to us anymore. In fact, they're listening to their constituents who are screaming about insurance back home," Jeff Grady, of the Florida Association of Insurance Agents, said.

The summit was organized by Demotech, an Ohio-based financial analysis and actuarial services firm and research partner of Insurance Journal. Demotech has assigned its Financial Stability Ratings to the majority of the Florida-domiciled homeowners carriers,

Joseph Petrelli, president of Demotech, felt too much emphasis was being placed on the public sector at a time when a broader approach is needed in Florida. So he and his asociates organized the summit "to provide insurance professionals with a meaningful analysis of options and expertise available to supplement the efforts of the public sector."

Petrelli pulled together experts on reinsurance, legislation, catastrophe modeling and what emerged as a key concern: how the industry communicates with the public at a time when nobody seems to be listening to anything except rate cuts.

At the summit, independent agents' representative Grady (see story page 71) hinted at a new Web-based program his association will soon launch that it hopes will bridge the communications gap between the industry and consumers.

Among the private sector executives who are talking if anyone will listen is Susan Straker, the president and one of the founders of Coral Insurance Co., a Florida only insurer (see story page 72). Straker thinks the reform passed in January that has stirred the latest political storm missed its target.

"I believe that it was aimed largely at the larger insurance companies. I don't think that it was aimed specifically at the small domestic carriers such as Coral. But we were in the same situation that they were, and we were much less capable of diversifying where our underwriting activity in response to what could be considered largely punitive provisions," Straker pointed out.

Agents must tell Fla. citizens of pros and cons of Citizens

As Florida insurance agents adjust to serious competition from the public sector, the Florida Association of Independent Agents has established a new staff position to act as a liaison between agents and state-backed Citizens Property Insurance Corp.

Jeff Grady, president of FAIA, said the organization's biggest challenge is to avoid -- at all cost -- making independent insurance agents "wards of the state" when it comes to writing properties.

"That is not the business we want to be in," Grady said. "So we've been developing some material for agents to basically sell against Citizens."

Grady said the Citizens process is complex and produces inordinate amounts of paperwork. There can be as many as four technical bulletins a week.

According to Grady, dealing with non-renewals and the pricing and coverage concerns of the voluntary market is challenging enough. Now agents have people who read something about Citizens' policies showing up at their doors and saying, "I need that policy."

Grady told a group at the Demotech/Insurance Journal Florida Private Sector Summit in Orlando last month that securing private coverage for clients when everyone is being told that the public insurer Citizens is the answer and has the lowest price is a tough job.

Part of an agent's job, however, is to level with customers about the risks associated with insuring through Citizens.

Even with around $1 billion in reserves and another $7 billion or so in available credit, Citizens is facing a probable maximum loss of $28 billion if a major storm hits. This shortfall will have to be recouped by selling bonds or through assessments against policyholders. While the assessment program affects all Florida insureds, those hit first and hardest will be Citizens policyholders.

"The assessment mechanism for Citizens is something that's misunderstood by many in the public and if our politicians know, they're not doing a very good job of disclosing it," Grady said. "The formula must be understood -- especially by consumers."

Grady explained that when Citizens sustains a deficit, the organization has three accounts it needs to replenish. The first place it goes is to non-homestead customers of Citizens, who have no other market option. Their premium will be assessed up to 10 percent per account or 30 percent.

"If that doesn't cure the deficit, then they go out to all Citizens policyholders, including the non-homestead customers again," Grady said. "So they get it twice. Then they go out to the voluntary market, and now the process is expanded to include auto and commercial base -- a much bigger pie."

There is another feature about Citizens that agents should tell policyholders: tough luck if they don't like the way their claims are handled by Citizens. "One of the biggest accomplishments of Citizens in the Legislature -- to hear their report at least internally -- was that they became exempt from the bad faith statute," according to Grady. "This is the 'face the music statute' if a company fails to handle a claim properly. Now that doesn't apply to Citizens and that's a huge advantage."

The threat of assessments and lack of bad faith protection are two major yet under-publicized concerns regarding Citizens. There can also be differences in coverage between Citizens and what the private market offers. Grady's group is performing an analysis of the top 10 carriers' forms to compare with Citizens' coverages and terms.

FAIA is also working on a white paper for agents that will include disclosures and specific documents to use when speaking with Citizens policyholders. Grady hopes it will help agents properly advise their customers as well as help them control their own liability in doing so.

Tough times in Tallahassee

FAIA President Jeff Grady said the attitude in Tallahassee toward the insurance industry, particularly since Gov. Charlie Crist took office and the special legislative session completed its work in January, has turned from professional to hostile.

"I feel like when talking to public officials these days that I really have the mark of Cain on my forehead -- it really is a different day," Grady told the Orlando audience. "I remember going up there and having a sense of trust and professionalism and mutual respect. Now we're tarnished as Satan. And some of these people are 'our friends' or real good friends to the agent back home, but they get up here in Tallahassee and they talk about us like we're some far off industry that they can just put on a poster board and throw darts at us -- and it's OK. And every time they do it, their approval ratings go up."

Grady said FAIA had kept "circling the wagons" trying to convince Crist and legislators that insurers are not crooks. "It really did not seem to do a whole lot, and when you go back up the governor sits on the front row of the committee meeting calling all of the insurance people liars, thieves and cheats -- and we're right back in the same boat," Grady said. "So we got thinking about this and wondered, who are they listening to? Well for one, they're listening to a very popular governor and he heard all that from the people who voted for him."

But the fact is, he added, the public and politicians are not listening to the industry.

Grady thinks subtle grassroots education might help. His staff is working on a new tool. "Our approach is to kind of back away but to provide a tool for consumers where they can enter a Web portal that allows discussion to occur between agents and clients -- when the clients are interested," Grady explained. "Education makes our plight better over the long haul."

A small private Fla. insurer faces Citizens and the 'perfect storm'

From "Happy Days" to "The Perfect Storm" is how one Florida insurance executive describes her state's defining years between 2003 and 2007 -- and she isn't talking just about the hurricanes.

Susan Straker, president of Coral Insurance Co., cited the hurricane law, House Bill 1A -- created during a special legislative session in January -- as "the classic example of why politicians should not get involved in the free market."

She told her company's tale at the Demotech/Insurance Journal Private Sector Summit last month in Orlando.

Straker said the most punitive part of the bill is that it forces companies like Coral into competition with state-backed Citizens Property Insurance Corp., which was originally the property insurer of last resort for coastal homeowners in hurricane-prone areas. Now Straker said the state-backed insurer is a "pay-later plan -- one that it is "extremely exposed" to damages that the next major storm will produce.

Straker likens her Florida company to a "tadpole" in comparison to the larger carriers that she says are more affected by the legislation. Back in the "happy days" of 2003 when Coral was getting started, Florida looked like a good area to underwrite, according to Straker. Florida had gone 11 years without a major storm and the insurance market was in the black for the first time in 13 years. The state had strengthened its building code after Hurricane Andrew. The climate was attracting 1,000 new residents every day and the state's tax burden was low. Also, the Internet was changing the way personal lines was underwritten, making it less labor-intensive.

"We looked at the market and saw insurers flourishing," she recalls.

The company received its go-ahead in early 2004. The amount of competition caught Coral somewhat by surprise. Later the industry came to realize that many of these companies were under-reinsured, although they didn't know that for sure until the end of 2004. "The year end was characterized by turmoil," she said.

The industry also came to realize in 2004 that Citizens was overburdened. "We knew that our market of last resort was filling up and it was straining. We had heard stories that they were having difficulty settling claims and that people who were with Citizens were unhappy but we didn't know to what extent our market would really be tested. It took 2005 to show us how bad it could get," Straker said.

The year 2005 turned out to be the most devastating storm season of modern times. Four major storms hit the state: Dennis, Katrina, Rita and Wilma. "Wilma was the knockout punch for Florida and it was not that strong of a storm," Straker said. "The result was again, we had a year that was characterized by turmoil and at this point it was pretty much a doomsday environment."

Straker said there were public adjusters and blue tarps everywhere -- and emergency orders.

"Probably all of you remember the fact that there was so much uncertainty in our market after 2004 and 2005, people were wondering what else could possibly happen next," Straker told the Orlando gathering.

The Florida Hurricane Catastrophe Fund was a factor in companies' planning and many carriers wondered when it would be depleted based on the two-year run on the resource. In 2006 it was no longer a mystery -- the CAT fund was exhausted. There were carrier insolvencies, further increasing the burden on Citizens.

"We had those frenzied reinsurance renewals and the associated sticker shock which led to rate filings with the OIR (Florida Office of Insurance Regulation)," Straker said. "Consumers were complaining. They were looking at their tax bills and their insurance premiums and they were also looking to the Carolinas."

Smaller companies like Coral could not issue blanket non-renewals. "We had to make it work and in doing so was at our own jeopardy," Straker said. "We had to write a certain amount of premium to keep our doors open and yet we had doubled the aggregate for the premium we were writing."

Straker explained that because of state-imposed reductions on businesses, the company's aggregate remains the same even though premiums have been reduced to nearly half. "The risk of having your aggregate explode is very great and requires skill and constant monitoring," she said.

There are other factors contributing to a "perfect storm" environment in Florida, including the "endangered housing market," according to Straker. She said mortgage defaults went up 30 percent between the last quarter of 2006 and the first quarter of 2007.

"Hand-in-hand with an endangered housing market, you'll find an emerging moral hazard because there are people who barely qualify for their home loans and they probably got more home than they could afford -- it brings out undesirable behaviors," Straker said. She said her firm has looked at reopened claims that have a "very strange smell to them." In one week in July, Coral had eight grease fires in eight different homes in the same zip code -- "that's very scary."

Straker doesn't hide her disdain for public adjusters who she believes are part of the problem. She referred to the adjusters as vultures.

"I would like to suggest that when you take these vultures, you add to that the people who are facing foreclosure, you add to that the decrease in property values for honest people who just need to sell their house, you take an anti-free market approach from our legislature and then add to that six months of constant risk of another Hurricane Andrew, that HB1A is not the only problem we're looking at. We're looking at a perfect storm," Straker said.

The silver lining, according to Straker, is that the new insurers entering the market that "have some real opportunities," the greatest of which may be that they will be unencumbered by the assessments that the surviving established companies will have to face.

Judge throws out all federal antitrust charges against insurers, brokers

No evidence found to support charges of a global conspiracy among commercial brokers and insurers

Finding the charges lack any factual support, a federal judge has dismissed a big antitrust conspiracy case that was lodged against large commercial insurance brokers and insurers back in 2004 when bid rigging and account steering probes were in full sway.

In dismissing the antitrust complaint for the second time, Chief Judge Garrett E. Brown Jr. of the U.S. District Court for New Jersey said the plaintiffs had no proof that there was any sort of conspiracy among insurers and brokers to secretly allocate accounts, refrain from competing, or pay incentive bonuses on certain commercial accounts.

The plaintiffs alleged that the defendants had engaged in both a global conspiracy and so-called "hub and spoke" conspiracies in which brokers acted as hubs to coordinate illegal distribution of commercial insurance accounts among insurers (the spokes).

Defendants in the suit that have now been cleared of federal antitrust charges are some of the largest insurance companies and brokerages including American International Group, The Hartford, Fireman's, Liberty Mutual, American Re, Travelers, Chubb, Marsh, Willis, Aon and Hilb Rogal & Hobb.

Consolidation of suits

The case was a consolidation of suits from around the country brought under federal antitrust statutes. It developed in the wake of investigations by state attorneys general including New York's Eliot Spitzer over alleged bid rigging, account steering and improper contingent commission payments.

These consolidated lawsuits took those charges to another level claiming that they were part of a conspiracy among certain large insurers and insurance brokers and accusing the players of antitrust violations and racketeering.

Earlier this month, Brown put the antitrust conspiracy charges to rest in granting the defendants' motions to dismiss. He had also agreed with defendants in April but gave plaintiffs one last chance to amend their complaint.

But Brown found the amended complaint was even less convincing than the earlier one. In completely dismissing the conspiracy allegations, Brown wrote:

"While this Court previously held that the conspiracy allegations were faulty because they failed to show some sort of recognizable allocation of the market (a way for the insurers

to understand what they were actually agreeing to divide), it appears that the allegations as presently drafted suffer from a more serious defect. This hub and spoke conspiracy is devoid of a factual basis for this Court to infer that an agreement existed among the competitors -- in this case, the Insurer Defendants. Plaintiffs want this Court to view the specific facts regarding the 'incumbency protection racket' through their lens -- which colors each demand from a broker to an insurer as being part of an agreement to restrain competition that already exists. However, when stepping back and viewing these facts in the aggregate, there is nothing in this record to suggest that there was any sort of express agreement among the insurers. While it is not necessary for the agreement to be explicit, the facts are simply too tenuous to intimate an implied agreement -- a rim to this hub and spoke conspiracy. The brokers demanded certain behavior of the insurers, but that does not constitute a horizontal agreement among insurers to collude."

No global conspiracy found

Brown found no evidence to support the charges of a global conspiracy among brokers to keep secret

their contingent commissions and not tell clients about them. Plaintiffs had argued that the defendants' membership in the same trade group, the Council of Insurance Agents and Brokers, was proof. But for Brown, "membership in various trade groups and the sharing of information are insufficient to support an inference of actual concert of action."

He wrote that since plaintiffs failed to prove that the insurer defendants colluded among themselves in the broker-centered conspiracies, "it is improbable that they colluded to further this global agreement as well."

While this dismissal affects the antitrust complaint brought against the defendants, charges of violating federal racketeering laws are being judged separately and remain before the court.

Some insurers and brokers have settled similar antitrust complaints with officials in New York, Connecticut and other states, although they have not admitted doing anything illegal. Among those that have settled are insurance broker Arthur J. Gallagher & Co. and Zurich American Insurance Co.

Industry skeptical, while Treasury opposes natural disaster pool

Federal legislation that encourages states to pool their catastrophe pool risks and then transfer them to the private market has been greeted with a lukewarm insurance industry reaction at best and outright opposition from the Bush Administration.

The bill, H.R. 3355, the Homeowners' Defense Act of 2007, introduced by Representatives Ron Klein, D-Fla., and Tim Mahoney, D-Fla., on Aug. 3, aims to address the availability and affordability of homeowners insurance by providing an opportunity for states to plan for disasters ahead of time, while also offering emergency relief for those states that may be in lower-risk regions.

Insurance industry representatives testified on the proposal this month before a joint hearing of the House Committee on Financial Services Subcommittee on Housing and Community Opportunity, and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Agents suggested that the legislation, while it has some commendable provisions, is not the answer.

The Independent Insurance Agents & Brokers of America, the nation's largest insurance association, said that the bill deserves serious consideration when addressing the growing problem of natural disaster risks, but did not offer its full support of the legislation as is.

Steve Spiro, an independent agent and president of Spiro Risk Management Inc., in Valley Stream, N.Y., testified on behalf of IIABA, saying proposals such as this bill could potentially be a part of a comprehensive solution to the problem of natural catastrophe insurance. But he also pointed out that the key to the success of any solution is how the private market will react and whether it will result in increased coverage.

"We strongly believe our industry must come together with policymakers to find a common solution that will encourage participation in at-risk markets," Spiro said.

Robert Joyce, chairman and CEO of Ohio-based Westfield Group, who testified on behalf of the Property Casualty Insurers Association of America (PCI), said one of the most promising aspects of the bill is a provision to create a federal liquidity facility to provide financial support for qualified state catastrophe funds.

"The liquidity facility proposed in the bill has considerable merit and could play an instrumental role in a long-term solution to America's natural disaster problem," Joyce said. "The liquidity proposal would offer solvency protection to state catastrophe funds in order to stabilize markets." However, Joyce also said that any federal program must be carefully structured so that it does not mask the true cost of insuring against catastrophes, encourage reckless development in high-risk areas, or hinder the flow of new private capital to the market.

Including the liquidity proposal, the bill has three parts.

According to the sponsors, the bill sets up a consortium for state-sponsored insurance funds to voluntarily pool their catastrophe risk with one another, and then transfer that risk to the private markets through the use of catastrophe bonds and reinsurance contracts. Sponsors maintain that following the risk transfer, state-sponsored insurance funds would be better protected and increasingly able to provide services for those who are not able to find insurance on their own.

The second part, the "liquidity loan" program, contains a provision that would make credit financing available to qualified state catastrophe funds.

The third part would make loans to state or regional catastrophe funds that are not qualified reinsurance plans or to state residual market entities.

Joyce noted that the bill's provisions do not specify how catastrophe loans would be repaid.

Opposition

The U.S. Treasury Assistant Secretary for Economic Policy Phillip Swagel testified that the Treasury strongly opposes H.R. 3355 because its provisions are at odds with its goal to ensure that there is a stable and well-developed private market for natural hazard insurance and reinsurance.

Allowing private insurance and capital markets to fulfill their roles is the best way to maintain the economic sustainability of communities at greatest risk of natural catastrophes, Swagel testified. "Federal government interference in a functioning natural hazard insurance market would crowd out an active and effective private market, increase the incentive for people to locate in high-risk areas, result in potentially large federal liabilities, and be unfair to taxpayers."

The Reinsurance Association of America (RAA) also testified that the reinsurance industry does not support the Homeowners Defense Act of 2007 citing concerns with provisions of the legislation that would unnecessarily disrupt private reinsurance market dynamics.

"We cannot support this legislation as introduced because of the emphasis on encouraging the creation of state catastrophe reinsurance funds," said Franklin W. Nutter, president of RAA. "Notwithstanding the extraordinary losses from natural catastrophes in 2004 and 2005, the capital markets and the insurance and reinsurance industry have shown their ability to meet natural catastrophe risk transfer needs of insurers and consumers when market dynamics are allowed to work."

Nutter added that the legislation appears to provide incentive for states to replace or compete with the private sector by under-pricing catastrophe risk. "These programs," he said, "serve to concentrate catastrophe risk in a state, rather than spread it to the global private reinsurance markets, turning sound risk management on its head."

Nutter said that while RAA could not support the legislation as introduced, he expressed the desire to work with the committee to improve HR 3355 as it moves through the legislative process.

Health premiums rise 6.1%; average family coverage costs $12,000

Premiums for employer-sponsored health insurance rose an average of 6.1 percent in 2007, less than the 7.7 percent increase reported last year but still higher than the increase in workers' wages (3.7 percent) or the overall inflation rate (2.6 percent), according to the 2007 Employer Health Benefits Survey released by the Kaiser Family Foundation and Health Research and Educational Trust.

The 6.1 percent average increase this year was the slowest rate of premium growth since 1999, when premiums rose 5.3 percent. Since 2001, premiums for family coverage have increased 78 percent, while wages have gone up 19 percent and inflation has gone up 17 percent.

The average premium for family coverage in 2007 is $12,106, and workers on average now pay $3,281 out of their paychecks to cover their share of the cost of a family policy.

"We're seeing some moderation in health-cost increases, but premiums for family coverage now top $12,000 annually," Kaiser President and CEO Drew E. Altman, Ph.D. said. "Every year health insurance becomes less affordable for families and businesses. Over the past six years, the amount families pay out of pocket for their share of premiums has increased by about $1,500."

"The number of options for low wage earners is limited and the greatest burden of all health care costs falls to this segment of the population," said Health Research and Educational Trust President Mary A. Pittman, Dr. P.H. "Although the economy seems to be strong, between 2005 and 2006 the total number of uninsured still rose by 5 percent, including a 9 percent increase in the number of uninsured children."

The annual Kaiser/HRET survey provides a detailed picture of how employer coverage is changing over time in terms of availability, costs and coverage for the 158 million people nationally who rely on employer-sponsored health insurance. It was conducted between January and May of 2007 and included 3,078 randomly selected, non-federal public and private firms with three or more employees (1,997 of which responded to the full survey and 1,081 of which responded to a single question about offering coverage).

While premiums continue to rise faster than workers' wages, this year's gap of 2.4 percentage points is much smaller than the 10.9 percentage point gap recorded four years ago, when premiums rose 13.9 percent and wages grew just 3 percent.

However, "despite the comparatively low rate of increase in premiums and a strong labor market, the percentage of the workforce obtaining coverage from employer-sponsored plans remained unchanged since 2006," reports the Health Affairs article by Kaiser's Gary Claxton and coauthors. The 60 percent of firms offering health benefits to at least some of their workers is statistically unchanged from last year's offer rate (61 percent). The offer rate remains significantly lower than it was in 2000, when 69 percent of firms offered health benefits. Nearly all (99 percent) large businesses with at least 200 workers offer health benefits to their workers this year, but fewer than half (45 percent) of the smallest firms with three to nine workers do so.

Contributions, cost-sharing

Covered workers on average pay 16 percent of the overall premiums for single coverage and 28 percent for family coverage -- shares that have remained relatively stable over the past years. However, workers in small firms (three to 199 workers) pay significantly more on average toward the cost of family coverage ($4,236 annually) compared to larger firms ($2,831 annually). For single coverage, the opposite is true, with workers at small firms annually contributing less on average than workers at large firms ($561 vs. $759).

Among firms that offer health benefits, 10 percent vary how much workers contribute based on the workers' earnings, about the same share as in 2005. About 6 percent of firms vary premium contributions based on employees' participation in wellness programs, up from 3 percent in 2005. In addition, 10 percent of firms offer financial incentives for workers to enroll in a spouse's health plan, which can reduce the firm's health care costs.

In spite of the extensive attention paid to consumer-driven health plans, the survey finds that these relatively new types of arrangements have made only a small inroad into the employer market. Such plans cover about 5 percent of all covered workers, which is not statistically different from the 4 percent share recorded in 2006.

Overall, an estimated 3.8 million workers are enrolled in consumer-driven plans, about equally divided between high-deductible plans that qualify for a Health Saving Account (HSA) and plans with a Health Reimbursement Arrangement (HRA). These plans feature a high-deductible plan and a tax-preferred savings option, from which employees can pay for their out-of-pocket medical expenses. Such plans are often described as consumer-driven because people pay directly for a greater share of their health care and may have an incentive to minimize its cost. They also may offer tools to help consumers choose providers based on cost and quality.

This year, 10 percent of firms offered a consumer-driven plan to their workers, up from (but not statistically different than) the 7 percent of firms reporting this for 2006. Firms with at least 1,000 workers are more likely to offer such plans, with nearly one in five (18 percent) offering one. Looking toward 2008, few firms that don't already offer such plans report that they are very likely to add a HRA plan (3 percent) or a HSA-qualified plan (2 percent).

Premiums for these high-deductible plans are generally lower than for other types of plans, though in addition to the premiums, employers may also contribute money to the savings accounts. The survey finds that firms on average pay a total of $7,815 toward the cost of family coverage for a HSA-qualified plan (including $714 for the account) and $10,179 toward the cost of family coverage for a high-deductible plan with a HRA (including $1,800 for the account). Compared to the $8,879 average firm contributions for other types of plans, employer contributions are lower for HSA-qualified plans and higher for plans with HRAs.

Businesses made no contribution at all to the savings account for roughly half of all workers enrolled in an HSA for family coverage, leaving workers to pay the generally higher out-of-pocket costs associated with their high-deductible plan.

"Consumer-driven plans have established a foothold in the employer market, but they haven't grown as much as one might think, given all the attention that they receive," said Kaiser Vice President Gary Claxton, co-author of the study and director of the Foundation's marketplace research.

"Despite the economic expansion that added 2 million new jobs from April 2006 to April 2007, the employer-based system can do no better than tread-water," said co-author Jon Gabel, senior fellow at the National Opinion Research Center at the University of Chicago.

Other findings

Cost-sharing. In 2007, for firms with deductibles, the average general annual deductible for single coverage is $461 for PPOs, $401 for HMOs, $621 for POS plans and $1,729 for consumer-driven plans. For plans with three- or four-tiered drug cost-sharing, the average co-payments were $11 for generic drugs, $25 for preferred drugs, and $43 for non-preferred drugs. Co-payments for fourth-tier drugs, which may include costly biological agents and lifestyle drugs, averaged $71.

Domestic partner benefits. Nearly half (47 percent) of all firms that offer health benefits make them available to unmarried opposite-sex domestic partners, and nearly 37 percent offer such benefits to same-sex partners. Large firms (with at least 200 workers) were less likely than small firms to offer domestic partner benefits to unmarried opposite-sex partners at 28 percent.

Market share of health plans. Preferred Provider Organizations continue to dominate the employer market, enrolling 57 percent of covered workers. Health Maintenance Organizations cover another 21 percent of workers, with 13 percent in Point-of-Service plans, 5 percent in consumer-driven plans, and 3 percent in conventional indemnity plans.

Other pre-tax benefits. Overall, 61 percent of firms that offer health benefits allow workers to use pre-tax dollars to pay for their share of their health premium costs. Fewer firms (22 percent) offer a Flexible Spending Account, in which workers can set aside pre-tax money to cover out-of-pocket health care spending. In both cases, large firms are far more likely to offer these benefits than smaller firms.

Future outlook. Many employers indicate that they expect to make significant changes to their health plans and benefits in 2008. Overall, 21 percent of firms say they are "very likely" to raise workers' premium contribution next year. Some firms also say they are "very likely" to increase office visit cost-sharing (13 percent), increase deductibles (12 percent) and increase prescription drug cost-sharing (11 percent). Very few firms say they are "very likely" to restrict eligibility for coverage or drop coverage altogether.

Progressive combines personal lines management

The Progressive Corp. in Mayfield, Ohio, is consolidating management of its two distribution channels for personal lines. Since 2000, Progressive's personal lines segment has been organized into two businesses -- the agency business and the direct business. The company said it will continue to price products based on how they are distributed to reflect the channel cost structure, but it is combining the operations of the two businesses into a single personal lines organization, consolidating the product research and development and management functions.

The new personal lines organization will be led by John Sauerland, currently president of the direct business group.

John Barbagallo, currently the agency group president, will become commercial lines group president, assuming responsibility for the commercial auto business and professional liability business. He will continue to manage the company's agent relationships and field sales.

Earlier this year, Brian Silva, currently the commercial auto group president, will retire in mid-2008. After helping with the transition, Silva will shift his focus to several of the company's key projects until his retirement date.

U.S. reinsurers report premiums dropped in 2Q

The Reinsurance Association of America (RAA), a group of 22 U. S. property and casualty reinsurers, reported writing $12.2 billion of net premiums during the six-months ended June 30, 2007, a decrease of $7.5 million from the same period in 2006.

The combined ratio for the group was 90.0 percent, an improvement from the 96.5 percent combined ratio reported for the same period in 2006. The combined ratio is attributable to a 62.8 percent loss ratio and an expense ratio of 27.2 percent, according to RAA.

Policyholders' surplus was $77.3 billion.

According to RAA, its underwriting members and their affiliates write more than two-thirds of the gross reinsurance coverage provided by U.S. professional reinsurance companies.

Insurers have manageable exposure to subprime turmoil, report says

The vast majority of U.S. insurers have little or no exposure to the volatility in the subprime mortgage market because a substantial percentage of their investments are in the highest-rated bonds or stocks with no direct ties to lenders, according to an Insurance Information Institute (I.I.I.) white paper, "Subprime" Home Mortgage Loans and the Insurance Industry.

"This conclusion is based on the recognition that both by law and by the nature of their business, insurers generally limit themselves to the low-risk end of the investing universe. Even for the very small share of their investments directly exposed to subprime and near-prime loans, insurers mainly invest in 'slices' of those investments that, according to the bond-rating agencies, are as safe as the safest corporate bonds," writes Dr. Steven Weisbart, the I.I.I.'s vice president and chief economist. "Thanks to conservative portfolio management strategies and restrictive state regulations, insurance companies have a very small portion of their total investments in risk loans of any type."

The I.I.I. report notes that about 53 percent of life/health insurers' invested assets were in the highest-rated class of bonds and 19 percent were in the next highest-rated class as of year-end 2006. The comparable percentages for the invested assets of property/casualty insurers in the bond market were 67 percent and 4 percent, respectively, the white paper says.

"Common and preferred stocks are a small part of the investments of life/health insurance companies, at 4.6 percent of net admitted assets, as of year-end 2006," Dr. Weisbart adds. "They are a moderate part of the investments of property/casualty companies, at 16 percent, as of year-end 2006." While a comparatively small percentage of insurers' investments, insurers do have sizable equity stakes in U.S. markets. U.S. life/health insurers, for instance, cumulatively owned preferred and common stocks valued at $138 billion as of Dec. 31, 2006, according to the National Association of Insurance Commissioners' (NAIC) annual statement database. This figure stood at $237 billion for U.S. property/casualty insurers, as of year-end 2006, the NAIC reported.

"Insurers' portfolios are still vulnerable to broad market sell-offs caused by fears originating in the subprime sector, such as occurred during July and August 2007," Dr. Weisbart states. "Nevertheless, direct losses will be very limited and insurers' tendency to hold securities on a long-term basis implies that the effects of short-term market volatility will likely be minimal."

The I.I.I.'s analysis of the subprime mortgage market's recent turmoil did hold out the possibility that claims may be filed by directors and officers liability insurance policyholders as well as those with errors and omissions coverage.

"It is likely that some actions will be brought that will trigger the defense benefits in these policies, and possibly also some payouts under the liability benefit provisions. Typically, these claims take a long time to develop. As such, it is much too early to estimate the dimensions of the claims experience that may emerge from the recent credit market developments," Dr. Weisbart writes.

"Major providers of D&O coverage tend to be among the largest and most financially sound insurers."

U.S. fire report: More fires; fewer deaths and injuries; rise in property losses

Fire departments in the United States responded to an estimated 1.6 million fires during 2006. These fires caused 3,245 civilian deaths and 16,400 injuries, according to the National Fire Protection Association (NFPA).

The number of fires increased slightly by about 3 percent from 2005 to 2006 while fire deaths fell 12 percent and fire injuries were down by 8 percent.

The total number of people who died from fires in 2006 (excluding firefighters) was the lowest since NFPA began collecting this data in 1977, and 4 percent lower than the previous low of 3,380 in 2002. The number of fire death varies from year to year, with most of the variation in fire deaths occurring in communities with populations under 10,000.

NFPA's study, Fire Loss in the United States During 2006, offers a detailed account of fire loss for the previous year and an analysis over time based on new information.

In 2006, the annual snapshot of fire loss in the United States showed that every 19 seconds a fire department responded to a fire somewhere in the U.S. Someone died every two hours and 42 minutes from a fire and someone was injured every 32 minutes. A fire occurred in a structure every minute, in a residence every minute and 16 seconds, and in a vehicle nearly every 2 minutes.

Direct property loss from fires in 2006 was roughly $11 billion, an increase of 6 percent from 2005. Nearly $7 billion of these losses resulted from fires in residential dwellings.

As in previous years, most fire deaths occurred in homes; home fires accounted for about 80 percent of all fire deaths. Eighty percent of all structure fires also occurred in the homes. One and two-family dwellings accounted for 58 percent of the structure fires and apartments accounted for 17 percent. In 2006, 2,580 people died from home fires, a decease of 15 percent from the prior year.

Although vehicle fires declined 4 percent from the previous year, they remained second to structures as the second leading cause of fire deaths in the United States in 2006. There were 278,000 vehicle fires that resulted in 490 deaths, 1,200 injuries, and $1.3 billion in property damage.

Guy Carpenter finds Lloyd's market at its 'healthiest in 300 years'

Findings boast stellar results for London market with Lloyd's leading the way

Guy Carpenter & Co., Marsh's reinsurance broker and risk management division, has released "The Lloyd's Market in 2007," its fifth annual review of Lloyd's financial and operational performance.

The finding are exceptionally good -- overall Lloyd's is probably in the healthiest position it has been in for the last 300 years. It reported record results for 2006, with net pre tax profits of �3.662 billion ($7.417 billion*), gross premiums written of �16.414 billion ($33.25 billion*), and a combined ratio of 83.1 percent. Underwriting capacity for 2007 is at an all-time high of �16.1 billion ($32.61 billion).

The report indicated that the strong performance was chiefly "driven by rising rates on U.S. catastrophe-exposed business, favorable claims experience and improved returns on investment. It also stressed that Lloyd's is "in an increasingly strong competitive position, as recognized in recent rating upgrades to 'A+' from both Standard & Poor's and Fitch."

Guy Carpenter's CEO Nick Frankland pointed out: "In 2006, leading players demonstrated once again that it is possible to achieve outstanding returns on equity at Lloyd's, which is crucial to the continuing strength of the market. In addition, the significant strengthening of the balance sheet over the last five years provides a good platform for the future."

The author of the report, Senior Vice President Mike Van Slooten, added: "Substantial mitigation of legacy issues has resulted in a reappraisal of the market's competitive advantages, with the result that new investors are being attracted to the platform. Lloyd's focused efforts to reduce the cost of mutuality, widen access to the market and improve service standards can only be to the benefit of policyholders."

Legacy issues

The "legacy issue" Lloyd's managed to get rid of were the liabilities it has carried since 1996 when it set up Equitas as a run-off vehicle for its pre-1992 claims, principally asbestos and environmental. In March Lloyd's completed the first phase of the transfer of its Equitas liabilities to National Indemnity Company (NIC), a member of the Berkshire Hathaway group of insurance companies.

The arrangement with NIC initially reinsures all of Equitas' liabilities, and provides a further $5.7 billion of reinsurance cover to Equitas. In addition NIC acquired Equitas Management Services Limited and will continue to conduct the run-off of its liabilities. The transaction received the approval of the UK's Financial Services Authority (FSA) and the Equitas Trustees.

The record underwriting capacity (up 8.9 percent compared to 2006) was bolstered by six new start-ups, who contributed a further �217 million ($440 million). Guy Carpenter's study indicated that, given the excellent result, "investor interest remains strong, driven by Lloyd's wide access to business and strong ratings."

The report also noted:

1) "Reinsurance recoverables have reduced by a third, with no collection issues reported on the 2005 hurricanes. Net resources (defined as total assets less policyholder and other liabilities) have increased by 21 percent to �13.3 billion [$27 billion]," bolstering Lloyd's balance sheet strength.

2) The issuance of �500 million [$1.014 billion] of debt in June 2007 "has allowed syndicate loans to be repaid and discontinued and will facilitate an expected halving of the Central Fund contribution rate for 2008." As a result, Lloyd's has reduced the amounts the Syndicates are required to contribute to the Central Fund. The ending of these assessments makes doing business at Lloyd's less expensive and more competitive.

3) "Business process reform has significantly improved controls over placement and is continuing to improve the control environment for claims and accounting and settlement."

Changes at Lloyd's

In recent years, Lloyd's brokers and underwriters have experienced vast changes in how they conduct business. Chairman Lord Peter Levene, who just announced that he will seek a third term in the post, former CEO Nick Prettejohn and his successor, Richard Ward, are dedicated to seeing that the mountains of paper Lloyd's produces, eventually joins the sailing ships Lloyd's used to insure in the pages of history.

After a few false starts -- notably the Kinnect fiasco -- they're now on the way to achieving that goal. Xchanging and RI3K, who just introduced a new e-message system, have rolled out complementary platforms and software that are broker/underwriter friendly, use ACORD standards, and enable more and more of Lloyd's back office work to be processed electronically. The days of the slipcase appear to be numbered.

Two factors have made the changeover a first priority at Lloyd's. The FSA has said in no uncertain terms that the policies based on "deal now, details later" are no longer acceptable. London got the message. In January the FSA acknowledged that "90 percent of contracts in the subscription market [Lloyd's] and 88 percent in the non-subscription market are now achieving contract certainty."

The second factor is cost. Lloyd's is more expensive than places like Bermuda, and, unless it brings those costs down, it stands to lose business. Companies like Hiscox, Catlin and Kiln moved their respective domiciles to Bermuda because it's quicker, easier and cheaper to do business. Instituting electronic processing will cut the costs of doing business in London, and make the entire market, especially Lloyd's, more competitive.

Market access, cats and the cycle

Guy Carpenter's report also listed:

Market Access: Lloyd's continues to focus on enhancing local distribution platforms in emerging markets and streamlining the broker accreditation and cover-holder approval process.

Catastrophe Exposure: Lloyd's reports that, based on its Realistic Disaster Scenario output, U.S. windstorm exposure has been reduced by one third since 2005, and

Cycle Management: The Franchise Performance Directorate is expected to be successful in limiting the downside of underwriting in softening market conditions.

Concerning that last point, Frankland observed: "The primary threat to Lloyd's remains the possibility of a marked downturn in the insurance cycle. In the absence of a major loss, we expect underwriting conditions to become difficult in most classes as we move into 2008, presenting a significant challenge to the Lloyd's franchise model.

We are already seeing leading players returning capital to shareholders and proposing sizable capacity cuts for next year, but it remains to be seen whether the same degree of discipline will extend across the broader market. There is no room for complacency if Lloyd's is to emerge in a position to fully capitalize on the next upswing."

At this point complacency doesn't appear to be a significant concern. Lloyd's leaders have their priorities firmly in mind and the reins of control, in the form of the Franchise Board, firmly in their hands.

A full copy of the report is available for download at: www.guycarp.com. Printed copies can be obtained by contacting Guy Carpenter at: marketing@guycarp.com.

Editor's Note: * The recent strength of the pound, currently worth more than $2.00, has somewhat inflated the dollar equivalent figures since they were first calculated.