Property market in cat-prone areas not soft -- yet

Global broker Willis, in its latest "Property Alert," indicated that the "the global capacity, pricing regimens, terms and conditions for both cat risks and non-cat risks in the global property insurance market are changing more rapidly than many would have anticipated one year ago."

Willis also noted that "insurance buyers are clearly benefiting from the health, financial strength and increased capacity of today's insurance marketplace."

Those conclusions are based on a review of natural catastrophe losses over the past few years combined with projections for the forthcoming hurricane season. The findings show that "outside catastrophe prone areas, the market is soft, with traditional markets and new ones chasing premium down while broadening coverage." However, the market in catastrophe-prone areas is not soft -- "yet -- particularly where the total catastrophe risk capacity required by a given insured dampens competitive market forces."

Willis found that there still are shortages of capacity for coverage against hurricanes, floods and earthquakes. In some areas, it is "impossible to purchase enough insurance to qualify for a commercial mortgage-backed securities loan unless the lenders agree to modify the insurance requirements," it said.

The report also addressed the need for a long-term solution to insuring against losses incurred from a terrorist attack. "The current iteration of TRIA, the Terrorism Risk Insurance Act, is due to sunset at the end of this year," the bulletin noted, "and Congressional action is required to ensure that this backstop remains in place." While Willis said it "firmly believes that the insurance industry has an obligation to cover as much of such a loss as possible. The reality is, however, that the nature and severity of the next attack is restricted only by the imagination of the terrorists -- and their thought patterns are beyond the industry's modeling capabilities."

For more information or to obtain the full report, visit www.willis.com/Extras/Marketplace percent20Realities.aspx

Arizona aims to raise workers' compensation benefits limits

Arizona is proposing to increase the caps on workers' compensation benefits received by employees hurt on the job.

Under a freshly rewritten workers' compensation bill given preliminary Senate approval on voice vote, the current $2,400 monthly cap on how much of an injured worker's pay can be used to calculate benefits would rise to $3,000 in 2008 and $3,600 in 2009. The limits then would be adjusted annually by the annual percentage increase in the mean wage paid in Arizona, up to 5 percent a year.

Under the pending bill, raising the current monthly cap would benefit workers making more than $28,800 annually.

Workers get benefits for two-thirds of the cap amount. The existing $2,400 monthly cap was set in 1999 and translates into a maximum monthly payment of $1,600. The benefits are not taxed.

While business groups' agreement to the annual adjustments of the benefit caps in future years was a major concession, labor scaled back its demands for higher caps and also signaled a willingness to discuss medical-cost issues of concern to businesses, participants in the talks said.

Workers' compensation itself represents a bargain between business and labor under the Arizona Constitution, with employers required to pay compensation to employees hurt on the job and the workers barred from suing their employers over the injuries.

The benefits-cap compromise, added to a bill (HB2195) originally dealing only with benefits paid to survivors of workers killed on the job, was hammered out during months of talks between lawmakers and representatives of business and labor groups.

While business interests have had more success at the Republican-led Legislature than unions in recent years, labor interests had leverage this year because they expressed an interest in mounting an initiative campaign for a ballot measure that could both lift the benefit caps and give injured workers the right to sue their employers under some circumstances.

Business interests were motivated to take that possibility seriously because of voters' passage last year of a labor-backed initiative to institute a state minimum wage, participants in the talks said.

"Minimum wage played a big role," said Marc Osborn, a lobbyist for the Arizona Associations of Industries.

Last year's vote was a "pivotal factor in [the workers' comp debate] because it demonstrated that labor could take an issue to the voters on fairness and win," said Mike Colletto, a negotiator for firefighters and other union members.

The possibility of a ballot measure on workers' compensation was particularly troubling because of tough constitutional restrictions on what changes legislators could make to voter-approved laws, said Sen. Barbara Leff, R-Paradise Valley, Ariz.

"Workers' comp is just too important to take any [chances] that something would go on the ballot that would make the system fall apart," said Leff, who worked on the issue with Republican Rep. John McComish of Phoenix. "There are unintended consequences when we go to the ballot, so everyone is gun-shy."

Colletto said labor representatives will discuss medical-cost issues with both an open mind and a determination to protect injured workers.

"If we can make the system more efficient and save the employer money without injuring people, that's a good thing and we'll strive to do that," Colletto said.

The bill was given preliminary approval without debate and was awaiting a formal Senate vote at press time. Passage would return the bill to the House, which previously considered a version without the injury benefits increase.

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

Calif. State Fund files 11% premium decrease

California's State Compensation Insurance Fund announced it filed for an 11 percent average decrease in collectible premium for its July 1, 2007, workers' compensation insurance rates. The new rates will affect new and renewal workers' compensation policies with an effective date on or after July 1, 2007.

The filing is State Fund's eighth consecutive rate reduction. Contributing to the 11 percent reduction in collectible premium is an average 8 percent reduction in manual rates, SCIF said.

Small employers (premiums between $1,000 and $75,000) with superior safety records will continue to receive a 10 percent workplace safety credit. "Small businesses account for a major portion of the California economy and State Fund is pleased to be able to pass on savings to reward these employers for maintaining safe workplaces," said Interim State Fund President Lawrence Mulryan.

He added, "We are continuing to see significant decreases in cost that are directly attributable to the 2004 passage of SB 899, the Governor's reform legislation, as well as AB 227 and SB 228 in 2003. State Fund will pass these savings back to employers in the form of lower rates to help California's economy continue to grow."

State Fund has approximately 222,000 policyholders ranging from small businesses to large group associations. State Fund's rates have fallen steadily since 2003, and the decreases over the past four years reflect a cumulative savings of 55 percent percent below pre-2004 rate levels, SCIF said.

For more information, visit www.scif.com/

Bank of Albuquerque awarded New Mexico insurance contract

The Bank of Albuquerque will be the custodian of more than $380 million in deposits from about 1,400 insurance companies doing business in New Mexico.

The bank has been awarded a one-year contract, beginning July 1, to oversee the deposits, the state Public Regulation Commission said.

The deposits help to ensure that insurance companies can pay creditors and policyholders.

The bank will be paid an annual custodial fee of 0.165 percent of all deposits, or about $650,000 a year, under the contract with the commission's Insurance Division.

The current contract is held by Santa Fe-based Century Bank.

The Insurance Division had changed the Century Bank contract in 2005 to allow the bank to charge higher fees than allowed by state rules.

The division later changed the contract to comply with the rules.

At one point, Century Bank was receiving an annual fee of 0.25 percent, or more than $900,000 per year. The rate was reduced to 0.2 percent, and Century Bank later refunded some $180,000 in excess fees.

"Under this commission, the 'backdoor' to the Insurance Division is now closed," said Jason Marks, commission vice chairman.

The Century Bank contract also proved controversial because the bank gave nearly $130,000 over three years to Con Alma Health Foundation Inc.

Con Alma is a nonprofit organization that former state Superintendent of Insurance Eric Serna helped found. Serna resigned last year as Con Alma's board president and retired from his state job.

The state attorney general's office is still investigating Serna, a spokesman said.

The Bank of Albuquerque submitted the lowest bid for the contract, beating out Century Bank and Wells Fargo.

An evaluation committee consisting of representatives of the commission and the state treasurer's office recommended that state Treasurer James Lewis award the new contract to Bank of Albuquerque.

"I am satisfied the selection process for the custodial bank was open, fully competitive and transparent to the citizens of New Mexico and the insurance industry," Lewis said.

Ben R. Lujan, commission chairman, said the commission and the treasurer's office are working to "strengthen the integrity of the Insurance Division and to restore public faith in the bidding process."

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

Group challenges Fireman's Fund's earthquake rates

Consumer advocates have filed a challenge to block a proposed 25 percent increase in Fireman's Fund's earthquake rates in California, a move that they say could save each of the company's earthquake customers $356 a year.

The nonprofit Foundation for Taxpayer and Consumer Rights also demanded the company decrease its homeowners insurance premiums by at least 30 percent, more than double the company's proposed reductions of 7 percent to 14 percent. The homeowners premium challenge could save policyholders $27 million, or approximately $437 per customer, the group said.

"A consumer whose earthquake and homeowners insurance are with Fireman's Fund will pay almost $800 a year too much if the company's rate plans are approved," said Carmen Balber, FTCR consumer advocate. "An unwarranted earthquake insurance rate hike will only have the effect of leaving more Californians uninsured when the big one comes."

California's Proposition 103 requires insurers to justify rate changes prior to imposing increases, and allows consumer groups to challenge excessive rates and request public hearings. The Insurance Commissioner must grant a hearing if a requested rate change exceeds 7 percent.

FTCR said its experts determined that Fireman's Fund's rate plans fail to meet several rules meant to keep prices fair and appropriate. According to its formal challenge, the insurer's requested earthquake rate hike is excessive, includes unjustifiable profit margins and does not use a credible model to determine risk. A substantial decrease in homeowners rates is called for because the company does not provide the data necessary to justify its filed rates, uses the wrong time frames to present an inadequate picture of risk, and would pass on to consumers costs that are specifically prohibited by law, the group said.

Study: Calif. workers' comp reforms are working

Yet risk managers say keeping workers safe and costs down still major concerns

California employers and insurers have started to see -- and should continue to see -- significant results from workers' compensation reforms enacted in 2005, according to the "2006 Cost Monitoring Report" released by the Workers' Compensation Insurance Rating Bureau of California.

Specialty Risk Services, a third-party claim administrator, agrees with that assessment, noting that its customers have felt the sunny side of the reforms.

According to the company, clients have experienced double-digit drops in several key areas:

• Physician costs decreased by 12 percent;


• Combined inpatient and outpatient costs decreased by 19 percent;


• Pharmacy costs decreased by 21 percent; and


• Network utilization by clients increased from 55 percent in 2003 to 72 percent in 2005.

One of the most significant benefits of the California legislation was the ability to direct medical care for the life of the claim into an approved medical provider network, SRS said. Employers also regained medical control of claims that existed before the establishment of the network and experience lower medical costs based on increased network penetration.

"Early indicators from SB 899 were very encouraging, and we've continued to see exceptional results with our book of business," said Pam Rippens, senior vice president of field operations for the company. "This is due, in large part, to our aggressive use of more than 30 certified network filings. We've also heavily leveraged the utilization review regulations as well as evidence-based medicine."

Rippens also cited tighter control of outpatient facility fees and treatment limits as dictated in Assembly Bill 227 and Senate Bill 228 as factors that contributed to success in California.

Another fringe benefit of California's workers' compensation reforms was the heightened awareness to the need for prompt claim reporting. According to the California Workers' Compensation Institute, average reporting time saw a marked declined following the reforms, dropping from 19.3 days to 14.2 days from the injury date to claim administrator notification time. SRS tallied similar results, reporting a time decline from 3.7 to 3 days in California.

"We've continued to stress to our clients the benefits of early reporting and our efforts have paid off. The quicker a claim is reported, the better the results in the long run," Rippens said.

Despite the benefits of the workers' comp reforms, risk managers still express concern about keeping employees safe. In a SRS survey, risk managers indicated that rising medical costs and the threat of pandemics keep them awake at night.

While 52 percent of the survey respondents said they worry about rising medical costs, 12 percent ranked pandemics as their biggest concern. Privacy issues and unhealthy employees tied for third with 6 percent each. Looking ahead five years, risk managers' worries shifted to talent management and an unhealthy employee population, which topped the list of biggest future concerns at 37 percent, followed a close second by rising medical costs at 34 percent.

In fact, 59 percent of industry professionals said they considered overweight employees to be at greatest risk for workplace injuries in the future, followed a far second by depressed employees at 20 percent and the aging workforce at 13 percent.

SRS's surveys were part of a research and education project called, "Workforce 2020: Are You Ready for the Future?," which is about the challenges risk managers face now and in the next two decades, in terms of immigration trends, population spurts and demographic shifts nationwide.

"Turn on the TV or pick up a newspaper, and you'll see headlines focused on the graying of America or its expanding waistline. These issues are not just trends that plague health care professionals anymore," said Ken Martino, senior vice president, account management for SRS. "They are serious concerns to risk managers -- something we learned first hand through our survey series. As an industry, we have to ask ourselves what we can do to head off these trends and lessen their impact down the line."

Interestingly, more than 51 percent of those surveyed expected their workforce to increase in the next 24 months. When asked if they had strategies to tackle workforce challenges of the future, 47 percent said they have some plans. However, only 9 percent strongly agreed that their company was prepared with workforce planning strategies for the future.

"Preparedness is critical," according to Martino. "Risk managers should really be asking themselves now what their vulnerabilities are both today as well as five, 10 or 15 years from now. Where are your exposures geographically and what are they in terms of the make-up of your workforce? Do you have plans in place for a disaster, such as a natural catastrophe, terrorism event or workplace violence? Are you leveraging technology advances to increase your productivity and effectiveness?

"Simple steps like re-engineering job tasks and sites for older workers or people with disabilities can pay off tenfold in the long run," Martino continued. "Partner with your TPA and take the time to plan for tomorrow. It will ensure success in the future."

In terms of return-to-work challenges, survey respondents said motivating an employee to return to work following an injury ties with motivating supervisors who play a critical role in the process. Both received 33 percent of the vote. Lack of transitional duties fell second, at 23 percent.

SRS is currently conducting a survey on return to work and the best practices used by clients. Results are expected by the end of the second quarter of 2007.

For more information on SRS' Workforce 2020 project or its survey in California, visit www.specialtyriskservices.com

Consumers not informed about homeowners insurance, study says

A large percentage of U.S. homeowners mistakenly believe that standard homeowners insurance protects them from an array of perils, according to research by the National Association of Insurance Commissioners, which recently hosted its summer conference in San Francisco. Yet, typical property and liability policies don't cover home damage from floods, earthquakes, water line breaks, termites, mold, and several other perils.

The NAIC survey found that 33 percent of U.S. heads of household, who own a home and have homeowners insurance, incorrectly believe flood damages would be covered by a standard homeowners or property and liability policy.

"As we enter the 2007 hurricane season, we strongly encourage consumers in flood--prone areas to check whether they are properly covered," said Walter Bell, NAIC president and Alabama Insurance Commissioner.

NAIC suggested the industry remind consumers that flood insurance polices generally are available from the National Flood Insurance Program and are often sold by agents that sell homeowners policies.

The NAIC survey also revealed other homeowner misunderstandings relating to common loss situations -- none of which are covered by standard homeowners policies -- such as:

• 68 percent think vehicles such as cars, boats and motorcycles stolen from or damaged on their property are covered.


• 51 percent think damages from a break in the water line on their property supplying water to their home are covered.


• 37 percent think damages due to a break in the sewer line on their property that connects to their municipal sewer system are covered.


• 35 percent think damages from earthquakes are covered.


• 34 percent think damages from mold are covered.


• 31 percent think damages from termites or other infestation are covered.


• 22 percent think pets stolen from or injured on their property are covered.

"Many homeowners could be seriously harmed financially by misunderstandings about their insurance," Bell said. "It's critical that consumers look closely at their policies and ask their insurance agents detailed questions to become fully aware of what is, and what is not, covered."

The NAIC survey also noted that 24 percent of respondents indicated their policies insured their homes for the actual cash value, while 64 percent said their policies covered the replacement cost. Another 12 percent said they did not know whether they had purchased actual cash value or replacement cost coverage.

Homeowners have fears of being sued, the survey indicated. Twenty--eight percent of respondents reported they were more concerned today than they were five years ago about being the target of a lawsuit. Yet according to the NAIC survey, a majority of homeowners -- 63 percent -- lack umbrella coverage.

To aid in education, the NAIC provides information, tips and considerations regarding homeowners insurance on its consumer education Web site, Insure U (www.InsureU online.org). The site is also available in Spanish (www.insureuonline.org/espanol).

Mulryan: Working to improve Calif. State Fund's value, transparency

California's State Compensation Insurance Fund suffered setbacks recently over unethical practices in its group programs, and an order by California Insurance Commissioner Steve Poizner forced the organization to address structural and operational changes.

Yet newly appointed SCIF Interim President Lawrence Mulryan hopes to turn that around -- even as he regrettably comes out of retirement.

Appointed to lead SCIF after the March firings of former president James Tudor and Renee Koren, vice president in charge of group programs, Mulryan addressed "what's going on" with SCIF at a recent Insurance Brokers and Agents of the West Blue Ribbon Conference in Hawaii.

It was only a couple of years ago that things were "kind of trending OK," Mulryan noted. "We had gotten past the big bubble, the big crisis, and things were pretty much under control. I was looking toward retirement. I had already told my board [at the California Insurance Guarantee Fund] that I had decided that I would retire."

Clearly, that did not work out very well, Mulryan joked.

Mulryan served as an executive consultant within the insurance community since 2006. From 1992 to 2006, he was executive director of the California Insurance Guarantee Association. Prior to that, Mulryan worked in the insurance industry as a legal counsel and senior executive, which included trade association representation, drafting legislation and managing and lobbying on legislative matters. Additionally, Mulryan spent more than 20 years on the San Rafael City Council, serving three terms as mayor. He retired in 2006.

As the new head of SCIF, however, he said he aims to reevaluate the value of the California workers' compensation organization and its transparency.

"What we're undertaking, inside the company, is looking at the value, reapplying the governance," Mulryan said. "For example, for the first time having an actual CFO position that would bring in all the financial controls, all the authority levels at any level, anything having to do with finances, totally under one person," he said.

Mulryan noted that he was responsible for bringing Stephen C. Kolakowski as interim CFO and Marjorie Berte as a management consultant to the organization.

The problem with the organization before he joined was not criminal -- despite reports by mainstream media, Mulryan explained.

"The figure you have probably read, $560 million ... is not missing," he emphasized. "The question is not, 'Is it missing?' but rather, 'Was that a good way to spend money?'" he asked. "In keeping the percentages and the ratios in the older contracts through the period when the fund was writing all the business it wrote, and the premium increases were so great, was it proper business etiquette to keep putting that much money into fees for the associations, or should it have been spent differently?" he asked. "We see no evidence of anybody pocketing funds, as we all wonder about that. We're still looking, but there's nothing yet."

As further proof that the state workers' compensation insurer was not that bad, he said the organization's ratios are favorable, and it has a "very significant surplus." If the organization were rated, he believes it would receive a very strong rating, he noted.

Nevertheless, in accepting his role as the head of the insurer, Mulryan recognizes that there are improvements to be made. "Overall, in the broad governance of it, it seemed like [there were] a lot of improvements we could make, to make things a lot more transparent, a lot clearer as to levels of responsibility," he said.

As part of taking responsibility, Mulryan said his leadership team is hoping to get a better understanding of the group association program, the primary cause of ethical concerns.

SCIF continues to conduct an internal investigation focusing on the organization's administrative fee program that provides discounts to group programs. The administrative fee program began in 1993 to provide group members discounts to reflect lower risk due to workplace safety programs run by the groups.

"It's a significant part of State Fund's business. Our plans are to keep that program in place, but also I want to know in particular, and so does the board, just where have all the fees gone on an ongoing basis," Mulryan said. As part of that examination, State Fund hopes to have a better understanding of group program relationships and contracts.

"We want to be sure that we know what we're bargaining for, and that we have auditable contracts that in the end, when we pay the fees on those, they'll be services rendered and value received. That's not always been clear enough in the past," Mulryan said. "I think that's one of the things that caused the board to be somewhat uncomfortable. There's not necessarily anything wrong, other than management just hasn't been as clear as they can be," he added.

Ultimately, Mulryan indicated he hopes to turn the criticism of State Fund around, eventually creating a better market for consumers.

"If I accomplish anything with my team ... we will make a company that will be a lot clearer as to what our objectives are. ... I like to think that we're making some progress already in that respect," he concluded.

Violent crime up, property crime down in 2006, FBI reports

Violent crime increased 1.3 percent in 2006 when compared with data from 2005. However, property crime decreased 2.9 percent for the same time period, according to the Federal Bureau of Investigation.

The FBI collected the national preliminary data from 11,723 law enforcement agencies that submitted at least six months of offense data through the Uniform Crime Reporting Program in both 2005 and 2006. Statistics from the annual report include the following information regarding property crime:

For 2006, property crime decreased 2.9 percent when compared with 2005 data. Motor vehicle theft offenses dropped 4.7 percent and larceny-theft offenses were down 3.5 percent. Burglary offenses increased 0.2 percent.

Property crime decreased in all of the nation's city population groups, ranging from a 3.4 percent decline in cities with populations of 100,000 to 499,999 persons to a 2.1 percent decrease in cities with 500,000 to 999,999 inhabitants.

Nonmetropolitan and metropolitan counties had declines in property crime, down 4.2 percent and 2.2 percent, respectively.

Motor vehicle theft and larceny-theft decreased in all of the nation's population groups.

For burglary, nonmetropolitan counties had the greatest decrease of 4.6 percent among the population groups, and cities with 500,000 to 999,999 inhabitants had the greatest increase (3.3 percent).

Three of the four regions saw decreases in reports of property crime from 2005 to 2006. However, property crimes were virtually unchanged (+0.1 percent) in the Midwest.

By offense type, each region experienced declines in the number of larceny-thefts and motor vehicle thefts.

Arson offenses, which are tracked separately from other property crime offenses, increased 1.8 percent from the previous year's number. All population groups had increases in arson offenses except for cities with populations of 250,000 to 499,999 inhabitants (-3.4 percent) and those cities with 100,000 to 249,999 persons (-0.8 percent).

Statistics from the annual report also included information regarding violent crime:

Three of the nation's four geographic regions had increases in violent crimes from 2005 to 2006.

By violent crime category, robbery offenses increased 6 percent, and murder and nonnegligent manslaughter increased 0.3 percent.

The largest increase in murder offenses occurred in cities with populations of 1,000,000 or more, 6.7 percent. In contrast, murders decreased 11.9 percent in nonmetropolitan counties.

Robbery offenses increased in each population group except nonmetropolitan counties, where these offenses were down 0.8 percent.

Aggravated assault offenses decreased 2.3 percent in cities with 500,000 to 999,999 inhabitants, the greatest decrease among the city population groups. Those offenses declined 5.4 percent in the nonmetropolitan counties.

Calif. commissioner seeks additional workers' comp reforms

California Insurance Commissioner Steve Poizner said even after the workers' compensation reforms of 2005, there still are systemic and structural deficiencies in the system.Thus, he ordered the state Workers' Compensation Insurance Rating Bureau to make improvements. He also recommended a 14.2 percent decrease in workers' compensation pure premium rates, noting the market is vibrant and profitable.

The advisory recommendation is used by the workers comp insurance industry as a benchmark for filing its rates.

The Commissioner stated that insurers are "reaping tremendous benefits" from recent reforms to the system, currently enjoying historic record-low loss ratios of 37 percent. Those ratios mean that insurers are only paying 37 cents in claims for every dollar collected in premium, he said.

"Recent reforms to the workers' comp system have worked exceptionally well," Poizner said. "Costs for insurers have dropped sharply, fueling an extremely healthy market driven by historic and unprecedented cost savings. ... I realize that California's economy will only benefit if injured workers get medical attention quickly, and if the costs savings are fully passed on to employers."

Consequently, Poizner issued an order to the state's workers' comp rating bureau that addresses the following issues, among others:

1. Inaccurate analysis/rate forecasting by the WCIRB - WCIRB recently recommended an 11.3 percent decrease in the pure premium rate. While there have been changes to the system, the WCIRB has been plagued by a 12-year history of forecasting inaccuracy, Poizner said. WCIRB pre-reform recommended rates (1995-2000) were too low by 20 percent to 60 percent to pay claims, and post-reform rate recommendations (2004-2006) would have overpaid claims by 30 percent to 50 percent, he said.

"The failure of the WCIRB to provide accurate forecasts adversely impacts the entire workers' compensation marketplace," he said. He ordered an audit of WCIRB to improve its data collection and forecast development.

2. Helping injured workers/improving workplace safety - The commissioner said he is concerned that some injured workers are not getting proper and timely medical attention. To ensure that insurers haven't instituted abusive utilization reviews, which may delay or prevent proper medical care, he ordered his department, in coordination with the Division of Workers' Compensation, to begin market conduct exams of insurers to verify that benefits are being delivered promptly. The Commissioner also directed the WCIRB to develop a plan to overhaul its experience rating system, so that businesses will have incentives to improve workplace safety.

3. Increasing competition in the system - Recent reforms have led to a robust and healthy workers' comp market, the Commissioner said. Yet he believes opportunities exist for insurers wishing to expand, enter or re-enter the market. He plans to host a Workers' Compensation Summit that will highlight opportunities in the state and examine how to provide continuing stimulation to the market.

4. Reducing rates/fighting fraud - Poizner noted that fraud adds an unacceptable surcharge to the cost of insurance and must be dramatically reduced. To deter illegal activity and lower costs, he formed a blue ribbon Advisory Task Force on Insurance Fraud to determine effective ways to fight workers' comp fraud.

To view the Commissioner's order, visit www.insurance.ca.gov/0400-news/0100-press-releases/00602007
/upload/PPDecisionandOrder.pdf

A copy of the proposed decision is available at www.insurance.ca. gov/0400-news/0100-press-releases/
00602007/upload/PPProposedDecision.pdf

Court: Injuries even to prosthetic parts deserve workers' comp benefits

American Appliances Inc. and Liberty Mutual Insurance Co. v. Industrial Claim Appeals Office of the State of Colorado and Charles E. Bodine, the court ruled that the injury Bodine had sustained to his hip prosthesis was a compensable injury.

Bodine "had a number of previous nonindustrial left hip replacements. In June 2005, when exiting his company truck, Bodine felt a pop in his left hip," according to the case. "He was diagnosed with a left hip prosthetic shift and underwent prosthetic hip replacement surgery."

American Appliances and its insurer Liberty Mutual requested dismissal of the claim, arguing that Bodine did not sustain an injury to his "person" because only "the prosthetic device [was] injured." An administrative law judge determined that the claim was compensable.

The employer and insurer appealed, citing a previous court case that determined that an accidental injury to that claimant's wooden leg was not compensable because "[c]ompensation can be awarded for personal injuries only," and "[a] wooden leg is a man's property, not part of his person, and no compensation can be awarded for its injury."

The appeals court disagreed, noting that it is an "employer's duty to provide a claimant such medical devices that will cure and relieve the effects of his fall." Because the administrative law judge found that the claimant needed a hip replacement, the Appeals Court concluded that the employer was liable, and the claim was compensable.

Risk managers take strong stand against contingent commissions

RIMS issues new policy statement denouncing such incentive pay for all agents and brokers, whether Wall Street or Main Street

The largest association of commercial insurance buyers has stepped-up its opposition to the acceptance of contingent compensation by any agent or broker, calling such compensation "an inherent conflict of interest" in a strongly worded policy restatement.

The 10,000-member Risk and Insurance Management Society (RIMS) said it is "troubled" that some in the insurance industry continue to promote contingent compensation even after "recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer."

"RIMS supports a business model for the insurance industry which does not provide for, offer or make available contingent commission arrangements for the brokerage industry," the group said in its revised policy statement.

For any broker or independent agent to accept these fees "represents an inherent conflict of interest," according to RIMS, which called for an end to contingencies.

RIMS had issued a policy position in 2005 that criticized contingencies but which did not call upon the insurance industry to discontinue them as the current policy does.

According to Terry Fleming, RIMS board member and risk manager for Montgomery County (Maryland), the association's members have been asking the group to come out with a stronger position against these supplemental compensation programs.

He said the organization decided to produce the new policy statement after a number of CEOs at the recent RIMS annual meeting took a "wait-and-see" attitude towards proposed alternative supplemental payment plans, some of which pay contingent fees prospectively or vary with the size of the account or brokerage involved.

Fleming said RIMS is "extremely concerned" that some of the same brokers that promised risk managers they would not accept contingent fees a few years ago are now considering reneging on that promise and accepting alternative contingent fees.

New compensation plans
The compensation plans being questioned traditionally involve payments to brokers after they place a certain volume of business with an insurer or meet other performance criteria such as profitability or business retention.

However, the structure of contingent plans has been changing in response to criticism. Several insurers, including Chubb and Travelers, are promoting alternative supplemental plans, which pay brokers prospectively for achieving certain volumes or performance goals. Critics say these prospective plans have the same effect as traditional retrospective plans.

Fleming said the RIMS opposition to contingencies applies to prospective as well as retrospective plans and to agents and brokers regardless of size.

At a CEO panel during the RIMS annual meeting in early May, executives from several large brokerages were given an opportunity to denounce contingent payments but did not clearly do so.

Marsh CEO Brian Storm claimed the issue must be addressed as part of the bigger issue of how to pay for improvements brokers make in the insurance process.

"Marsh is going to take its time with this issue. We want to know how our clients, how the industry feels about it. We certainly understand transparency as well or better than anyone. I think that we'll come to a conclusion that is good for the industry, not just for Marsh," Storms told the RIMS audience.

Gregory C. Case, president and CEO, Aon Corp., indicated that contingencies were still in play at his firm.

"One observation I would make, and from Aon's standpoint, we don't know what the definition of supplemental is. We can't take the answer as 'no' right now. I don't know what it means," Case maintained.

Patrick Gallagher Jr. chairman, president, CEO, Arthur J. Gallagher & Co., suggested that the commitment that his firm and others have made to making all compensation plans transparent eliminates any potential conflict of interest cited by critics of contingencies.

Absent from the RIMS panel was Joseph Plumeri, CEO of the large broker Willis Group Holdings. Plumeri's firm has stood out for its strong vow not to accept any form of contingent payments, which is now the RIMS position.

After a review of the prospective compensation plans recently proposed by certain carriers, Willis renewed its vow. Plumeri said his firm would not be accepting these new incentive arrangements because in its opinion they fail to fix the conflicts associated with the contingent commissions they are meant to replace.

"They have performance-driven elements that make lump-sum payments contingent on factors such as retention, growth and profitability -- features that rendered contingent commission plans incompatible with conflict-free transparency and our clients' best interests," Willis said in its statement.

Anti-contingency policy
RIMS is urging its members to enforce the anti-contingency policy in their dealings with brokers but Fleming said the risk managers would also support a prohibition through legislation or regulation.

He said risk managers can't tell the insurance industry how to structure its compensation but the group can make known its opposition to a particular form of compensation.

The large risk management organization is also supporting full disclosure of "all sources of compensation, direct and indirect, now or in the future" even where buyers fail to request it.

"Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors, and insurers," the RIMS policy says.

RIMS urged its members to evaluate their relationships with brokers and take action to correct situations where transparency and full disclosure are not followed.

Fast-growing, state-run property insurers pose risk for taxpayers

Exponential growth of state-run property insurers of last resort ultimately may shift much of the long-term risk of hurricane-related losses to policyholders and taxpayers, even those who live nowhere near the coast, reports the private insurance industry's Insurance Information Institute (I.I.I.).

By year-end 2006, total exposure to loss in state-run property insurers is estimated to have surged to more than $600 billion, compared with $54.7 billion in 1990. Total policies in force had also risen to in excess of two million.

The explosive growth in these plans is attributable to a number of factors, including the rapid rise in coastal development and property values, and the changing shape and role of state-run property insurers in a number of states, according to a new study from the I.I.I.

"While state-run insurers of last resort fulfill a key role by ensuring that policyholders can obtain insurance coverage, many have morphed from their traditional role as urban property insurers into major providers of insurance in high-risk coastal areas," said Dr. Robert P. Hartwig, president and chief economist of the I.I.I.

According to Hartwig, this shift of high risk exposure away from the private property insurance market is placing an enormous financial burden on state-run insurers, leaving a number of them operating at substantial deficits. As a result, state-run insurers of last resort may end up shifting the long-term risks of hurricane-related losses to policyholders and taxpayers who do not live near the coast.

"Depending on the state, the redistribution of costs is commonly achieved via laws that allow state-run insurers (which are often the largest insurers in the most hazardous areas) to recover their losses in excess of their claims-paying resources by assessing (effectively taxing) the insurance policies of homeowners and business owners throughout the state, including those well away from the coast and those who have never filed a claim," Hartwig said. "In some cases, even unrelated types of insurance such as auto insurance and commercial liability coverage can be assessed."

"Even in states where the value of insured coastal property represents a relatively small percentage of total insured property values, this does not mean that state-run property insurers are not experiencing rapid growth," added Claire Wilkinson, vice president, Global Issues at the I.I.I. and co-author of the study.

For example, North Carolina's $105.3 billion in insured coastal exposure represents just 9 percent of the state's total insured property values. Yet the state's beach and windstorm plan saw its exposure and total policy count more than double between 2003 and 2006.

"The insurance industry is committed to working in partnership with public policymakers, consumers and businesses in developing solutions to the formidable challenges posed by catastrophe risks in future," Hartwig said.

Court sides with insurers on credit reporting case

The Supreme Court has sided with two insurance companies in a case involving alleged violations of the Fair Credit Reporting Act. The law requires insurance companies and other businesses to notify customers who are charged more because of their credit ratings.The law requires insurance companies and other businesses to notify customers who are charged more because of their credit ratings.

In a unanimous decision, the justices said Geico General Insurance Co. did not violate the law and that Seattle-based Safeco might have, but did not do so recklessly.

The insurance industry said a decision against it could have subjected companies to billions of dollars in punitive damages for failing to notify customers.

The Property Casualty Insurers Association of America agreed that the ruling by the U.S. Supreme Court clarifies significant issues related to the rules regarding insurers' requirements to provide adverse action notice to consumers.

"Today's ruling reverses the appeals court decision that said the defendant insurance companies had acted in 'willful disregard' of the law for failing to send adverse action notices," said Kathleen Jensen, senior legal counsel for PCI. "We contended in our amicus that the 9th Circuit Court used a very low standard for determining whether insurers acted in willful disregard for the law."

The court also ruled that the benchmark for determining whether FCRA notice is required at new business should be the rate the applicant would have had if the company had not taken his credit score into account, not a benchmark of what the "best" rate is. The court further clarified that once a consumer has learned that his credit report led the insurer to charge more, he has no need to be told over again with each renewal if his rate has not changed.

Thirteen state insurance commissioners said that a lower threshhold for proving liability, adopted by the 9th U.S. Circuit Court of Appeals in San Francisco, would motivate compliance with the law.

To find liability, a company's conduct must be more than "merely careless," wrote Justice David Souter.

Souter said that a company's conduct must entail an unjustifiably high risk of harm that is either known to a company or is so obvious that it should have been known.

The appeals court warned companies against relying on "creative lawyering that provides indefensible answers." Liability, the appeals court said, could stem from a company's "deliberate failure to determine the extent of its obligations."

Relying on implausible interpretations of its obligations may constitute reckless disregard for the law and therefore amount to a willful violation, the appeals court said.

The Supreme Court adopted a notification requirement favored by the industry. The standard limits the circumstances in which customers must be told their premiums are higher because of their credit ratings. The appeals court and lawyers for consumers said they must be notified any time they pay more than the lowest rate available to customers with the very best credit scores.

"Geico has the better position," the Supreme Court said.

Geico did not owe a prospective customer such notification, the court said. The company had offered him a rate that was the one he would have received if his credit score had not been taken into account.

Safeco did not notify two of its customers because it thought the law did not apply to initial applications, a mistake that left the company in violation of the law.

"The company was not reckless in falling down on its duty," Souter wrote.

Under a more expansive notification standard, Safeco would be required to send adverse action notices to 80 percent of the company's new customers, Maureen Mahoney, an attorney defending the two companies, said at arguments in the Supreme Court in January. At Geico, just 10 percent of new customers qualify for the top tier of credit, Mahoney added.

There are credit reports on 200 million Americans, and consumer information is used by an array of lenders, retailers, employers and government agencies. Credit reporting agencies generate 1.5 billion consumer reports per year.

Congress passed the credit reporting act in 1970 to protect consumers from flaws in the system and improve the reliability of reports so that the business sector can accurately gauge risk. Consumer groups point to the notification requirement as the cornerstone to cleansing credit reports of inaccurate information.

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