Top 10 Stories of the Year – West

In the era when cowboys and gold panners roamed, the West was characterized as a wild yet adventurous place to live. Judging by 2006’s insurance industry headlines, those sentiments don’t seem to have changed.

In the past year, agents and brokers in the western region of the United States pushed to protect their compensations and use of credit scoring. And when not out fighting those battles, the region endured the wrath of Mother Nature. Using earthquakes, La Niña and then El Niño conditions as her weapons — the latter of which are expected to continue for the next one to three months according to the National Oceanic and Atmospheric Administration — the grand dame flogged the western states with heavy rains, which led to floods, and warmer than normal temperatures, which sparked wildfires.

If history is any indication of what’s to come, living in the West will continue to be a wild ride. Following are the top news stories that occurred in the region in 2006, as picked by Insurance Journal’s editors.

1. Redefining agent roles and commissions

Following New York’s investigations of improper producer compensation at Marsh McLennan, insurance commissioners in other states looked within their boundaries to see if illegal practices were occurring. Arizona, Hawaii, Oregon and Washington, found no indication of illegal practices and no need to take further steps. California, on the other hand, debated the appropriateness of commissions and whether they should be disclosed to customers.

Toward the end of 2005, California Insurance Commissioner John Garamendi encouraged voluntary compensation disclosure without imposing new rules. Some say that has improved transparency and trust in the industry. Yet in Sept. 2006, he tried to designate a settlement agreement he had reached with American Reliable Insurance Co. as a precedential decision that could be used in future cases to designate brokers as “agents in fact,” which could affect commissions.

The Department of Insurance alleged that American Reliable had violated California law by “permitting” particular retail broker-agents to charge brokers’ fees. CDI believed that the brokers in question were “de facto agents,” or producers, who were acting as brokers, but whose relationship with the insurer was tantamount to that of an appointed agency, according to Steve Young, general counsel for the Insurance Brokers and Agents of the West. Even worse, Young added, was that the commissioner attempted “to give these distorted opinions the force of law by attempting to designate them as a precedential decision” for use in future disputes.

“CDI is improperly attempting to regulate fees that licensed California producers may charge for professional services, when there is no … legal authority … permitting it to do so,” said Roger Chaix, president of the California Insurance Wholesalers Association.

IBA West filed a petition with the California Office of Administrative Law (OAL), which was joined by other insurance associations, asking it to declare that Garamendi acted illegally. The OAL is expected to rule on the petition no later than April 2007.

2. Credit scores to continue — for now

Insurer’s use of credit history in underwriting was challenged in the judicial system and court of public opinion.

In Jan. 2006, an Alaska Superior court ruled that credit history can be used. Colorado faced a credit scoring ban that was introduced in the legislature but failed on a committee deadline the last week of its session. And consumers used their ballots to weigh in on a voter initiative to ban credit scoring use in Oregon.

Prior to the election, the industry feared Oregonians would want to keep their scores private. “When the initiative first qualified for the ballot last June, polls indicated that it was favored by nearly 80 percent of voters in the state. … PCI leaders felt that such a loss in a ballot initiative campaign could set a dangerous precedent for other states and trigger a widespread effort to ban not only the use of credit history but other proven effective underwriting factors in states across the country,” said June Holmes, interim CEO of the Property Casualty Insurers Association of America (PCI).

Yet Oregon Measure 42 was defeated, allowing insurers to continue using the scores. “We’ve learned that we need not fear voters won’t understand the benefits of credit scoring and will respond on basis of their own interests,” said Kenton Brine, northwest regional manager for PCI.

3. Political climate change

Elections brought a new insurance commissioner to California, and there likely will be new insurance post appointees in Alaska, Colorado and Idaho because of changes in gubernatorial leadership. Meanwhile, a new commissioner was appointed in New Mexico.

Notably in California, Republican Steve Poizner will take the reins at the Department of Insurance after several years of Democratic leadership in the office.

“I think it’s going to be fun to get to know him, and hopefully his office will be an open office. Really, after the current commissioner (John Garamendi), all you can do is hope,” said David Nielson, executive director for the California Alliance of Insurance Agents and Brokers.

Former Commissioner Garamendi was criticized by the industry for using a broad interpretation of his position’s statutory powers to issue regulations. According to Sam Sorich, president of the Association of California Insurance Companies, under Garamendi’s leadership, the California Department of Insurance sent 14 sets of regulations to the OAL in December, an unprecedented number.

In New Mexico, Morris Chavez was appointed insurance superintendent in October. The former commissioner, Eric Serna, retired as part of a settlement approved by the Public Regulation Commission. He was being investigated by the state attorney general for his dealings with a bank that does business with the state insurance division.

4. Water woes

New Orleans may have had Katrina, but the West faced its own flood waters, too. California rang in 2006 with massive rain and flooding. Following devastating storms, reservoirs and rivers reached their highest levels in several years, and President Bush declared many areas federal disaster areas.

Later in the year, heavy rains created flooding in Hawaii, Oregon and Washington.

Meanwhile, the National Flood Insurance Program could expand areas designated as 100-year floodplains. NFIP is not confident areas previously thought of as high enough to avoid a 100-year flood would stay dry after all.

5. Earthquake risk not emphasized enough

The importance of earthquake coverage can’t be underscored enough. April 18, 2006, marked the 100th anniversary of the 1906 San Francisco Earthquake and Fire. The catastrophe affected thousands of lives, caused hundreds of millions of dollars in damage and generated aftershocks in insurance and engineering communities. Based on 2006 population and property exposures in the San Francisco Bay area, Risk Management Solutions estimates there would be at least $260 billion in damages if the 1906 quake repeated itself.

In October, Hawaii suffered two earthquakes with magnitudes of 6.7 and 6.0 that tested emergency response systems and created widespread power outages. While the temblors inflicted major damage, they did not push people to purchase earthquake coverage, according to Hawaii Insurance Commissioner J.P. Schmidt.

Despite the risks, consumers often complain that coverage is not affordable. Claire Wilkinson, spokeswoman for the Insurance Information Institute said “only 10 to 15 percent of U.S. homeowners have earthquake coverage.”

6. Auto rate ups and downs

In Colorado, the state’s switch from a no-fault to tort system in 2003 has improved auto premium rates and carrier competition. “We’ve seen rates average 25 percent down since the switch to tort. Rates are more competitive,” said Kelly Campbell of PCI.

Following a lengthy fight between California’s Department of Insurance and insurers, rates are changing. In July, the DOI adopted new regulations to ensure that the three rating factors stipulated in Proposition 103 — a person’s driving safety record, miles driven, and driving experience — have more weight than any other auto premium rating factors.

“From a producers’ point of view, there likely will be some rate changes for auto insurance, affecting customers differently,” ACIC’s Sorich said. “Generally, the regulations will have the effect of lowering rates in congested areas and probably increasing rates in rural areas.”

7. E. coli and agriculture safety

An E. coli outbreak in 26 states traced to contaminated bags of fresh spinach spurred a massive product recall in September. Within a month, 199 cases of illness were reported to the Centers for Disease Control and Prevention.

The event underlined the risks facing the nation’s agricultural system, which “is probably more shaky than the public really knows,” said Dr. Jerry R. Gillespie, director of the Western Institute for Food Safety and Security. Even if someone with ill intent claimed to have infected the food supply without really having done it, the claim itself could “bring the [food] industry to its knees,” he said.

In California, the E. coli outbreak could prove to do just that. Farmers could endure up to $74 million in losses, according to Western Growers; 2005’s spinach crop was valued at $258.3 million.

8. Areas ablaze

Throughout Arizona, California, Colorado, Montana and Washington, wildfires ignited, threatening homes, infrastructure, businesses and natural resources. Mid-year, 68,775 blazes had ignited, making the 2006 wildfire season among the worst in 10 years, according to the National Interagency Fire Center. NIFC data showed 5.03 million acres burned by August, eclipsing the 4.9 million acres burned in 2004, and overshadowing the 10-year average of 2.8 million acres.

Whether started by Santa Ana winds or mischief, the fires took their toll. The California Department of Forestry and Fire Protection estimated suppression efforts to total $105.3 million and $49.4 million in damages. Declaring a wildfire emergency in August, Washington Gov. Chris Gregoire said, “our firefighting resources have begun to grow scarce.”

9. Workers’ comp reductions

Nearly all the western states have been working to reduce workers’ compensation rates and increase carrier competition in 2006.

California’s workers’ comp climate received the most news headlines, with the state touting the benefits of reforms made in 2003 and 2004.

Since workers’ comp reforms were implemented in California in 2002, labor, government and insurers agree that the market has become more competitive and costs have decreased. “Small and large businesses alike have benefited from these reform measures,” said Jim Tudor, State Fund president. “Workers’ compensation costs are coming under control, California is enjoying a robust competitive workers’ compensation market and State Fund’s market share has decreased significantly since 2004.”

Yet in 2006, three pending workers’ compensation ballot initiatives moved to undo the reforms. Two versions would have allowed plaintiff attorneys to sue employers in addition to pursuing a workers’ comp claim. Although the legislature raised benefits in 2002, one of the measures would force employers to pay for another benefit increase.

“We knew opposition groups would launch a major assault on the reforms,” said Stewart Sawyer, IBA West president, in February. Turning the clock back on reforms “would be devastating to the state’s economy.”

“One of the issues that stands out in 2006 was that the push-back on workers’ compensation reforms did not get out of the box,” said Clark Payan, CEO for IBA West. “There was a strong sense in the business community, not only in insurance but among all businesses, of the importance of the reforms.”

10. Fighting fraud

Fraud costs the industry millions of dollars. So in the past year, several state regulators took steps to combat illegal practices.

Washington created a new anti-fraud unit. The Colorado legislature approved a bill adding a prosecutor and three new investigators to the Attorney General’s office. Alaska Division of Insurance Director Linda Hall hired an insurance fraud attorney within the Department of Law. And the California Department of Insurance launched a Web site to fight workers’ comp fraud.

Topics California Catastrophe Carriers Fraud Legislation Agencies Workers' Compensation Wildfire Flood Agribusiness Washington Oregon Hawaii Colorado Alaska