White Papers and Blueprints: Agents Chart Their Own Regulatory Future

Independent agents hold onto market share, prepare for post-November election politics

Insurance Journal‘s Editor-in-Chief Andrea Wells interviewed Robert Rusbuldt, CEO and president of the Independent Insurance Agents and Brokers of America (the Big “I”), at the Big “I” Legislative Conference in Washington, D.C., where nearly 1,200 independent agents met with legislators to discuss industry issues and then attended industry panels and a trade show. Rusbuldt’s interview touched on the U.S. Treasury’s blueprint for federal insurance regulation, independent agents’ market share, recruitment of young talent to the industry, tensions over certificates of insurance and what to expect politically come November. The entire interview may be viewed at www.InsuranceJournal.tv. The following are excerpts from the interview.

Editor’s Note: The most recent Big “I” market share survey showed independent agents holding onto their 80 percent share of the commercial lines market and slightly more than 35 percent of the personal lines market. Agents dropped about one-half a percentage point in personal lines. Overall independent agents write about 60 percent — or nearly $290 billion — of all property/casualty premiums.

The most recent Big “I” market share report showed the independent agency system holding its own, but there was a slight decrease. Is this drop something that concerns you?
Rusbuldt: Well, as you know for the past eight years or so, the independent agency has grown vis-a-vis captive agents and direct writers in both commercial lines and personal lines. There are a lot of reasons for that.

This last year, in personal lines there was a very, very slight dip. It was statistically insignificant, so it was almost status quo. And I think, there are a lot of reasons for that — the soft market, the aggressiveness and more competition in the marketplace, the incredible amount of advertising being done by some of the direct writers in captive agency companies. So, it has been very competitive out there.

… [I]n a soft market you have to sell a lot more than in a hard market. You can’t live on your renewals. You have to go out and increase your policy counts to just keep your revenue at the same level from last year.

I think you’re going to see over the next 10 years, the independent agency system continue to grow, particularly in personal lines because we have almost all the commercial lines market anyway.

Was anything in that market share report surprising to you?
Rusbuldt: It’s interesting. Large agencies have focused on two areas in recent years — obviously, commercial property casualty and employee benefits. Interestingly, and I was surprised by this, some of the larger agencies are re-emphasizing personal lines again. Some of these jumbo agencies, you know, the $20 million in revenue and more agencies are now rediscovering that they can actually be profitable in personal lines.

So, I was a little surprised by that. That doesn’t mean that all large agencies are re-emphasizing personal lines. But, we were surprised at how many of those jumbo agencies are now starting to say, “We can’t just ignore this big, big chunk of business here.”

Last September, the Big “I” issued a white paper on certificates of insurance. What are the problems with certificates, and the reasons behind that white paper?
Rusbuldt: We’ve been hearing from a number of agents, particularly those agents that do a lot of work in the construction area, where certificates of insurance are very important. What we have seen is that a number of business clients are requiring certificates of insurance and wanting these certificates that aren’t in the actual underlying policy, which of course you can’t do.

So, there’s been a lot of pressure on agents to issue these certificates of insurance, to be aggressive in issuing these certificates of insurance. In fact the agents have to follow the law and have to follow the policy. So, we put out a white paper to deal with certificates of insurance.

What is the role of a company in the certificates of insurance issue? What’s the role of the agent? What’s the role of the policyholder? What’s the role of the state regulator? What can we do electronically to make this more efficient?

Just as we have inefficiencies in the non-resident licensing area, there are inefficiencies in issuing certificates of insurance. Some of our larger agencies have people who do nothing but issue these certs all day. So, it’s become very burdensome for agencies, and we’re looking for a way to streamline that, make the independent agency more efficient.

What should the states be doing to help streamline the process? And agents themselves?
Rusbuldt: First, you need to enforce the law. Many states have laws that guide certificates of insurance and say that you can’t put in a cert something that does not exist in the underlying policy. Sometimes those things get through the cracks. Regulators need to enforce their regulations, their bulletins, their laws. When an agent comes to them and says, “I’m being pressured by this client,” they need to do something about that. Let the policyholders know, from an education perspective, that you can’t get something that you are not paying for in essence, that’s not in the policy. So, there’s a major education effort, I think, that state insurance departments can do, in conjunction with us in the private sector, to educate consumers about certificates of insurance.

Insurance Journal recently surveyed young agents across the country and found that 83 percent are optimistic or very optimistic about their career. And 81 percent also reported that they love their jobs and they plan to be an agent permanently. Are agency owners still having trouble attracting new talent and younger producers?
Rusbuldt: It is an issue. It’s an issue for both insurance companies and insurance agencies. Attracting talent, top talent, right out of college or junior college, or sometimes even high school, is an issue. And one of the reasons is, since the 1980s the investment banking world, the securities firms and others in the financial services industries might have been a little sexier. The go-go years of the stock market growth and the boom and all that.

But I have to tell you, I’ve seen a resurgence of interest, especially with what’s going on in our economy today, in careers in the independent agency system. I think your study bodes well for that. People are satisfied with what they do. You can make an incredibly good living, and you can make as much as you want, if you want to produce that business.

We are one of the capitalistic segments of our economy, because you get to eat what you kill, in essence. Independent agents are really sort of the backbone of what entrepreneurs are about in this country. So I think your survey has some good news for independent agencies. It might also mean that they want their older principals to move on, so they can move up a little quicker in some of those agencies.

And 81 percent saying they plan to stick with it as their career is impressive. Do you feel that once the industry does attract young people that they typically stay?
Rusbuldt: Yes. The issue is not getting them to stay in the industry; the issue is getting them into our industry initially. And I think, once they get into our industry, they generally stay in the industry. They find out … this industry from afar looked very complex, very daunting. Once you get inside, you learn our jargon, you learn our ways of doing business; it’s a very rewarding career, not just financially, but I think it is from a life perspective. A lot of businesses in the Big “I” are family-run businesses from big to small. I think there are a lot of intangible rewards to being in the independent agency system.

U.S. Treasury Secretary Paulson introduced his blueprint for modernizing financial services regulation, which includes provisions for a federal insurance regulator and optional charter. What about this blueprint?
Rusbuldt: Well, first of all, I think, the Treasury Department should be commended … They made a good faith effort to come up with a reform plan that they think is the right thing for the economy and for our country. So, I don’t hold that against the Treasury Department; however, I think that they have made some mistakes.

In particular, the provision for OFC (Optional Federal Charter) for the insurance industry is something that we disagree with. We support the goals of uniformity and efficiency in our regulatory system. That is why we support federal legislation to mandate on the states these efficiencies and uniformity requirements, but we don’t think adding a federal regulator on top of the state system will work properly. We don’t think that it will serve our customers at the end of the day having to deal with two different regulators.

Remember, if you are a customer, you have six or seven different insurance policies. You might be a small business owner. You might have automobile insurance, homeowners insurance, an umbrella policy, a BOP, so on and so forth. You have a disaster that hits your area. For half of your policies, you may have to call Washington, D.C., and deal with a regulator there. For the other half of your policies, you will be dealing with the state capital and your state insurance department. It will be very confusing for consumers.

Insurance agents, also, don’t have an option under an OFC. Insurance agents will have to navigate two systems because an independent agency will deal with nationally or federally regulated companies and they will deal with state regulated companies; therefore, they will have to be experts in both regulatory systems. It is not a choice for agents.

There are other things — deregulation of policy forms, which for an independent agent could create the Tower of Babel in an independent agency. An OFC in many respects will make independent agencies less efficient and more confusing. We have some business problems with an OFC, but we support the goals of an OFC.

We just have a different way of achieving those goals through targeted legislation, the excess and surplus lines bill, the agency licensing reform bill. I can envision maybe the next bill being a speed-to-market bill to get products faster and preempting prior approval, state laws and things of that nature. We strongly support our company brethren that support an OFC in concept. We support those goals, but we just have a different way of achieving those goals.

What do you think of the political chances of it passing?
Rusbuldt: Well, even Secretary Paulson said this is a six to eight year endeavor. I happen to think that maybe some of my kids or grandkids might be working on this in the future. This is not a one-year project, a two-year project. [Rep.] Paul Kanjorski [D-Pa.], who is the chairman of the Insurance Subcommittee in the House of Representatives, just told the Big “I” yesterday that this is a long-term project.

But there is a distinction. [Sen.] Chris Dodd [D-Conn.] came out yesterday, Paul Kanjorski and other key insurance people in Congress and said that they are much more amenable toward looking at an OFC for life insurance. But they don’t think it works for the property/casualty industry.

We can see that sort of growing divide in opinion on Capitol Hill, even in our industry, that recognizes the property/casualty industry is much more complex than the life insurance industry with everything from residual market mechanisms and pooling mechanisms at the state level to the nature of our business from tsunamis and hurricanes and tornadoes and hail damage to auto theft rates and major cities versus rural areas to even rating differences within one’s city. Property/ casualty is very localized, regionalized, and the risks are very different than the life industry. We see a lot of that conversation taking place now as well.

Do you have any concerns that with the current state of the economy the blueprint might have some additional appeal to Congress?
Rusbuldt: That’s the No. 1 question of the day: What does this mean short-term for our economy? The Fed Chairman and Secretary Paulson are saying we may go into negative growth. Well, if you have two quarters of negative growth, you are in a recession. We are technically not in a recession yet, but we may get there soon.

So the question is: what does this reform proposal have to do with where we are and where we may be heading for the next few quarters? The answer is really nothing. Even Secretary Paulson admitted that this is more of a long-term; this is not intended to deal with the subprime mortgage prices and all the interlocking we have going on between investment banking, commercial banking, securities firms and so on and so forth.

It really will have no effect on some of the short-term problems that we have, with one exception. There is a provision in the Treasury proposal that would enhance the powers of the Federal Reserve Board to look at systemic problems that may exist in the financial services industry. And they would deal with the functional regulators. They would deal with the OCC. They would deal with the FDIC. They would deal with the state insurance regulators. They would deal with the SEC and so on and so forth — the Office of Thrift Supervision. Their powers would be enhanced to request information, to investigate in each one of these functional areas. I think that makes some sense. I don’t think that’s a threat to the state regulatory system. I think there is a need for somebody at the federal level to be able to look at those kinds of issues, to avoid cataclysmic problems in our economy in the future. Conceptually that makes some sense and that might deal with one of the short-term issues.

Given all the attention on the election, do you expect anything to happen on insurance legislation from now until then?
Rusbuldt: One issue has to be addressed … that is flood insurance reform and re-authorization. That has to be done by September of this year. I expect that will be really the only insurance issue that will be addressed between now and the end of the year — the November elections. That’s because it has to be done because there’s a deadline.

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