Top 10 Stories of the Year – National

The fight to save contingent commissions topped the minds of agents across the nation as a few select states drove public policy efforts to end their use by insurers. The industry grabbed hold of predictive modeling and analytical tools. In November, Democrats took control of Congress while most insureds enjoyed declining rates, except in coastal and cat-prone areas. Insurers smartened up after lessons learned from Hurricane Katrina with the use of enterprise risk management and a possible avian flu pandemic made headlines. Limited progress was made extending the Terrorism Risk Insurance Act or modernizing insurance regulation, but the topics remained on the industry’s radar. Following are the top national news stories that occurred in 2006, as picked by Insurance Journal’s editors.

1. Agency compensation at risk

The fight to save contingent commissions was on in earnest in 2006. A small group of states pushed settlements with insurers that could affect agents and brokers nationwide. Multiple states signed pacts with Zurich American to close their probe into the insurer’s involvement in alleged bid-rigging and unfair compensation practices in the commercial insurance market. While Zurich’s multi-state settlement requires it to provide full disclosure of what it pays its agents and brokers for commercial lines business, a separate three-state agreement signed with attorneys general for New York, Illinois and Connecticut, and the New York Department of Insurance prohibits Zurich and three other large insurers (ACE, AIG, and St. Paul Travelers) from paying contingent commissions for certain insurance business. Agents and brokers will continue to fight to save contingency compensation, which if eliminated could reduce the compensation of hundreds of thousands of agents nationwide.

2. Congress Goes Blue

The nation bled blue on Election Day in 2006 with the U.S. Congress, state governors and insurance commissioners turning over posts to Democratic candidates. Democrats took over control of the House and Senate by slim margins and also now control 28 governors’ seats and three territories and commonwealths, as well as 23 state legislatures. The change could mean policy changes in Washington, D.C., and states around the country but many industry insiders say blue may not be a bad color for insurance. On the national front, key issues remain the same: terrorism insurance, flood insurance reform, and insurance regulatory reform.

3. Predicting the Future on Pricing

Predictive modeling and other analytical techniques that enable insurers to harness volumes of data and strategically hone their personal lines marketing, underwriting and pricing are rapidly changing the industry. Analysts say those insurers unable to employ the new analytics run the risk of adverse selection and the industry faces likely consolidation. Segmented marketing, including credit scoring, is no longer confined to personal lines business only; more and more insurers are also trying it in Main Street commercial lines business. Catastrophe models are also enabling insurers to measure, manage and price for catastrophe risk, but ISO’s Chairman, President and CEO Frank Coyne, says “the answers that come out of catastrophe models are only as good as the exposure data fed into them.” He says insurers unable to keep up in the intellectual and technological arms race face a grim prognosis.

4. Soft Market … Not Everywhere

The soft market bellowed down on the insurance industry in most lines, personal and commercial, but hard market prices still hamper insureds living and working on or near the coast or in catastrophe-prone regions. Sharp property insurance rate increases, and restrictions on availability continue to affect residents and business owners with properties in regions exposed to hurricanes and earthquakes. Outside the cat-prone regions, prices decreased or remained flat in virtually all areas of commercial business, while personal auto remained relatively flat with an expectation of the first overall decrease of 0.5 percent in 2007 since 1999. Nevertheless, Florida and the Gulf Coast along with California continue to deal with rising costs and restrictions on availability of coastal property insurance coverage and earthquake coverage.

5. Katrina Lessons

Just one year after Hurricane Katrina, nearly 95 percent of homeowners insurance claims were reported settled in Louisiana and Mississippi. The Insurance Information Institute estimated that more than 993,000 homeowners insurance claims have been settled in the two states, totaling nearly $15.5 billion. Homeowners insurers ultimately will pay more than one million homeowners claims totaling $16.4 billion from Hurricane Katrina. An additional $2 billion in automobile claims were settled for damaged vehicles in both states. The first post-Katrina insurance lawsuit, Leonard v. Nationwide, went to trial and insurers came out on top when a Mississippi judge upheld the exclusion for damage caused by water and water-borne materials in an insurance contract. But that lawsuit was only the beginning. At the end of October, 1,100 Katrina-related lawsuits had been filed with 145 cases scheduled court dates in 2007 and a similar number expected to be scheduled into 2008.

6. Calling All ERM

Catastrophes, such as Hurricanes Katrina and Rita, and the demands of credit rating agencies and regulators worldwide, have made Enterprise Risk Management imperative for property/casualty insurers. Simply put, ERM is the process of planning, organizing, leading, and controlling the activities of an organization in order to minimize the effects of risk on capital and earnings. In the last two years, the insurance industry watched as ERM came into vogue and in 2006 insurers worldwide grasped its true value. Sixty percent of insurers responding to a survey of risk and capital management practices by the Tillinghast business of Towers Perrin report that they explicitly factor risk management considerations into their decision-making processes. In a world of ERM, actuaries too will assume a new role, serving not only in their traditional practice areas of pricing and reserving, but also serving as the insurer’s risk manager.

7. Living with Terror

Terrorism insurance went to Washington, again, in 2006. As 2006 comes to a close, the insurance industry awaits the first renewals for terrorism insurance policies under a TRIA-protected world. But as the Terrorism Risk Insurance Extension Act makes way towards its expiration on Dec. 31, 2007, January 2007 renewals remain at best, questionable in the eyes of insurers. In September, FBI Director Robert Mueller told a group of reporters that the bureau sees a rising threat from domestic terrorists and the problem of terrorism will be around for a substantial period of time. The new “blue” Congress may be good news for another TRIA extension, report many industry insiders who claim the Democrats are more likely to renew the federal backstop without delay than Republicans.

8. Revamping insurance regulation

The push to keep state-based regulation was again an issue in 2006, but efforts to pass federal legislation that would create national standards for how states regulate the surplus lines market and reinsurance industry stalled after passing the U.S. House of Representatives. H.R. 5637, The Non-Admitted and Reinsurance Reform Act of 2006, would create a uniform system of surplus lines premium tax allocation and remittance, one-state compliance on multi-state surplus lines risks, and direct access to the surplus lines market for sophisticated commercial purchasers. For reinsurance, among other things it would give the ceding insurer’s state of domicile sole authority to govern reinsurance contracts and determine whether or not a particular reinsurance contract qualifies for credit for reinsurance. The insurance industry also saw the introduction of legislation that would allow life and property/casualty insurers to choose federal rather than state regulation under an optional federal charter system. The “National Insurance Act of 2006” was introduced by U.S. Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., both members of the Senate Committee on Banking, Housing, and Urban Affairs, and a House version was later introduced by Rep. Ed Royce, R-Calif., a senior Member of the House Financial Services Committee. Neither the House nor Senate version made it out of committee.

9. Avian Flu

It’s reasonable to assume that an avian flu pandemic could take flight in the near future, drastically impacting the life insurance industry with notable effects on the property/casualty industry as well. The avian flu strain, H5N1, is first known to have jumped from chickens to humans in 1997, when authorities began tracking this particular strain. To date, approximately 205 people have been infected by the virus, mainly in Southeast Asia, and 113 have died since 2003. Thus far, more than 100 million birds have either died from strain H5N1, or been killed to control the outbreak. Insurance buyers were cautioned in 2006 to review their insurance and risk management programs, looking for possible financial recourse in the event of an outbreak.

10. Merck’s Vioxx gets hammered

U.S. drug manufacturer Merck & Co. and its embattled arthritis medication, Vioxx, have been hammered with product liability lawsuits. Vioxx was prescribed to millions of patients around the world before Merck pulled it from the market on Sept. 30, 2004, after studies indicated it increased the risk of heart attacks and strokes. Merck, based in Whitehouse Station, N.J., reported that it faces about 27,200 lawsuits over Vioxx plus another 265 potential class-action suits. Another 14,000 plaintiffs have entered agreements with Merck suspending the time limit for lawsuits. To date, Merck has won four federal cases over Vioxx and lost one. In state courts, the company now has won four and lost three. A judge in one case ordered a retrial after jurors sided with Merck. In Germany, a court rejected two claims the drug, including one seeking euro80,000 (US$100,000) in damages.