2006: Mother Nature and political deals made 2006 an unsettling year

From Maine to Virginia, agents and adjusters helped property owners dig out from damaging floods. High waters seemed to hit a new state every week. Meanwhile, these same agents had to worry about whether their income was at stake due to a wave of insurer settlements they had no say in. Regulators showed some restraint despite being pressured to tinker with coastal markets and voters initiated changes in the ranks of policymakers.

Unsettling Deals on Agent Compensation
Every month in 2006 seemed to bring news of another big insurer or big broker settling charges of bid rigging and/or improper producer compensation for big money. Among the insurers: Zurich ($324 million), AIG ($1.6 billion), ACE ($80 million), St. Paul Travelers ($77 million). Several of the deals involved the attorneys general of New York and Connecticut but they were not alone. The settlements followed investigations begun back in 2004. Only one insurer — Liberty Mutual — decided to fight. Agents now wish more insurers had opted to fight rather than settle because the settlements are forcing Main Street agents, who were not involved in the big investigations, to defend their right to receive contingent compensation and control their disclosure. Agents went to court to try to block one of these multiple state deals signed by Zurich. By November, matters worsened when New York Attorney General Eliot Spitzer notified ACE, AIG, St. Paul Travelers and Zurich that, under agreements reached earlier this year, they could no longer pay contingent commissions to agents and brokers who sell automobile, homeowners and certain other insurance products. Also, Connecticut agents were warned to expect legislation banning all contingent pay.

Flood Realities
Property owners in flood prone areas across the region had a tough year and lack of insurance coverage made it tougher for many of them. Floodwaters in Pennsylvania destroyed at least 518 homes and affected another 7,100 homes and businesses. Thousands of residents and business owners in Massachusetts, New Hampshire and southern Maine had to clean up after the worst flooding since the 1930s. Widespread flooding over a period of four days in late June devastated many communities in New York State’s Southern Tier and Catskills. Pennsylvania, New York, Delaware and New Jersey agreed to jointly examine the effects of changes at reservoirs throughout the entire Delaware River basin. New York City promised to better manage its reservoirs. Virginia began looking into whether the Woodrow Wilson Bridge project contributed to flooding that seriously damaged about 150 homes in Fairfax County. Perhaps the only good news was that purchases of flood insurance in the region and nationally were up, led by New Hampshire where sales jumped 26 percent.

Political Climate Change
The insurance regulatory climate in the Middle Atlantic and New England states is in flux as a result of the November election. Several of the regions’ state insurance commissioners are jumping ship or readying to be pushed. Newly-elected Democratic governors in Massachusetts, New York and Maryland are expected to name their own commissioners to replace the appointees of their predecessors. Incumbent commissioners in Maine and Vermont have elected to leave, even though their jobs were considered safe. The midterm elections also catapulted several Northeast Democrats into positions of influence on key Congressional committees dealing with insurance issues. They include Rep. Barney Frank, D-Mass., new chair of the House Financial Services Committee, and Rep, Paul Kanjorski, D-Pa., incoming chair of the House Financial Services subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. In addition, Sen. Chris Dodd, D-Conn., and Sen. Patrick Leahy, D-Vt., move up to head the key banking and judiciary committees.

Don’t Go Near the Water
Property insurers, most notably Allstate, heeding risk models, lessons of Katrina and hurricane forecasters hinting the Northeast is long overdue for a big one, continued restricting their business and raising rates along the Eastern seaboard. The Mass. FAIR Plan got a rate hike but continued to be a popular home for Cape Cod risks; Conn. ran into a controversy over what mitigation efforts insurers could reasonably require of property owners; New York held hearings on availability on Long Island and Westchester County but held off on any restrictive regulations; Delaware doubled its FAIR Plan’s limits and Virginia warned of rising deductibles to come. Much of the industry news in 2006 revolved around a wake-up call from hurricane experts that the Northeast’s luck in ducking major storms is about to change, big time. The weather experts warned that this year could bring the Northeast a storm like the 1938 hurricane that killed 600 people and resulted in more than $306 million in damage then. By year’s end, the Northeast, in fact the country, had escaped the season relatively unscathed but the year wasn’t finished before insurance and storm researchers were back, warning that the below-average 2006 hurricane season probably won’t be repeated.

Beacon of Trouble
Early in the year as it lobbied for a law allowing it to expand out of state and reducing the influence the governor has over appointments to its board, Beacon Mutual Insurance Co., Rhode Island’s dominant workers’ compensation writer, was facing questions from the Carcieri Administration about its dealings. Beacon officials rejected the notion they were involved in any wrongdoing or that the Carcieri administration had reason to question them. A political battle ensued over the legislation and over appointments to the insurer’s board. An investigation headed by former Gov. Lincoln Almond found Beacon had given unsupportable discounts for certain large customers and maintained inappropriate relationships with some agencies. The board fired CEO Joseph Solomon and three board members resigned. Since then the company has begun cooperating with administration officials, implemented a sizable rate decrease and withdrawn from the political spotlight. A new CEO is expected to be named soon.

World Trade Center Answer
After five years of litigation, the big insurance question regarding the attacks on the World Trade Center was finally settled in 2006. In October, a federal court in New York upheld the jury verdicts that recognized the two-plane terrorist attacks on the towers at the World Trade Center on Sept. 11, 2001, as a single event for some insurers and two events for others. As a result, the court let stand an April verdict that held the attacks to be one event under the WilProp insurance binder used by major insurers. Under that verdict, WTC developer Larry Silverstein and his Silverstein Properties became entitled to about $4.6 billion. The decision also affirmed a separate jury verdict for nine other insurers that found the event was two claims under a different Travelers binder they used while negotiating final coverage terms. The case is SR International Business Insurance Co. Ltd. vs. World Trade Center Properties LLC, et al.

Re-Connecting with Insurance
Connecticut remains dependent upon the insurance sector for many of its jobs and much of its economic growth. The state has triple the U.S. average of insurance carrier jobs and the highest concentration of such jobs among all states, according to a recent study. But the growth in this sector and the appreciation even within the state’s own borders for the significance of the insurance sector was lackluster. In August, a dozen Connecticut insurance companies and associations launched a non-profit coalition to reconnect the state’s own residents with its sizable insurance industry. Insure Connecticut’s Future wants to remind residents that the industry remains essential to the state economy and an integral part of their everyday lives. The effort to boost the state’s insurance sector received a shot in the arm when $2.7 million federal training funds were awarded to a partnership that will create IFS University that is charged with developing a curriculum and training model for financial managers and analysts, accountants and auditors, financial sales agents and brokers, and actuaries — which are projected to grow and also to require ongoing skill enhancement.

N.H.’s Premium Cut
New Hampshire lawmakers agreed to cut the state’s 2 percent tax on insurance premiums down to 1 percent over the next four years, which would make it the lowest in the New England and mid-Atlantic states. The reduction will save domestic insurers on the taxes they pay to New Hampshire and insurers stand to save even more — an estimated $3.6 million — in so-called retaliatory taxes they pay to other states in which they do business. While it will reduce premium tax revenue to the state, supporters argue it will make up lost tax revenues by attracting insurers and jobs. An Ernst & Young report estimated that the state could recoup as much as 65 percent of the lost tax revenues. The same report said the tax cut would produce 750 new insurance jobs and another 731 insurance-related jobs over several years.

High Risk in Mass.
Massachusetts is known for having a unique private passenger auto insurance system characterized by limited price competition but plenty of political vying. This year saw a real political fight pitting insurers against each other over a change to the system’s high-risk sharing mechanism. Currently, Massachusetts assigns agents representing high-risk drivers to insurance companies, and then allows the companies to assign individual drivers into a pool. The new high risk plan is familiar to insurers in more than 40 other states — it’s an assigned risk plan under which high-risk drivers are divvied up among insurers randomly based on a company’s market share. In any other state, this would not be big news but changing the Bay State system never comes easily. Insurance Commissioner Bowler started working on the plan four years ago. Her plan survived a court challenge by some insurers opposed to it. Her final order came this month. Will the administration of incoming Gov. Deval Patrick follow her lead?

Wal-Mart’s Fair Share
Maryland enacted a first-of-its-kind state law that would have required non-governmental employers with 10,000 or more workers to spend at least 8 percent of payroll on health care or pay the difference in taxes — a definition directly aimed at Wal-Mart Stores Inc., which critics charge offers inadequate health care that force some employees to rely on state-funded programs. After it passed in Maryland, several other states took notice and began advancing legislation. But the movement came to a halt in July when U.S. District Judge J. Frederick Motz ruled that the Wal-Mart law, officially known as the Maryland Fair Share Health Care Fund Act, was invalid and pre-empted by the federal ERISA law.

Topics Carriers New York Agencies Legislation Flood Virginia Massachusetts Hurricane Connecticut Maryland Maine Delaware New Hampshire