THURSDAY, MAY 20, 2010 

                                                Big “I” Association News




P-C Trends
Chinese Drywall Problem: Bigger Than You Think
The property loss from Chinese drywall could exceed every U.S. hurricane except Katrina and Andrew.

This week a minor player in the growing stink surrounding Chinese Drywall settled its lawsuit with a key manufacturer of the tainted gypsum board.  The homebuilder’s settlement, coming on the heels of two other judgments in April, gives insight into how this growing catastrophe will affect independent agents. While homebuilders with the biggest exposures have yet to settle and thousands of individual homeowners are consulting with their lawyers, it is safe to say the impact will be bigger than recent news reports indicate.

The chart below shows the impact of Chinese drywall will be widespread based on complaints received as of May 12, 2010 at the Consumer Products Safety Commission. An estimated 500 million pounds of tainted drywall came into the United States from 2004 to2006—that is about 7.1 million 4’x8’ sheets of drywall and it may be in more than 100,000 homes. While the number of homes affected is greatest in Florida, Louisiana, Mississippi, Alabama and Virginia, the drywall supplies have affected all but 12 states.



Source: Consumer Products Safety Commission

The three reported settlements or verdicts indicate that the initial estimates of $20 to $30 billion in losses associated with tainted appear feasible. Based on $80 per square foot (the lowest cost from the verdicts made public) in 100,000 homes with an average of 2,200 square feet per house, the loss would be $18 billion in property damage. The adverse health effects of living with the drywall have not been addressed, but the property loss potential alone would make Chinese drywall bigger disaster than every U.S. hurricane except for Katrina (2005) and Andrew (1992).

It seems obvious that the total loss will greatly exceed the two indentified foreign-based manufacturers ability and/or willingness to compensate homeowners. The market value of the manufacturing firms is difficult to obtain because they are not public companies, but it seems very unlikely that both firms combined would have a market value of more than $20 billion. Add to that the fact that collecting a U.S. liability judgment against a foreign corporation based in China is probably a long-shot at best. This will leave homeowners and their lawyers looking to every possible source for compensation beyond manufacturer payments.

So what should an independent agent know about Chinese drywall?

First, agents should be aware that when claims are filed for faulty drywall, homeowners insurers are likely to cite the standard policy’s pollution exclusion. Whether that approach holds up depends on the exact policy form and state laws, but this approach was reported as the most likely at the end of 2009 by Business Insurance.

Second, homeowners who pursue homebuilders, contracted installers or sellers of the drywall (do-it-yourselfers) are not assured of being paid, even if clear liability is established. While remediation claims made against established homebuilders like Lennar or Beazer seem like a good bet, agents should know that completed operations or products liability coverage for all homebuilders, contractors or retail sellers is anything but a sure thing. One contractor (WCI Communities) has already entered Chapter 11 bankruptcy protection and pollution exclusions and nuances of completed operations coverage can render many a CGL policy lacking for tainted drywall.

Third, agents should use catastrophic events to educate clients on risks and insurance available. Contractors working on remediation of tainted drywall will need special coverage. By the very nature of the remediation risk, the contractor is working with an environmental hazardous or pollution exposure. Homebuilder and general and artisan contractor clients may now be sensitized to their completed operations exposures and how they can fall under what was perhaps a seemingly irrelevant pollution exclusion. Agents should know where to find coverage via specialty providers for contractors pollution liability and a host of specialty property, liability and combined insurance coverage forms.

Paul Buse ( paul.buse@iiaba.net) is president of Big I Advantage® and a licensed p-c agent.

For more information on pollution risks, environmental hazards, mold and how insurance policies respond, go to www.independentagent.com/vu. Inaddition, a specialty environmental impairment and pollution liability insurance wholesaler will be added to Big "I" Markets in the coming weeks. Watch for Two for Tuesday for more information.





On the Hill
P-C Industry Opposes Repeal of McCarran-Ferguson Exemption for Health Insurers
Joint letter to U.S. Senators explains problems with Leahy amendment.

Last week, the Big “I” and others in the property-casualty insurance industry joined forces in a letter to every member of the United States Senate opposing an amendment proposed by Sen. Patrick Leahy (D-Vt.) that would repeal the anti-trust exemption for health insurers under the McCarran-Ferguson Act. The amendment by Sen. Leahy has been offered to the financial services regulatory reform legislation currently being considered by the Senate.

The Big “I” is strongly opposed to lifting the anti-trust exemption for health and particularly medical malpractice insurance, which is a p-c product. This misguided provision would put small insurers at a competitive disadvantage that would inevitably shrink the health and medical malpractice insurance marketplaces and lead to higher premiums for consumers.

The letter says, “While the amendment targets health insurers, its flawed language and lack of definitions are a bad precedent for repealing the anti-trust exemption for any line of insurance whether it is health, life or property-casualty.”

Previous efforts to repeal this exemption, including during the recent major health care debate, have failed when decision-makers realize the negative impact it would have on the marketplace and consumers.

“Because of the flawed language of the Leahy amendment, as recently as January 14th, 2010, the Congressional Research Office stated that ‘Passage of any of the measures is likely to precipitate litigation to define the scope of the prohibition and/or any remaining exemption.’ Ironically, such uncertainty will likely inhibit, rather than promote competition, putting the Leahy amendment squarely at odds with the fundamental purpose of the federal anti-trust laws.”

Although Sen. Leahy has submitted his amendment, more than 250 other amendments have also been submitted to the Senate’s financial services regulatory reform legislation and it is likely that less than one-third of them will actually be considered. Therefore, at this time, it is unclear whether Sen. Leahy’s amendment will be debated by the full Senate.

To view the full text of the letter, please click here.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.





On the Hill
Big “I” Seeks to Protect Agent Role in Health Care Roll Out
Medical loss ratio provision could have a negative impact on agent commissions.

Last Friday, the Big “I” and industry partners again teamed up to defend insurance agents and brokers as the health care reform law enters the implementation phase. The Big “I”, along with the National Association of Health Underwriters (NAHU), the Council of Insurance Agents and Brokers (CIAB) and the National Association of Insurance and Financial Advisors (NAIFA), sent a letter to U. S. Secretary of the Department of Health and Human Services (HHS) Kathleen Sebelius regarding the creation and definition of “Medical Loss Ratios” (MLRs) as required by the new health care reform law. The new law stipulates that health insurance issuers must spend at least 85% of premiums collected for large group coverage and 80% for small group or individual coverage on medical care. Starting Jan. 1, 2011, insurers are to publicly report their medical loss ratio data each year and reimburse policy holders if these limits are breached.

The National Association of Insurance Commissioners (NAIC) and HHS are currently working together to define what constitutes “medical costs” and “administrative costs” when determining MLRs. How these expenses are defined is critically important to both insurance companies and agents and brokers who sell health insurance.

In the joint letter, the alliance says, “While we strongly support the goals of reducing health care costs, improving health outcomes for patients and providing better value for health care consumers, we are extremely concerned that narrow MLR definitions would adversely impact spending on such important health plan activities as case management, wellness, disease management, and fraud and abuse prevention programs, among others.”

During congressional consideration of health care reform, the Big “I” opposed the adoption of these MLRs because they could unfairly impact agents and brokers and could lead to diminished care. The Big “I” successfully worked with the health insurance industry to lower the MLR percentages in the original House and Senate legislation from 90%-85% (large group-small group/individual) to the 85%-80% levels in the final legislation. Nonetheless, there remains much concern that even these reduced levels could have a serious impact on agents and brokers. In this regard, the Wall Street Journal published an article by Mark Schoofs and Avery Johnson titled “Health Care Overhaul Hits Sales Commissions” on May 17, which details the potential negative effect on agent and broker commissions.

The joint letter concludes by stating, “Professionally licensed and trained agents and brokers are committed to fostering quality and affordability without harming the insurance marketplace. The goal of health care reform was to provide affordable and quality health care to all Americans, and we must keep these goals in mind as we develop important MLR guidelines.”

To view the full text of the letter, please click here.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.


L-H Trends
Don’t Fall for the Big Fish Story
Make sure clients consider taxes, inflation and other factors to calculate a real rate of return on investments.

Sometimes investment discussions seem to drift into the realm of fishing stories: "I had the big one before the line broke" or "I threw it back in the lake." Many people like to entertain their acquaintances at social functions with stories of their lucrative investments. But the reality is that most people don't actually know their real rate of return because of related factors such as transaction costs, taxes and inflation.

For example, a person might say “I bought a stock mutual fund for $10,000 and sold it for $20,000.” (For simplicity, let's assume that it was net of the trading costs.) Therefore, they brag, "I doubled my money" Certainly at one level that it is true, but there are several considerations to calculate the actual annualized rate of return. The holding period of an investment makes a big difference in determining the rate of return. If someone buys stock at $10,000 and two years later sells it for $20,000m the actual annualized pre-tax rate of return was 41%—a very healthy return. But, if the person held the stock for 10 years, the actual annualized pre-tax rate of return was just over 7% annually.

The next factor is the realized return net of income taxes. This will be a bigger factor next year, when the highest capital gains brackets return to 20% from the current 15% level. This means that that the net amount realized in the example after capital gains taxes is reduced to $18,000, or a net gain of $8,000, which drops the return to about 6% on an annualized basis. Of course, that doesn't sound like a bad return compared to the overall stock market's returns over the past 10 years. But, another factor is the rate of inflation, which was fairly reasonable over the past decade in the 2.5% range on annualized basis. So the net after-tax inflation annualized return was in the neighborhood of 3.5%, which most investment gurus would say is a reasonable return. In this simplified example it was assumed that the stock mutual fund didn't have any distributions paid out each year, which would have been a further drag on earnings. The point of this example is that at first glance, the investor seemed to have a very good return on investment (i.e. doubling their investment in ten years.) On the other hand, if the annualized return was described as 6% on an annual basis (again forgetting the economic environment of the past decade), it sounds more tepid.

The big concern that many investors will have is that not only are capital gains rates increasing, but ordinary income taxes are going back up. The new health care reform legislation will tack on an additional .9% on incomes over $200,000 ($250,000 family) for individual taxpayers. Also, a new tax of 3.8% is imposed on unearned income—i.e. rental income—for these same higher income taxpayers. These new taxes mean that independent insurance agents will need to have a conversation with their customers regarding the realized after-tax returns of investing in the coming years.

High net worth individuals will also need to consider the after-tax proceeds available for their beneficiaries and heirs depending on the final estate tax legislation that Congress will pass sometime this year. One of the big concerns for business owners is how to perpetuate the business for their children to run if they desire. With the coming increase in estate taxes, there will be a need for liquidity to meet tax obligations, operating capital and other needs. Using annual gifting limits, irrevocable life insurance trusts (ILIT), creative estate planning and trusts to maximize the use of the estate exemption for each spouse's property are all important topics to broach with business owners of closely-held businesses. Help clients ensure their planning accomplishes their financial objectives in light of a rising tax environment.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.


Agency Management
Rethink How You Open
Maximize the impact of the opening of a sales call.

Most salespeople take how they open a sales call for granted. The opening is a place to differentiate yourself and get your calls (especially first calls) off to a great start. But it requires taking the time to plan how you will open. Although it takes a small amount of time, you create the foundation of the entire call with your opening.

Remember these five important steps when you open—salespeople who master them create a competitive advantage:

Don't forget about rapport. Prepare for rapport. In addition to what you prepare, look for rapport cues. Be sensitive to customer signals, but don't bypass rapport. People buy from people they like when all else is fairly equal (and sometimes when it is not).

Rethink your purpose. Instead of saying, “I am here to tell you about us and what we do in …” say, “I am here to learn more about your objectives and share with you what we do in …” (for a first meeting) or “Before I discuss what I have prepared, I'd like to learn about …”

You probably are well prepared, so leverage your preparation. Say, “In preparation for the meeting, I have … (example: discussed X with our specialists, researched …)” This will help you gain credibility and more time.

Give a prospect 30 to 60-second overview of your credentials and check if there are any questions. Tailor it to your prospect.

Lead out of the opening by going into needs vs. your presentation! When you are ready to wrap up the opening, do so with a question that sets the expectation you will be asking questions. This will also help you gain client cooperation. Remember, you have already let the client know you prepared for the meeting, so this will help the client want to give you information. For example, “So that I can focus on what the priorities are for you, may I ask a few questions about … before I share with you what I have prepared?” Then you are in the need dialogue where you can question, listen, and drill down so you can be persuasive when you present.

These opening steps may seem like small points, but in fact, many, if not most, producers skip one or several of them.

When you open the call effectively, you open the dialogue. By giving in the opening, you will get a lot more in the remainder of the call!

Linda Richardson contributes to the Big “I” Virtual University.