FRIDAY, JUNE 25, 2010  

                                                Big “I” Association News




On the Hill
Financial Services Reform Bill Agreement Reached
Changes made to federal insurance office provision help guard against inappropriate preemption of state insurance laws.

This week, the House/Senate conference committee on financial regulatory reform concluded negotiations to reconcile S. 3217, the “Restoring American Financial Stability Act,” and H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009.”  Discussions regarding Title V (the insurance title) were wrapped up after the conference committee agreed to make two additional changes that were strongly supported by the Big “I.”

The Big “I” commended Chairmen Barney Frank (D-Mass.) and Chris Dodd (D-Conn.), Ranking Members Spencer Bachus (R-Ala.) and Richard Shelby (R-Ala.), and the other members of the conference committee for agreeing to make these changes to the language establishing an insurance information office at the federal level with no regulatory authority. The two additional revisions—properly defining those international insurance agreements covered by the act and providing for de novo review of preemption decisions by the new Federal Insurance Office—will help guard against the inappropriate preemption of state insurance laws that have served to protect insurance consumers during the recent financial crisis.

Last week, when the negotiation process began, the House proposed several changes to Title V of the base text to reflect the House language on the insurance information office, and the Senate accepted the following provisions also supported by the Big “I”:

• Designate the office as the Federal Insurance Office (FIO) rather than the Office of National Insurance.
• Mandate that the FIO jointly negotiate international insurance agreements with the United States Trade Representative and consult with Congress before, during and after any such negotiations.
• Require FIO to obtain information from state insurance regulators and other publicly available sources before requesting the same from the private sector.
• Bolster the bill’s due process protections and help protect against the unnecessary and arbitrary preemption of state law.

The inclusion of these final two provisions in addition to the changes above represent a major victory for the Big “I,” which has been advocating for the House language due to its very limited preemption of state insurance laws.

After wrapping up negotiation on other outstanding issues, the committee approved the report early Friday morning.  It must now come before the House and Senate chambers for a final vote before it is sent to the president’s desk. The vote is currently expected to take place next week so that it can be signed into law by July 4. Stay tuned to future issues of IN&V for information on other aspects of the legislation and how it will affect insurance markets.

Lauren Cialone (lauren.cialone@iiaba.net)is Big “I” director of federal government affairs.





P-C Trends
I Need to Call My….Lawyer?
Survey finds small business owners are not turning to agents for risk management.

Only 10% of small business owners rely most on their insurance agent for risk management issues, according to a recent survey conducted by Travelers during America’s Small Business Summit in Washington, D.C. Industry experts say this provides an opening for agents to demonstrate value to commercial clients.

“It’s an incredible opportunity for independent agents to really assert themselves in the process of risk management, which they engage in daily,” says Kelly Stacy, vice president of field management and distribution at Travelers Select Accounts. “I think it really speaks to the opportunity that’s out there.”

Consumers are looking for choice and an advisor who can help them with critical planning issues, Stacy says. Independent agents end up competing with attorneys for this top spot, with 28% of those surveyed identifying their lawyers as their most trusted advisor.

“Attorneys really have very limited knowledge about the whole risk management process, so it’s a constant fight,” says Alex Soto, and independent agent with InSource in Miami. “If you are a small business, your best source ought to be your agent.”

Ultimately the challenge for independent agents is to prove their expertise in risk management to their small business clients. Although many agencies may be focusing their efforts on larger clients, Stacy says it’s often equally important to zero in on small businesses.

“Every business that an independent agency is representing…may be a large business tomorrow,” he says. “If this is a bit of a wake-up call, that’s a good thing for all of us.”

With small business owners having to wear so many different hats though, risk management can sometimes fall to the bottom of the to-do list.

“They’re running personnel, they’re running distribution, they’re running sales, they’re running marketing, they’re running technology,” Stacy says. “You generally find a consumer or a buyer in that space running a very complex small business, having to do it all and I think it’s very easy then to push the element of risk or insurance off the table.”

John O'Connor, vice president of product and underwriting at Travelers Select Accounts, agrees that many small business owners spend more time on operational risks.

For example, if they lost a supplier or were worried about key personnel, “as opposed to business risks associated with disasters or losses, and insurance associated with that,” O’Connor says.

Business continuity plans are also essential, with the threat of companies not reopening after a disaster or failing outright without one, O’Connor says.

“Without the guidance of an independent agent who understands the business continuity plan and risk management, they assume that the insurance contract in and of itself will help them get back in business after a disaster,” he says. “That’s not necessarily the case. There’s the need to actually plan for it and also maintain service to the customers—that’s critical.”

But a business continuity plan is so much more than a major disaster like a hurricane, Soto says.

“It’s a different plan if you have a fire in your office, it’s a different plan if that water cooler breaks and it’s a different plan if it’s a pandemic,” Soto says. “Each one requires a little different response.”

The survey results serve as a call to action for agents.

“I think there’s an opportunity for every independent agency…to remind [their small business clients] of the value that they bring as it relates to risk management,” Stacy said.

Diane Rusignola (diane.rusignola@iiaba.net) is IA managing editor.





L-H Trends
Halfway Gone
Now is the time to help clients make plans for tax changes in 2011.

It seems like a nanosecond ago people made 2010 New Year’s resolutions—but the year is now half over.  As usual, time is flying by, oil continues to flow into the Gulf and the economy still seems muddled, especially with regard to unemployment and consumer spending.

Summer usually represents a time for vacations and a relaxed pace of doing business. The reality is that the season is one of the most hectic periods as people try balance work and time off. It’s typically more difficult to prospect and to arrange meetings with potential clients. Should the summer become lost time for agents trying to generate activity to meet their new business goals?  The answer should be a resounding no. Agents should take on a new sense of urgency that they have a duty to reach out to business owners, professionals, retirees and others to convey that 2011 will bring one thing with certainty: higher taxes. 

In order to minimize the harmful effects of higher taxes, agents should review with clients the financial steps that they need to take in 2010 and for 2011. Let’s take a typical example where an agent is introduced to a principal in a local architecture firm. The business owner asks the agent if his business is slow given the state of the economy. The agent answers, “Actually the reverse is true. With so many changes in the tax code which will be effective in just six months, I’m very busy meeting with my clients discussing what steps they should be taking to minimize their income and estate tax liability for next year. Some of them are accelerating income in 2010. Others are taking realized gains in their portfolio this year to take advantage of lower capital gains rates and positioning their portfolio to generate less dividend income.  Still others are reviewing their estate plans to make sure they are maximizing their tax-free gifts and positioning the use of estate tax credits.  If you haven’t been performing a similar exercise, I’ll be glad to get together with you to discuss your specific situation. I have two mornings open next week for breakfast if you would like to meet.“

What changes are on the horizon? Beginning in 2011, tax rates that were in effect prior to 2001 will return. The top income tax rate goes back to 39.6 percent. Right now, for individuals dying after 2010, the federal estate tax returns with a $1,000,000 exemption and a 50% maximum rate. While it is expected that Congress will take some action on these rules during 2010, it has been distracted by other priorities. However, it is clear that the estate tax will return in 2011 and will be a major concern for business owners, farmers and other people that have accumulated assets. This concern is not limited to just the “super wealthy.”

Another important tax changes deals with investments. In 2011, the maximum long-term capital gains tax rate returns to 20% from 15%. A lower 10% tax rate is used by individuals who are in the 15% tax bracket. Their long-term capital gains had been tax-free since 2008. Also, in 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at the individual’s highest marginal tax rate. There are also a myriad of tax changes relating to the child care credit, Section 529 Plans and the tax rate for S corporations.

Agents need to instill in their clients and potential clients that waiting until the end of 2010 may be too late to effectively deal with these changes in the tax laws. If a client should be implementing or revising their retirement plan to lower their corporate and/or personal income taxes, there are mandated notification periods for installing a Safe Harbor 401(k) for 2010 that needs to occur by November 1 of this year. Don’t wait to discuss these issues with customers.

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


Legal Advocacy
Text Messages May Not be Private 
U.S. Supreme Court decision reinforces importance of workplace e-mail policies.

The U.S. Supreme Court unanimously decided last week that a California police officer’s privacy rights were not violated when his supervisors read text messages sent and received on his work-issued pager, which included sexually explicit messages. Although the decision was based on whether a public employer (the city of Ontario, Calif.) violated the Fourth Amendment’s prohibition against unreasonable searches by the government, which does not apply directly to private employers, the Court’s discussion of employees’ privacy expectations highlights the importance for businesses, including insurance agencies, to have an up-to-date and comprehensive electronic communications policy in place.

In the opinion, the Court analyzed whether the officer had a reasonable expectation of privacy regarding his text messages. The Court weighed the city’s e-mail policy and statements to employees that text messages would be treated the same way as e-mails against later statements by the officer’s supervisor implying that the officer’s text messages would not be reviewed if he paid any fees for exceeding the monthly texting limit. The city’s e-mail policy stated that employees “should have no expectation of privacy or confidentiality when using” the city’s computers. The discussion of this issue in the opinion suggests that the Court will consider e-mail policies in determining future cases involving employees’ rights to privacy, although this case was decided on the narrowest issue possible—whether the search was reasonable.

In the Court’s view, workplace norms and laws will continue to change as means of communication evolve. As Justice Kennedy wrote, “Rapid changes in the dynamics of communication and information transmission are evident not just in technology itself but in what society accepts as proper behavior.” The Court believed it would be unwise to use the facts in this case to establish broad premises on the existence and extent of privacy expectations by employees using employer-provided devises.

The take-away from this case for non-government employers, such as insurance agencies and brokerage firms, is that comprehensive written computer, Internet and electronic communications policies are important business tools. Whether agencies are developing such policies now or reviewing existing policies, whatever policy is adopted should be provided to all employees, and it should be flexible enough to cover current and emerging technologies and ways of communicating.  As the Court’s opinion alludes, having such a policy in place can go a long way in demonstrating that a company has set and communicated to its employees the level of privacy, if any, employees should expect when using company-issued computers, pagers and other electronic devices to communicate, and when using non-company issued devices for business communications. At the same time, a clear policy also benefits employees so that they can adjust their use of these devices as necessary or appropriate.

To view the opinion City of Ontario v. Quon, log on to www.independentagent.com and select Legal Advocacy, then Cases.

Scott Kneeland (scott.kneeland@iiaba.net) is Big “I” counsel.


On the Hill
Big “I” Launches Grassroots on Crop and Flood Insurance
Agents respond against proposed cuts to crop program; urge Congress to extend expired flood insurance program.

Over the past week, the Big “I” has sprung into action on two issues important to many independent agents, crop insurance and flood insurance, with two grassroots phone campaigns. So far, the first campaign has targeted 10 United States senators and expresses the association’s opposition to the Obama administration’s proposal to cut the federal crop insurance program by $6 billion over 10 years and put an 80% cap on agent commissions. The second campaign currently targets 15 states and urges an extension of the National Flood Insurance Program (NFIP) which has been expired since May 31.

Initial reports indicate that thousands of independent insurance agents and brokers already heeded the call to action and are flooding congressional offices with phone calls.

CROP INSURANCE: 
Big “I” members in certain states are calling their senators to voice their opposition to the agent commission cap in the third draft of the Risk Management Agency’s (RMA) Standard Reinsurance Agreement (SRA). This agreement determines the terms and conditions for the Administrative and Operating (A&O) reimbursements and underwriting gains for crop insurance companies. Agent commissions are part of the A&O reimbursement, and this draft makes significant cuts to this A&O. The draft is the first time that RMA has attempted to directly regulate agent crop insurance commissions rather than allow the marketplace to determine the appropriate commission rate.

The draft SRA would cap company expenditures on agent commissions at 80% of the A&O subsidy (calculated at the state level), and cap total agent compensation, including profit sharing or similar plans, at 100% of the total A&O reimbursement.
The Big “I” has argued that the cap does not impact the crop insurance budget, has no policy merit and needlessly weakens an already struggling agricultural economy.

NFIP: 
The National Flood Insurance Program (NFIP) grassroots campaign urges senators from 15 states to extend the program which has been expired since May 31, 2010.

This week the U.S. House of Representatives passed H.R. 5569, the “National Flood Insurance Program Extension Act of 2010,” which extends the program until Sept. 30, 2010. The Big “I” is urging the Senate to follow suit.

Until one of several legislative efforts lands on the president’s desk, the program will remain expired. The expiration has caused confusion in the marketplace for consumers, agents, companies and even regulators. Residential and commercial real estate transactions in flood zones across the country face the prospect of coming to a virtual halt, as federally-backed mortgage loans for properties in flood zones cannot be secured without this critical protection. The Big “I” is concerned that the expiration of this program, in the midst of hurricane season and the summer storm season in the Midwest, leaves millions of consumers exposed and unprotected from potential flood losses.

Although the NFIP is a non-controversial program that protects five and a half million consumers across the country, it has been expired since May 31 because congressional leaders included its extension with other controversial program extensions.

If you receive a Grassroots Action Alert from your state association on either of these issues, please reach out to your members of Congress.

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