Brokers List Legislative Priorities
You don’t have to spend your days watching C-SPAN to know that insurance issues are taking a prominent role on Capitol Hill lately.
“I don’t think I’ve ever seen the parochial interest [the insurance industry] holds having risen to the national priority that is the current environment,” said Joel Wood, senior vice president of government affairs for The Council of Insurance Agents & Brokers. “Agents have a lot of skin in the game.”
With the passage of the flood insurance bill, many agents are breathing a sigh of relief that the specter of massive rate increases won’t become a reality. However, several other pending issues could have weighty consequences for the insurance industry at large, and agents in particular.
The Affordable Care Act
“The independent agents are small business owners that are being impacted greatly by the implementation of health care reform,” said Mike Becker, executive vice president and CEO of the National Association of Professional Insurance Agents (PIA).
“We’ve been incredibly loud advocates for the agent, ensuring that they’re able to participate, should they desire to do so, and they’re fairly and justly compensated for doing so, whether they’re participating in the traditional market or through an exchange,” he said.
PIA is currently asking members to find cosponsors for H.R. 2328, the Access to Professional Health Insurance Advisors Act, introduced by U.S. Reps. Mike Rogers (R-MI) and John Barrow (D-GA), to ensure that agent compensation is not disadvantaged by implementation of the ACA.
Wood pointed out that the current political climate during mid-year elections may make it difficult to achieve much change on the legislative end, so the CIAB is focusing more on regulatory issues related to health care.
“The pieces we’ve been engaged on are with respect to issues that impact ERISA [Employee Retirement Income Security Act] with the Department of Labor, to testifying on the wellness provisions, to working with the various agencies on trying to develop the right kind of nondiscrimination rule that has yet to come forward and the auto-enrollment rules that have yet to come forward.
“There are a million moving parts on the Affordable Care Act, and we try to engage on all of that impact our clients,” Wood said.
Another issue that is top of mind for agents is renewal of the Terrorism Risk Insurance Act (TRIA), which is set to expire at the end of the year.
“Almost every major commercial policy today has a rider on it that says that post-Dec. 31st 2014, terrorism coverage will not be in place depending upon the outcome of this debate,” Wood stated.
“It’s a product that’s not easily accessible in the private market without the terrorism risk and insurance program,” said Becker. “We support those programs and we’re going to be advocating for its passage.”
The CIAB is also focusing on the Foreign Account Tax Compliance Act, which is designed to prevent tax evasion in transactions with offshore companies.
“We have unsuccessfully argued to the IRS that we should be exempted from implementation and reporting requirements on commercial insurance transactions,” Wood said. “Now, we’re moving to the implementation side and it’s going to be a burden both on the brokers and on their clients.
“Theoretically this sounds pretty simple, but there are unanswered questions. What is Lloyd’s of London, for example? Is that one insurance company or is it 200 companies, or is it 20,000 syndicates?”
To that end, CIAB is seeking clarification within the rules so that it can become a clearinghouse to help international insurers to comply with FATCA.
One of PIA’s biggest concerns involves federal regulation of insurance.
“We don’t think that there’s any further reason for federal regulation in this sphere,” said Jon Gentile, PIA national director of federal affairs.
“The insurance industry historically has been regulated at the state level. One of the things that came out of the financial crisis was that state regulation did, in fact, work and it worked well. We just want to make sure that our members are up on the Hill letting members of Congress know that state-based regulation does work well and has been for some time.”
However, the CIAB views this issue through a different lens.
“We think that it’s almost an embarrassment that our industry’s regulation is so fragmented when it comes to international trade,” said Wood. “We’re surprised at the degree to which some state insurance regulators have taken umbrage at the obvious role, as asserted in Dodd Frank for the Federal Insurance Office, to participate in reflecting U.S. goals in global talks.
“It’s a national business,” he said. “There has been a huge amount of consolidation. All the trend lines are going further in that direction.”
Wood also said that CIAB is advocating for passage of the National Association of Registered Agents and Brokers Reform Act that is designed to streamline interstate insurance licensing.
“It was big disappointment on not getting it [added as a rider to] the flood legislation. Shame on us, if we can’t get that to the finish line this year,” he said.
SEC Policy Could Impact D&O Policies
It wasn’t quite the shot heard ’round the world, but the Securities and Exchange Commission’s recent announcement that it’s going to start requiring admissions of wrongdoing before agreeing to settlements certainly got insurers’ attention. However, the big question seems to be whether or not the agency’s bite is as big as its bark.
“Obviously, Harbinger and JPMorgan are the big cases at the moment,” said Will Fahey, senior vice president of Management Solutions at Zurich. “Those were somewhat extreme situations that are not typical enforcement actions. It remains to be seen if the SEC is going to be looking to implement this new policy requiring admissions of guilt more broadly or if they are just going to do it in isolated circumstances.”
If the policy truly becomes the SEC’s new mode of operation, it could have a big impact on D&O policies.
“If an individual admits guilt, then clearly there would be no coverage for that individual,” Fahey said. “Where there’s an admission of wrongdoing by a corporate entity itself, it’s not at all clear whether that invokes the fraud exclusion. It may. But that’s by no means settled.
“It’s a wait-and-see game to see how the SEC proceeds. Depending how that goes, we might see insurance carriers potentially address that coverage uncertainty.”
Steve Boughal, vice president and chief underwriting officer at Hartford Financial Products pointed out the potential for a sharp rise in costs for insureds due to the possibility of extended investigations and prolonged litigation.
“Seeking admissions of wrongdoing has the potential to decrease cooperation between the SEC and the target of the investigation,” he said. “Admission language will be heavily negotiated between the SEC and the target, which may increase legal costs associated with finalizing a settlement.”
Samuel Rosenthal, a partner at law firm Patton Boggs and chair of the firm’s Government Investigations and White Collar Litigation practice group, said that admissions of wrongdoing may hit some directors and officers hard.
“In D&O policies, there’s often a regulatory exclusion so it may mean that the policy itself will disclaim any liability for a regulatory action.
“But that’s policy by policy,” he said. “However, there are also exclusions for fraud and criminal conduct. Most policies — virtually all — won’t let somebody insure against fraud or criminal conduct. If you’ve admitted to engaging in fraud or criminal conduct, yes, you’re probably going to vitiate your D&O coverage.”
That doesn’t mean that insurers’ costs won’t skyrocket in the meantime. “You can insure if there has been no final determination,” Rosenthal said. “If somebody has been charged with fraud, there’s still coverage until there’s a final adjudication.”
While the impact of this directive continues to play out, Boughal cautioned both carriers and insureds to pay close attention to the finer points of policy language.
“It’s important for policyholders to understand the language of their policies and know whether it covers activity related to SEC investigations. Fines and penalties may be excluded from an insurance policy’s definition of loss.
“Directors and officers should review the type and amount of insurance they’ve purchased,” he said. “They might want to consider E&O insurance as a complement to D&O. This is especially important for companies in the financial institutions industry or companies that provide services that expose them to securities regulations, such as accounting or law firms.”
From the insurers’ perspective, Rosenthal said the SEC’s potential requirement is an opportunity to refine coverage exclusions.
“The carrier looks at this policy as a good thing. They may want to broaden their regulatory exclusions and their exclusions for fraud. I would think that the carriers always have an interest in broadening the exclusions; they always have in interest in making sure there are limits to coverage. The insured by contrast, has the opposite interest in making sure that the exclusions are as limited as possible.”
Brokers Target Emerging Markets
Brokerages in emerging markets will collectively account for more than 23 percent of the global market in commercial nonlife insurance by 2016, according to a recent study by Finaccord.
The pace of growth in countries such as India, Argentina, and China will outpace that of North America and Europe for the next three years, the study found.
“Insurance exposure growth in the U.S. has been only moderate over the last few years,” said Greg Dickerson, analyst, Fitch Ratings. “Western Europe has had its own financial problems.
“The big brokers, like Aon, Marsh and Willis, already have tremendous market penetration in these areas. It’s hard to fight for a bigger piece of the pie when there’s a lack of acquisition targets. It has been a challenge for brokers to find new business.
“In emerging markets,” he said, “it’s easier to win a larger portion of a rapidly growing pie.”
Another factor is that emerging markets are “seeing the emergence of a middle class,” said Meyer Shields, an analyst with Keefe, Bruyette and Woods, an investment bank and broker-dealer that specializes in the financial services sector. “There’s a need for greater insurance penetration because they have more things that need protected. This can be a source of faster earnings growth for brokers.”
Bernd Bergmann, a consultant at Finaccord, said emerging markets offer some unique challenges.
“For example,” he said, “there could be a boom in niche-specialized products. The reality is that local brokers may have lower levels of expertise in these areas.”
In addition, he said, liability segments such as D&O, environmental, and cyber security may be especially ripe for growth.
However, growth comes with its own set of hurdles, such as diverse regulatory issues.
China’s insurance regulations, Berman said, are based on province, so expansion may be slower there. “India’s regulatory situation can be erratic as well.”
Another potential challenge, Shields said, is that “underwriters may lack historical data to underwrite new risks.”
Working with larger brokerages, he said, may allow brokers to seek the expertise they need in formulating new coverage for complex risks. “They can refer to someone within the company who has handled something similar.”
Although Aon, Marsh, and Willis already have platforms in many of the rapidly growing areas, Dickerson said, “it’s always expensive to expand into new territories.”
“There’s an integration risk with buying companies,” he said. “There may be cultural differences with foreign governments and clients. You have to invest time in relationship building.”
Bergman added that even large brokerages might have to work harder to achieve growth “organically” in some countries.
Despite the substantial challenges, Bergmann said the situation is a positive one for brokers looking to increase business.
“Global insurance needs are growing fast,” he said. “This can be a tremendous opportunity for brokers.”