BROKER DISCLOSURE BUT WITH INCENTIVE COMPENSATION - The Independent Insurance Agents & Brokers of America (the Big "I") testified before a Senate subcommittee in support of broker disclosure of incentive compensation arrangements, the continued use of legal, longstanding sales incentives, and the need to preserve, but reform and modernize, the state-based insurance regulatory system. Spokesman for the "Big I" distinguished between placement service agreements (PSAs) and contingent commissions — a crucial distinction, because PSAs compensate brokers up-front for the placement of business based on volume, whereas contingent commissions are contingent on a number of factors and paid on the back end. Contingent commissions are a legal, legitimate form of compensation to reward excellent sales performance. Sales incentive programs are a legal and legitimate tool used in nearly every industry to reward performance, including those that also rely on commission payments, from refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice.

NAIFA RESPONDS - The National Association of Insurance and Financial Advisors (NAIFA) applauded the efforts of lawmakers, state regulators and state attorneys general who gathered on Capitol Hill to address reported insurance brokerage abuses. "We want to help consumers make informed buying decisions," said David F. Woods, CLU, ChFC, LUTCF, NAIFA's chief executive officer. "We have always supported disclosure of the relationship between the agent and the company, and the total cost of putting a policy on the books during the buying process. Knowing the total cost of the insurance is most helpful to consumers." 

NAIC MODEL LEGISLATION - The NAIC's newly formed Executive Task Force on Broker Activities released draft model legislation that would implement new disclosure requirements designed to ensure consumers are provided the information necessary to understand the manner in which brokers are compensated for the sale of insurance products. Among the requirements contained in the draft model legislation, brokers would be required to first obtain the insured's written consent before receiving compensation from the insurer for the same transaction. In addition, brokers would be required to disclose the amount of compensation from the insurer and the method for calculating the compensation, including any contingent compensation. In those cases where the contingent commission is not known, brokers would be required to provide a reasonable estimate of the amount and method for calculating such compensation.  More information is available at http://www.naic.org

AIA QUESTIONS NAIC BUDGET SURPLUS - According to the American Insurance Association (AIA), the excessive operating reserve, or surplus, called for in the proposed 2005 budget of the National Association of Insurance Commissioners (NAIC) is unjustified. Testifying during the NAIC's hearing on its proposed budget, AIA Senior Counsel Phillip Carson said, "If this proposed budget is approved in its current form, the NAIC will have a surplus of just under $50 million by the end of 2005. For what contingencies is the NAIC reserving this money?" 

AIG SETTLES WITH SEC – AIG has agreed to pay $126 million to settle federal criminal and regulatory probes into whether it helped two companies fraudulently inflate earnings (PNC Financial Services, Pennsylvania's largest bank, and cell phone distributor Brightpoint).  The settlement was announced after the Wall Street Journal said that AIG chief executive Maurice "Hank" Greenberg is being investigated by the U.S. Attorney's office in Manhattan for possibly manipulating AIG's stock price in advance of AIG's acquisition of American General in August 2001.  AIG would have had to pay more in stock for American General if its shares fell below a certain level and Greenberg is said to have asked Richard Grasso, then head of the NYSE, for help in propping up AIG's stock price. 

HEALTH REGULATORS NEXT FOR SPITZER? - New York Attorney General Eliot Spitzer attacked the U.S. Food and Drug Administration and Health and Human Services for failing to ensure that the drug industry publicly disclose negative results about its drugs. Spitzer sued GlaxoSmithKline, which settled out of court earlier this year when Spitzer charged the company with suppressing negative data about Paxil. Spitzer announced, "From day one, when we announced the Glaxo case, we have been saying, 'Where is the FDA'?"

EMPLOYEE-BENEFIT INSURERS NEXT FOR SPITZER? - This is one busy man!  BusinessWeek Online reports that "New York's Attorney General now has employee-benefits insurers in his sights."  The article is available by clicking here.
 

ZURICH EMPLOYEES PLEAD GUILTY - Two executives at Zurich American pled guilty to misdemeanors related to bid rigging in the insurance market. The two had been facing felony charges, but agreed to cooperate with New York Attorney General Eliot Spitzer's ongoing investigation. A New York state judge accepted the pleas. Both face a maximum sentence of one year in prison. 

SPITZER'S IMPACT - Since Spitzer initiated his investigation into mutual fund trading in September 2003, companies that have settled with regulators have agreed to pay $1.17 billion in restitution to investors and $821 million in civil penalties. They also have agreed to reduce their fees by $925 million over five years. On another front, it's estimated that broker profits have been pushed down 25% since Eliot Spitzer launched his investigation into insurance industry payments.

DI SETTLEMENT - UnumProvident has negotiated a settlement agreement in response to a multistate market conduct exam that uncovered problems with the company's handling of disability insurance claims.  Under the settlement, UnumProvident will reassess in the neighborhood of 215,000 LTD claims processed since January 1, 2000 and will revamp its procedures for handling future LTD claims. 

IN RESPONSE - Class-action attorneys began recruiting UnumProvident customers as potential plaintiffs through a website: http://www.bigclassaction.com.  UnumProvident, of course, is not alone on this website as a potential target of class-action lawsuits. 

NEW SCRUTINY - The Washington Post reports that the SEC is opening yet another investigation of the mutual fund industry, this time to determine whether brokerage firms gave lavish gifts to mutual fund employees in exchange for business.  Gifts of more than $100 a year to an employee of an entity with which the broker conducts business violate long-standing rules.  Acceptance of such gifts also raises questions as to whether conflict of interest rules were broken. 

CFO CONCERNS FOR 2005 – A Tillinghast survey of insurance CFOs reveals interest rate risk, market consolidation and the implementation of enterprise risk management (ERM) are key concerns for North American life insurance company CFOs heading into 2005. Additionally, CFO confidence is down significantly from the CFO survey in 2003 with respect to preparedness to address distribution and expense issues. Respondents cited inadequate control over distribution channels (41%), technology limitations (38%), resistant culture (35%) and inadequate scale (31%) as obstacles to dealing with the top industry challenges.

INSURANCE INDUSTRY M&A – Expect the investigations into alleged bid rigging between brokers and insurers to trigger takeovers as players react to increased scrutiny and higher compliance costs. 

EXECUTIVE LIFE POLICYHOLDERS ACTION - A number of former Executive Life Insurance Co. policyholders announced the launch of the Executive Life Action Network (http://www.executivelife.org) to help recover more than $4 billion in losses from the largest financial fraud in California history. Credit Lyonnais and other defendants recently admitted to criminally defrauding the U.S. government after a five-year investigation into what the Department of Justice called a "massive fraud scheme." A civil lawsuit filed by the California Department of Insurance is scheduled to go to trial in February of 2005. 

PBHG FOUNDERS BARRED, FINED BIG BUCKS – This may be how all these cases should be handled. Gary Pilgrim and Harold Baxter, the founders of PBHG mutual funds, agreed to pay $160 million in restitution and civil fines and to be banned for life from the securities industry to resolve allegations they facilitated improper trading in the funds. The fines and restitution are virtually unprecedented for individuals in civil cases. The company also had to pay a $100 million settlement earlier this year. 
 

RETIREMENT PERCEPTION VS. REALITY - Two recent studies underscore the seriousness of individuals' inaccurate perceptions of their retirement readiness. According to Allstate's "Retirement Reality Check" survey, the vast majority (74%) of baby boomers believe that they are somewhat or very prepared financially for retirement. However, only 8% have completed ten basic steps for retirement preparation. Genworth Financial's "Retirement Income Readiness Survey" also highlights the discrepancy between perception and reality. It revealed that while 90% of respondents believe it is somewhat or very likely they will achieve their retirement goals, 60% were surprised to learn that $1 million in savings will only safely provide roughly $40,000 in annual retirement income.

MORE ON NATIONAL RETIREMENT READINESS CRISIS – These facts should help strengthen your desire to help your clients with their retirement plans:

• Average life spans are increasing - Once a married couple reaches the age of 65, there is a 97% chance one of them will live to 75, a 72% chance one will live to 85.
• Poor national savings rates – 50% of all workers and 34% of workers age 55 and older report that their total savings and investments, excluding the value of their homes, are less than $50,000.
• Unrealistic expectations for Social Security – 90% of older Americans say they expect to rely on Social Security as their top source of retirement income. Yet, in 2001 Social Security supplied only 39% of retirement income for individuals 65 or older.
• Decline of employer-sponsored pension plans - The number of individuals covered solely by an employer-sponsored defined benefit plan decreased from approximately 58% in 1981 to 12% in 2001.
• No plans for retirement income – 71% of workers do not have a plan to transform their retirement savings into a steady stream of retirement income.
• Inadequate retirement planning - Prior to reaching retirement, 54% of current retirees had never thought about how many years they would spend in retirement, and 43% had underestimated the amount of time they would spend in retirement.

HSAs IN OUR FUTURE? – As reported by National Underwriter, according to 'anonymous sources,' the Bush administration "might propose eliminating the deduction employers get for paying for employee health coverage" and, in return, propose other tax breaks for businesses and promote proposals for new lifetime and retirement savings accounts together with an expanded health savings account program.

STANDARD MILEAGE RATE – The 2005 standard mileage rate for business driving will increase by 3 cents to 40-1/2 cents per mile, a record increase due mainly to the surge in the price of gasoline.
 

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PBGC DEFICIT NOW $23.3 BILLION – Well, it seems like we keep reporting increasing deficits at the Pension Benefit Guaranty Corp. The deficit more than doubled to $23.3 billion in fiscal year 2004, caused mostly by bankrupt airlines. The agency, which is funded by corporate premiums, may need a taxpayer bailout...see below.

NEED COMPREHENSIVE PENSION - U.S. Senator Peter G. Fitzgerald (R- IL), following news of the record deficit at the PBGC, issued a statement that to protect workers and taxpayers, as well as companies that have fully funded their plans, Congress should, at a minimum, do the following: 

1) Amend the ERISA definition of 'current liabilities.' Companies now are supposed to make sure that their plans are 90 percent funded as a percentage of 'current liabilities.' The trouble is that the definition of "current liabilities" is a political one, not an actuarial one, and even 100 percent of current liabilities is an amount far less than that needed to pay all benefits.

2) Amend the corporate tax code to provide incentives for employers to put more money into pension funds, in good times, than is technically required.

3) Make it more difficult for employers to terminate their pension plans when they file for bankruptcy.
 
CONFUSION IS THE NORM IN LTC - Though the cost of nursing home care now averages $56,000 a year, according to a fact sheet from the National Governors Association (NGA), the overwhelming majority of seniors don't purchase the insurance that could help them avoid such a financial burden. So says a recent study by Bankers Life and Casualty Company. Some 60% of seniors believe Medicare will cover long-term care costs. In fact, Medicare usually covers only 100 days of skilled nursing care and only if it follows a hospital discharge. It does not provide for extended community or institutional care. 

KEMPER LIFE NOW CHASE INSURANCE - Kemper Life will begin its second century of business with the name Chase Insurance, reflecting its new role as the insurance arm of JPMorgan Chase. The insurance company that today is Chase Insurance began doing business in 1905 as part of the Kemper Life Companies and became part of Zurich Life in the 1990s. Bank One purchased several Zurich Life companies in 2003, changed the name to One Life. Bank One itself merged into JPMorgan Chase in July of 2004.

EXECUTIVE PAY REFORM? - Calpers, the biggest U.S. pension fund and certainly the one with the most active board, put corporate boardrooms on notice that it plans a crackdown on executive compensation, as well as on hedge funds. Board members oversee the $166 billion California Public Employees' Retirement System. 

LIFE INSURANCE ACTIVITY OFF 1.9% - Applications for life insurance in North America declined -1.9% in October year-over-year, marking flat to declining activity for nine of the last ten months of 2004. 2004 year-over-year declines have been relatively quiet. Year-to-date, North American applications were off slightly at -1.4% versus the same period last year; down -1.5% in the U.S. More at http://www.mib.com 

ING SELLS LIFE OF GEORGIA TO JACKSON NATIONAL - ING will sell its Atlanta-based unit Life of Georgia to Jackson National Life for about $256.8 million. Jackson National Life is a unit of Britain's Prudential Plc. About 570 Life of Georgia employees will be affected by the sale. 

DONATING TO A CHARITY – If you or your clients plan on donating to a charity before year end, you might want to take a look at the BBB's Wise Giving Alliance. The Alliance reports on nationally soliciting charitable organizations that are the subject of donor inquiries. These reports include an evaluation of the subject charity in relation to the voluntary BBB charity standards. Check out specific charities at http://www.give.org/.

SETTING YOURSELF ON FIRE AND OTHER INCREDIBLE THINGS PEOPLE DO WHILE COMMITTING INSURANCE FRAUD - People may think they're being clever when they try to cheat insurance companies, but often they end up making mistakes that get them caught, injured and sometimes even killed. Here are a few "lulus" from Progressive. 

• Take the case of the motorcyclist who wiped out and, while lying on the side of the road with a ruptured spleen, had the presence of mind to call 1-800-PROGRESSIVE to buy coverage. What he didn't know was that a witness who saw the accident also heard him make the call.
• In another case, a couple's car caught on fire. While the husband was on the phone with Progressive buying a policy, his wife was overheard yelling in the background that the car was about to explode. 
• Some people figure the easiest and quickest way to collect insurance money is to destroy their car by setting it on fire. Not necessarily. Consider the case of two brothers who were hired to set a car on fire. They doused it with gasoline, and to make sure the vehicle would be completely destroyed, they decided to throw in a pipe bomb. The bomb exploded, setting one of the men on fire. He was likely killed instantly from the explosion, but his brother, not realizing that, rushed to extinguish the flames and ended up catching on fire. He ran toward a nearby highway for help and flagged down a state trooper who had come to investigate the black cloud of smoke. The man told the trooper what he and his brother had done and then, like his brother, passed away from his injuries.
• A customer said some parts were stolen from his car, and to support his claim, he submitted what appeared to be phony invoices along with Polaroid photos. At first blush the photos looked pretty good, but something seemed a little odd about them. On closer inspection, investigators realized the guy had taken extreme close-ups of a toy car that was the same color and make of his actual car. The customer eventually admitted he took photos of the toy car in an attempt to get his claim paid. 

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