Change in the wind.Although 2006 was a relatively quiet year for insurers on the actual weather front, plenty of volatile activity swept across the regulatory and legal landscapes, leaving significant change in its wake. Hardest hitting, perhaps, were the November elections, which rolled in a new Democratic majority in Congress that is likely to grant insurers some parts of their agenda, but deny others. In August, Congress passed the Pension Protection Act, giving life insurers previously impossible product possibilities, and health insurers worked all year to tame the implementation of Medicare Part D, which went into effect Jan. 1.
The National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. saw progress in the development of the Interstate Insurance Product Regulation Commission and approved a proposal to provide short-term relief from redundant reserves for some life insurers. The industry also felt the effects of activity in other areas such as capital markets, broker recovery and mergers and acquisitions. The most significant insurance events of 2006, chosen for their lasting impact on the industry, are described in the following pages.
Acquisition Trend Continues for Insurers
Expanding an insurance business one contract at a time is a slow process compared with buying existing businesses. And becoming big brings economies and capabilities. So the question for 2007 may be whether consolidators will be able to find the right deals.
Some 71% of respondents to a 2006 survey expect consolidation in the global insurance market to accelerate through 2009. The survey, by consulting and accounting firm KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm)
KPMG Kaiser Permanente Medical Group
KPMG Keiner Prüft Mehr Genau (German)
KPMG Kommen Prüfen Meckern Gehen LLP LLP - Lower Layer Protocol , quizzed 200 board-level executives of both life and property/casualty insurers worldwide.
In a recent three-year period, 36% of European respondents reported acquiring at least one business, while only 26% of North American North American
named after North America.
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see North American blastomycosis.
North American cattle tick
see boophilusannulatus. insurers and 20% of Asia-Pacific insurers reported doing so. Recent acquisitions included MetLife buying Travelers' life and annuity business from Citigroup, Swiss Re Swiss Re is the world’s largest reinsurer, now that it has acquired GE Insurance Solutions (Ligi 2006). Founded in 1863, Swiss Re now operates in more than 30 countries. General Electric owns 8.9% of the firm. buying GE Insurance Solutions, and the United Kingdom's Aviva buying Iowa-based AmerUs.
Perhaps the most promising buys may be of businesses that some insurers no longer want. Consultants say the U.S. market is still heavily populated with small and medium-size companies that will try to divest noncore operations.
What Acquirers Seek
* Good Price
* Attractive Target
* Local Knowledge
See National Association of Investors Corporation (NAIC). Gives Life Insurers Reserve Relief
The life insurance industry took a big step forward in its effort to move to a "principles-based" approach to setting reserves when the National Association of Insurance Commissioners in September approved an industry proposal that provides short-term relief from redundant reserves for writers of both universal life with secondary guarantees and term life.
The American Council American Council may refer to:
One piece of the proposal allows the use of lapse rates in calculating reserves for the no-lapse guarantee on the UL policies. The second piece calls for splitting the existing 2001 Commissioners Standard Ordinary mortality table, which would primarily lower reserves for term-life writers.
Work is now focused on getting the mortality table changes adopted in all 50 states and the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). for use on policies issued in 2007 and later, said Paul Graham For other persons named Paul Graham, see Paul Graham (disambiguation).
Paul Graham (b. Weymouth, England, 1964) is a Lisp programmer, venture capitalist, and essayist. , ACLI ACLI American Council of Life Insurers
ACLI Associazioni Cristiane Lavoratori Italiani (Italy)
ACLI American Council of Life Insurance
ACLI Ada Command Language Interpretation vice president of insurance regulation and chief actuary.
--Fran Matso Lysiak
Pension Act Provides New Opportunities
Passed in early August, the Pension Protection Act grants a seven-year window for most defined-benefit plans to become fully funded. Among its other provisions, the measure gives clarification to the "safest available annuity standard" to encourage more employers to offer lifetime annuities as a payout option from 401(k)s and makes permanent the retirement provisions of 2001's Economic Growth and Tax Relief Reconciliation Act.
Another provision allows insurers and investment firms to provide investment advice to 401(k) and Individual Retirement Account participants, even when their own products are among the investment options. And perhaps most significantly for life insurers, the final bill opened the door to "life care annuities," hybrid products that combine the features of long-termcare insurance with life insurance and annuities. The provisions would allow both life insurance and annuity products to include riders for long-term-care coverage and would greatly expand the tax-free exchange tax-free exchange
An exchange of assets between taxpayers in which any gain or loss is not recognized in the period during which the exchange takes place. Rather, taxpayers are required to adjust the basis of assets exchanged. of life, endowment and annuity contracts for long-term-care contracts.
Past Hurricanes Still Affect Insurers
For a year with an almost nonexistent non·ex·is·tence
1. The condition of not existing.
2. Something that does not exist.
non hurricane season Hurricane season refers to a period in a year when hurricanes usually form. For more information see: Tropical cyclone#Times of formation.
For a lists of past seasons, see:
One key development in 2006 was that the first wind vs. flood case was decided in Mississippi--in favor of the insurance industry. While the case was not complete precedent for the issue, experts said it was a good sign that the flood exclusion would be upheld in future cases seeking homeowners coverage for storm surge storm surge: see under storm. .
Another lingering effect of 2005's storms was the rising cost and lack of availability of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. , which drove up homeowners premiums. This was compounded by catastrophe modelers increasing the probable maximum losses in their models because of Katrina and rating agencies increasing capital-adequacy requirements--both of which drove the need for more reinsurance. The light hurricane season in 2006, experts said, is unlikely to change this situation in the near-term future.
States Approve Interstate Product Compact
Regulators at the National Association of Insurance Commissioners praise the progress of the development of the Interstate Insurance Product Regulation Commission.
The seeds were planted in 2000, when regulators adopted their Statement of Intent: The Future of Insurance Regulation. The roadmap proposed substantial regulatory reforms to modernize state insurance regulation, and a way to get there, creating a single point of filing for life insurance, annuity and other wealth-protection insurance products.
By May of 2006, Alaska became the critical joiner join·er
1. A carpenter, especially a cabinetmaker.
2. Informal A person given to joining groups, organizations, or causes. of the compact, meeting the operational goal of 26 states or premium volume representation of 40%. Since then, the Interstate Insurance Product Regulation Commission has been established, its bylaws The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management.
Bylaws may specify the qualifications, rights, and liabilities of membership, and the powers, duties, and grounds for the dissolution of an adopted and its executive director hired.
Moving ahead to early 2007, all the framework is due to be in place, enabling the commission to accept product filings.
E.U. Reinsurance Directive Adoption Begins
The European Union's planned adoption of its Reinsurance Directive by the end of 2007 will give added impetus to the long push by European reinsurers for an end to U.S. collateralization In medicine, collateralization, also vessel collaterlization and blood vessel collateralization, is the growth of a blood vessel or several blood vessels that serve the same end organ or vascular bed as another blood vessel that cannot adequately supply that end organ rules.
The directive will bring in a single reinsurance protocol across the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the
European Community , allowing any E.U.-based reinsurer re·in·sure
tr.v. re·in·sured, re·in·sur·ing, re·in·sures
To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. to operate effectively as a domestic reinsurer throughout the Union. The European Union itself is to expand Jan. 1, 2007, from 25 members to 27, with the admission of Bulgaria and Romania.
The directive was approved at E.U. level in 2005. Member states are required to incorporate it into their national laws by December 2007. Ireland, which is seeking to promote Dublin as a financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. center, was the first to adopt the directive, in July 2006.
Pressure on the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. to change its rules has come from the European Union and from such entities as Lloyd's and the International Underwriting Association.
Capital Markets Provide Financing Innovations
The melding of reinsurance with capital markets picked up the pace this year, with severe market dislocations caused by two straight years of record hurricane losses. The property/casualty segment saw a record year for catastrophe bonds in 2006. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. A.M. Best Co.'s annual reinsurance report, published in August 2006, cat bond issuances for both life and nonlife more than doubled in 2005, and appear set to overtake that production in 2006.
Private equity also picked up the pace as a source of reinsurer formations. Hedge funds and sidecars--specialty reinsurers that isolate a reinsurer's more volatile risks--added to the sudden growth of capital-market strategies in the global market. All of these trends are expected to continue into 2007, as reinsurers seek to manage their risk concentrations better. Reinsurers are also relying on these techniques to better allocate their capital in response to cyclical turns in specific lines of business.
Election Results Influence Insurers' Agenda
The Democrats' takeover of Congress is a mixed bag and will affect insurers long beyond 2007. A permanent terrorism insurance Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities.
It is considered to be a difficult product for insurance companies, as the odds of terrorist attacks are very backstop seems likely, as Sen. Chris Dodd, D-Conn., who helped create the backstop, will take Senate Banking over from Sen. Richard Shelby Richard Craig Shelby (born May 6 1934), sometimes known as Dick Shelby, is an American politician. He currently is the senior U.S. Senator from Alabama. Originally elected to the Senate as a Democrat, Shelby switched to the Republican Party in 1994 when it gained the , R-Ala., who opposed it. A vote on the backstop is high on Dodd's agenda.
Federal chartering is less certain. Some Democrats support it, but some insurance trade groups fear Democrats will be inclined to scrutinize industry practices, rather than loosen state oversight.
Rep. Charles Rangel, D-N.Y., who will take over Ways and Means WAYS AND MEANS. In legislative assemblies there is usually appointed a committee whose duties are to inquire into, and propose to the house, the ways and means to be adopted to raise funds for the use of the government. This body is called the committee of ways and means. , may consider proposals to overhaul Medicare's Part D drug program, and to restructure Medicare Advantage plans.
Health Insurers Tackle Medicare Part D
Last year marked a major milestone for millions of seniors with the rollout of Medicare Part D, and "2006 had a solid record for the program in terms of beneficiary satisfaction, problem resolution and cost effectiveness," said Karen Ignagni, president and chief executive officer of America's Health Insurance Plans.
Even though the industry had to wade through a myriad of challenges including systems glitches, Jane Galvin, director of regulatory affairs Regulatory Affairs (RA), also called Government Affairs, is a profession within regulated industries, such as pharmaceuticals, medical devices, energy, and banking. Regulatory Affairs professionals usually have responsibility for the following general areas:
More plan sponsors are set to come on board in 2007. The federal government also is proposing some changes to the Part D program. But time will tell, said Galvin. "We'll have to see what changes may arise given the recent change in the Congress."
Galvin said the first priorities in 2007 will be to find individuals who haven't yet enrolled in the Medicare Rx program and help them find a good option.
HHS Estimates of Medicare Part D Enrollment (Millions) Projected vs. Actual Projected Part D Enrollment = 29.3 million Dual Eligibles Enrolled in Enrolled in (auto-assigned Medicare stand-alone to Part D Advantage Prescription plans) Prescription Drug Plans Drug Plans (excluding duals) Dec 2005 6.2 4.4 1 11.6 Jan 2006 6.2 4.5 3.6 14.3 Feb 2006 6.2 4.8 4.9 15.9 Mar 2006 6.4 5.1 6.4 17.9 Apr 2006 6.4 5.2 8.1 19.7 June 2006 6.6 5.5 10.4 22.5 Note: Table made from bar graph. Source: Projected: HHS Medicare Prescription Drug Benefit Final Rule, Jan. 28, 2005; Actual: HHS, Dec. 2005-June 2006
Brokers Expect Smoother Road Ahead
Commercial insurance brokers continue efforts to stabilize their businesses. Restructuring measures, including layoffs, consolidating locations and exiting noncore functions, are paying off in the form of significant cost savings.
Regulators relaxed some restrictions on contingent commissions Contingent commissions is a term used in the American insurance industry for any kind of broker's commission which is contingent upon some event occurring (instead of a commission paid on the sale itself). In the UK this form of payment is known as Overriders. , allowing brokers to accept fees from carriers when acting as underwriting manager. Other revenue initiatives have not been as successful as some hoped.
Meanwhile, mid-tier brokers not affected as much by the bid-rigging scandal have gained ground as more clients diversify their brokerage needs and successful producers poached poach 1
tr.v. poached, poach·ing, poach·es
To cook in a boiling or simmering liquid: Poach the fish in wine. from competitors begin to yield results. Personnel defections have slowed, although a mass exodus of top producers from Benfield Group to Aon Re in the third quarter could cost Benfield $18 million.
The brokers expect savings, investments in new market segments and acquisitions to improve margins in the coming years. Competition for middle-market accounts is expected to be most intense. Still, even for Marsh, which suffered the most from the bid-rigging scandal, the road ahead gets progressively smoother.
2006 Net Income Compared With Same Quarter in 2005 Marsh & McLennan Cos. 1st Quarter $416 million, [up arrow] 210.4% 2nd Quarter $172 million, [up arrow] 3.6% 3rd Quarter $176 million, [up arrow] 155% Aon Corp. 1st Quarter $198 million, [down arrow] 1% 2nd Quarter $193 million, [up arrow] 1% 3rd Quarter $106 million, [down arrow] 13% Willis Group Holdings 1st Quarter $140 million, [up arrow] 109% 2nd Quarter $72 million, [down arrow] 36.8% 3rd Quarter $89 million, [up arrow], 45% Source: Company reports