News:
State Farm: Let no-fault auto insurance end
Bill Pancake
February 21, 2006
A recent Orlando Sentinel editorial overestimates the potential for reform of Florida's no-fault auto insurance system. There have been several efforts to reform Florida's no-fault system for more than a decade. None has had a meaningful effect on reducing costs and helping consumers. The current system is actually costing Florida families millions of dollars in extra premiums every year. That's why lawmakers should allow the system to sunset next year as scheduled.
Despite the Sentinel's assertion, it's not true that State Farm doesn't think anything can be done about the widespread fraud in the system. As Florida's largest insurer, State Farm has proposed real reform for years. What we have learned is that nothing will be done.
Bob Dance Automotive
That is because real reforms are opposed by the special interests that benefit from a system that provides incentives for fraud and overcharges. Staged accidents, fraudulent claims and grossly inflated medical and legal billings add hundreds of dollars per year to the cost of an auto insurance policy in Florida.
Unlike typical health insurance, workers' compensation and Medicaid-fee schedules, medical providers can charge auto insurance companies as much as they like under the no-fault system, often double normal rates. A similar lack of cost control allows attorneys to run up their rates.
If the no-fault system sunsets as scheduled next year, auto insurance rates for consumers would drop precipitously, and people who cause accidents would be held accountable.
In addition, drivers who have health insurance would no longer be forced to buy PIP insurance that duplicates coverage they already carry.
It is true that health-insurance premiums in Colorado have risen slightly as a result of the repeal of no-fault. But the increases were negligible, and more than compensated for by the savings on auto coverage. The Colorado Division of Insurance reported a 1 percent average rate increase among health insurers directly attributable to the repeal of no-fault.
But Colorado motorists experienced an average 31 percent reduction in premiums for policies with only bodily injury and property-damage coverage, and a 21 percent premium reduction for full-coverage policies. Florida families should expect to save $250 a year when we put an end to the broken system.
There will undoubtedly be some adjustments when Florida's no-fault law ends.
If someone who does not have health insurance is injured, they would be compensated through the medical-payments section of their auto policy. The responsible party's insurer would have to reimburse the victim's insurer.
If the responsible party doesn't carry insurance, the victim would be able to tap uninsured motorist coverage.
In the end, allowing the no-fault system to expire would lower rates for consumers and eliminate rampant overcharges and scamming, setting the stage for a system that rewards good drivers and holds accountable those who are really at fault.
Source: http://www.orlandosentinel.com/news/opinion/orl-myword2106feb21,0,1025649.story?coll=orl-opinion-headlines
Deals prompt insurance industry changes
By Eileen Powell
20 Feb, 2006
NEW YORK -- A little more than a year ago, executives at insurance brokerage Marsh & McLennan Companies Inc. were forced to make a public apology for bid rigging, price fixing and using hidden commissions to pump up sales.
This month, it was American International Group Inc.'s turn. AIG, one of the world's largest insurance companies, admitted to its part in the price-fixing scams as well as accounting trickery to boost its earnings.
Clients and investors who were hurt by those practices will get compensation under the record settlements extracted by federal and state regulators - $850 million from Marsh and $1.64 billion from AIG.
But probably more importantly, experts say, is that the insurance business already has become more open and more competitive, benefiting the companies and consumers who buy property and casualty insurance.
"There's an awareness that full disclosure - disclosure that informs the consumer and educates the consumer - is the business model for the insurance community," said Michael T. McRaith, director of the Illinois Division of Insurance.
And while there had been concerns that the regulatory settlements would drive up the prices of policies, especially for smaller businesses, that doesn't appear to be happening.
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"We have not seen an uptick in costs for commercial general liability policies," McRaith said. He credits that in part to increased competition.
"As long as there's money to be made, insurance will be available for manufacturers, small businesses - in the same way it was before these settlements," he said.
This is not to say that the big insurance companies at the center of the scandals aren't scrambling to regain their footing.
Central to the settlements with New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and the U.S. Justice Department was the elimination of so-called contingent commissions, also known in the industry as marketing service agreements. These commissions, which were upfront payments from insurance companies in exchange for having business steered their way, had been major contributors to the brokers' profitability. The industry's failure to disclose the contingent commissions has led regulators to move to ban them outright.
For New York-based Marsh, the largest brokerage in the nation, the loss of commissions that once accounted for more than $840 million a year in revenue has forced a painful restructuring. The company has had to refinance its debt, sharply cut costs and lay off some 5,000 workers.
Chip Law, an insurance analyst with the research firm SNL Financial in Charlottesville, Va., said that the defections of high-powered Marsh salesmen could be the most painful result of the scandal.
"They've been losing tons of executives who are starting new companies or are picked up by other companies," Law said. "I think that has hurt some of the relationships Marsh had, because these guys were in with the CEOs and CFOs who need the insurance."
Marsh's president and chief executive, Michael G. Cherkasky, told The Associated Press that replacing those lost commissions with well-disclosed fees "has been a challenge ... that's coming along more slowly than we had hoped."
The company Feb. 14 reported fourth quarter earnings of $35 million, or 6 cents a share, as revenue in its risk and insurance services division - the unit rocked by the scandal - fell 7 percent from a year earlier to $1.3 billion.
Still, Cherkasky said he believed 2006 will be a better year, following "our first bump up in new sales" in January.
"Now we're all going to compete for value - who can provide value in the areas of advice and solutions to companies on a global basis - and I think we're well-positioned to do that," Cherkasky said.
New York-based AIG, meanwhile, has joined other insurance companies in eschewing contingent commissions and promised Spitzer it would support legislation to ban them.
The settlement with AIG, the largest ever concluded by regulators with a single company, not only commits the company to accounting and corporate governance reforms but also installs an independent consultant to oversee its financial practices for the next three years.
In agreeing to the deal, AIG Chief Executive Martin Sullivan said the company has "committed to business practices that provide transparency and fairness in the insurance market."
Ernst Csiszar, president and chief executive of the Property Casualty Insurers Association of America trade group in Des Plaines, Ill., said that with the end of contingent commissions, there's more disclosure up front about the costs of policies and associated fees.
"When clients have that kind of information, it opens it up to competition" because they can comparison shop, he said.
On the industry side, he said, companies will have to be more mindful about the profitability of their customers.
"In the past, companies could take advantage of what I call 'peanut-buttering,' which is spreading the cost of handling a specific client over others," Csiszar said. "Now you have to be much more aware of whether you're getting margins from a particular client and which clients don't provide you with the margins you need.
"You have to look more closely at the quality of the business you take on."
Source: http://seattlepi.nwsource.com/business/1310AP_Insurance_in_Transition.html |