I saw a great piece in the March issue of CFO magazine regarding mediocre insurance brokers. They have some great advice in evaluating your current broker to see if you need to change brokers. If you care to view it from the source go here

Is Your Broker Mediocre?

It may be a buyer’s market, but choosing the best broker is far from easy.
David M. Katz – CFO Magazine (March 1, 2010)

These are bargain-basement days for insurance buyers. In the fourth quarter of 2009, workers’-compensation and general-liability premiums dropped 5.5% and 5%, respectively, from the previous year, according to a survey of 1,100 risk managers by Advisen and the Risk and Insurance Management Society. Even the cost of directors’ and officers’ (D&O) liability insurance — a tougher market given that corporate boards are in the hot seat — dropped 2.8%.

The soft market makes it tempting to just call brokers for competing bids, sit back, and enjoy the show. Unfortunately, it’s not that simple. The recession has left most insurance buyers with substantially altered physical and financial assets, not to mention changed organizational structures and payrolls, all of which require changes in coverage. At the same time, the squeeze on brokers is not an unmitigated blessing for buyers; the competing pressures of shrinking margins and demand for better value have forced brokers to consolidate and cut costs. That means buyers need to be more vigilant, not less, about the underlying health of their broker and the level of service they can reasonably expect.

Arguably it is the largest brokers that have taken the biggest hits from falling insurance prices. At Aon and Marsh, revenues for the nine months ended September 30, 2009, decreased by about $200 million and $300 million, respectively, compared with the same period in 2008. The third top broker, London-based Willis, enjoyed a 5% rise in international fees and commissions during this period, only to see it washed away by a 5% drop in its North American revenue.

The impact on the quality of broker services is unclear. While the big firms cut employees last year, they are not disclosing the number and kinds of staff reductions. Aon’s recent restructuring has focused on back-office costs, says a company spokeswoman, and other companies claim that they have made, at most, only modest cuts in client-facing employees.

Can Service Remain Unaffected?
Many insurance buyers agree that their brokers have held the line on quality or even improved services. When the fortunes of SunCal Cos., a residential real estate developer, began to head south, “my broker came to me and reduced its fee,” says Gordon Adams, the company’s director of risk management. “There was no quid pro quo of any kind” from the broker, a Willis specialty-construction unit with which the company had a long-standing relationship. Others note that brokers have become more transparent about fees and now use the Web effectively to communicate policy information to buyers.

Still, if their down times persist, brokers will be hard-pressed not to reduce service quality. Even cuts in back-office staff can have an impact on service. A continuing shortage of claims handlers, insurance-policy administrators, and office staff could make it tough to get timely responses from your broker when questions about policies arise.

The best way for buyers to avoid delays or unpleasant surprises is to apply a little risk-management discipline to the broker relationship itself. In a soft market, the cost of coverage isn’t necessarily a differentiator — instead, you should follow a set of best practices for evaluating and managing a broker.

1. Make sure the broker understands your business. “One of the critical success factors is [brokers'] understanding of our business, so they can acquire the right insurance for us,” says Michael Twomey, CFO of Newgistics, a cargo transporter. Most risk managers feel that such understanding is best served by long-term buyer-broker relationships. Large brokerages are likely to have units with deep knowledge of a given industry, but they are more likely than small firms to shift around the people who work for you. Some buyers, like SunCal, which stuck with the same unit when it moved from Aon to Willis, feel that individual brokers are more important than the firms that employ them.

2. Communicate regularly between policy renewal dates. Institute processes so that operating units communicate to internal risk managers any changes that could affect coverage. Such changes could include a new location, new equipment, or a change in cargo to be shipped. Let your D&O broker, in particular, know about possible legal risks stemming from mergers and acquisitions, falling share prices, and product defects.

3. Start early on renewals. If you think you might want to change brokers or make a radical shift in your insurance coverage, get a request for proposal out to potential brokers at least six months before your current insurance expires. If you plan to stick with your incumbent, meet with the broker at least 90 days before renewals to review in detail all exposures. To get the proper coverage, the risk manager should give the broker complete information about the company’s assets and operations. In the case of workers’ comp, for example, has the workforce shrunk or grown and have new physical activities added new exposures?

4. Decide how to pay your broker. Finance chiefs should keep their companies’ current cash and budget needs in mind when determining how brokers will be compensated. “A commission setup improves cash flow, because the insurer pays the broker up front,” notes Terry Fleming, president of the Risk and Insurance Management Society and director of risk management for Montgomery County, Maryland. On the other hand, fee-based compensation helps buyers see more clearly what they are paying for.

5. Don’t change brokers too often. In a soft market, it is tempting to jump from one broker to another in search of deals. But if you want to develop a solid partnership with your broker, don’t switch every year. A reputation for skipping around could hike your premiums or make it tougher to find decent coverage when a hard market returns.

6. Match the brokerage to your company size. Multinational companies need global brokers, as do large national companies. A smaller company might receive more attention from a smaller broker.

7. Insist on transparency. To make sure that brokers are acting solely in your interest rather than that of the insurer, ask the broker to confirm that in writing. Pay special attention to contingent compensation (extra payments insurers pay brokers based on the performance of their clients’ business).

If broker acceptance of such compensation is “warping the decision process, and [the broker] is not really looking at doing a good search of [insurers] out there, that’s a problem,” says Ron Fior, CFO of Callidus Software, a vendor of sales-performance tools. Not that it’s a problem at Callidus: the company’s broker, USI Holdings, routinely provides Fior with lists of the dozens of insurers it has contacted.

David M. Katz is New York bureau chief at CFO.

This has potentially huge ramifications on the insurance industry. Time will tell if it does any good . . . or anything at all.

By Patrick Yoest
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)–The White House on Tuesday publicly backed legislation to repeal the health insurance industry’s antitrust exemption, a small part of the Obama administration’s still-uncertain strategy to pass broader health overhaul legislation.

The bill, which the U.S. House of Representatives will vote on Wednesday, would remove insurers’ long-time exemption to competition laws, which Democrats hope will lower premiums in insurance markets by giving consumers more choices. The exemption for insurance companies was enacted in the McCarran-Ferguson Act of 1945.

Specifically, the bill would strip the exemption for egregious violations such as price fixing, bid rigging and market allocation. The White House Office of Management and Budget in a statement announced its support for the legislation, saying that “this bill will benefit the American health-care consumer by ensuring that competition has a prominent role in reforming health insurance markets throughout the nation.”

House Rules Committee Chairwoman Louise Slaughter, (D., N.Y.), a leading proponent of the bill, suggested that it is a matter of fairness that the industry is subject to the same rules as other companies.

“This industry has enjoyed a big giveaway for far too long, and it’s about time that it plays by the same rules as everyone else,” Slaughter said.

America’s Health Insurance Plans, an industry trade group, said in a statement Tuesday that the health insurance industry is already highly regulated and that mergers and other business practices are already subject to federal antitrust laws. Further, it cited “legal uncertainty” that would be created by the new law, which it said would chill developments in the industry.

Leading insurers in AHIP include Aetna Inc. (AET), Humana Inc. (HUM), Cigna Corp. (CI) and UnitedHealth Group Inc. (UNH).

It’s uncertain how Republicans will come down on the bill. A spokesman for House Minority Leader John Boehner (R., Ohio) said Boehner had not announced how he would vote.

Congressional Democrats are still trying to find their footing on health care, even though the White House introduced an 11-page document intended to act as a road map for blending House and Senate-passed versions of the legislation.

House Speaker Nancy Pelosi (D., Calif.) said she is “very pleased” with the White House proposal and that it is “getting a good reception” with House Democrats. But Rep. Peter DeFazio (D., Ore.), who appeared with Pelosi as part of a push for the anti-trust legislation, cited his own concerns about the omission from the plan of a government-run health insurance plan and a nationwide exchange for buying insurance.

DeFazio suggested the White House plan has not been presented as a take-it-or-leave-it proposition.

“We’re really beginning the process in the caucus over again,” DeFazio said. “There’s no fait accompli. There’s been no whipping, there’s been no pushing.”

-By Patrick Yoest, Dow Jones Newswires; 202-862-3554; patrick.yoest@dowjones.com

for full article go HERE

I gave my first directors and officers (D&O) liability insurance presentation to a board of directors in 1996. The CFO of this publicly traded company asked me to discuss the highlights of its recently renewed D&O insurance program. The presentation lasted less than five minutes—and not one question was asked by any of the board members present. In fact, most of them were engaged in other conversations that they must have deemed more important or more interesting than insurance. My presentation was a mere formality: the board essentially rubber-stamped the CFO’s insurance
decisions.

Since then, a board’s involvement in insurance decisions, like D&O coverage, has changed dramatically. Now our firm presents to its client public company boards and audit committees at least once a year. Board members are no longer passive and disinterested when it comes to insurance. Instead, most are well informed about the liabilities directors face and want to fully vet their D&O insurance protection—specifically its structure, limits and scope of coverage. Questions often arise about insurance carrier solvency, the importance of differences in conditions A-side coverage, appropriate coverage limits and the terms and conditions of the policy. A decade ago, CFOs generally made all these decisions; in today’s ever-litigious corporate environment, many executives now defer these important decisions to their entire boards for input and formal approval before finalizing major insurance placements.

Risky business

Boards are also becoming more engaged in risk management, specifically enterprise risk management (ERM). Traditional risk management identifies exposures to loss, examines various techniques to address the risk and then selects the most appropriate techniques to control it. Note that risk management focuses only on accidental losses, not all losses. A key technique used in risk management is insurance or risk transfer; however, insurance is only one facet of risk management. It’s been suggested that the paradox of insurance is that it is a good first and last response to managing risk, but is not always the most appropriate response. There are other important risk management tools, such as risk avoidance, self insurance, loss prevention, loss control, contractual risk transfer and alternative forms of risk financing.

All-encompassing risk

In contrast, enterprise risk management deals with all aspects of an organization’s risk, not just accidental loss. The Risk and Insurance Management Society defines ERM as “a strategic business discipline that supports the achievement of an organization’s objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an interrelated risk portfolio.” The Committee of Sponsoring Organizations of the Treadway Commission defines ERM as a “process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” Both definitions are mouthfuls, but the point is that ERM is all-encompassing and comprises the spectrum of organizational risk. Note the key takeaway that ERM is a process “effected by an entity’s board of directors.” Since the recent financial and economic meltdown, the board’s involvement in ERM has grown significantly. Boards are expected to more effectively identify and assess risks across the organization, driven in large part by anxious shareholders and other stakeholders who want to ensure that both the balance sheet and shareholder value is properly protected. As such, the board’s role in ERM is one of the hottest topics in corporate governance.

Proposed rules

In July 2009, the Securities and Exchange Commission (SEC) took these responsibilities even further by proposing new disclosure rules regarding board oversight of ERM, which could impact how boards approach and manage risk in the future. The proposed amendments include newly mandated disclosures on the boards’ increasing involvement with ERM. If you thought directors of a public company had a tough enough job fulfilling traditional fiduciary and stewardship duties, imagine how those directors must feel knowing they could be held responsible for not accurately identifying and assessing all entity risks and for not properly planning a response for each one. If the SEC proposal passes, Christmas will come early and often to the plaintiff’s bar.

More responsibility?

The process of identifying and managing traditional and known risks is certainly doable for directors. But should they also be held accountable for the highly improbable “Black Swan”? According to Black Swan author Nassim Nicholas Taleb, “a Black Swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.” He considers 9/11 the prime example of this phenomenon. Think about being responsible for identifying something that is unpredictable, something that has a huge negative impact, and after the fact, experts assert that you should have predicted it. That is one tough exercise for anyone. Boards need to be well equipped to deal with these increasing responsibilities, relying heavily on outside professional service providers to guide them through the labyrinth that is ERM. Whether or not the proposed SEC risk management oversight rules are enacted, ERM will become a recurring theme in boardrooms across America. In fact, it just moved to the top of the agenda.

by Spence Hoole

Hank Greenberg is one of the most iconic of characters in the insurance and finance worlds. Maria Bartiromo of Businessweek had an interesting interview with him recently:

MARIA BARTIROMO

A New York Times story last week suggested that you are poaching talent from AIG and reconstructing the AIG model at your privately held firm, C.V. Starr. Is your intention to build a competitor to AIG?
MAURICE “HANK” GREENBERG

No. Look, I’m building an insurance company and an investment company. We didn’t poach anybody. We hired 13 people from AIG out of the 100,000-plus they have. We didn’t poach them; they came to us. A lot of them had left AIG previously. I know one company in Switzerland that hired 130 people from AIG.

So you’re saying AIG’s talent is fleeing?
That’s been going on for some time.

Are the restrictions on executive compensation imposed by pay czar Ken Feinberg driving talent into your arms?
They’re driving people into anybody’s arms, not just mine. Anybody in the insurance business. Why would someone running an important area of the company and doing a good job stay there for the maximum of $200,000 when they can maybe make $400,000 to $600,000 someplace else?

I’m sure you’ve thought about this, but what if Spitzer had not forced you out as CEO of AIG in 2005? How would things have been different?
It would have been 100% different. Nothing like [what has happened] would have taken place. [AIG] would have been strong. Oh, we would have had some losses, but they would have been minuscule compared with what we’ve seen.

How much money would you have saved the American taxpayer?
We wouldn’t, in my judgment, have had to borrow any money from the taxpayer.

What would you have done differently?
I know for a fact that [Martin] Sullivan told everybody: “Just do everything you want, get as much business as you can, and don’t worry about a goddam thing.” Everything they did disregarded risk management. That’s not the way you run a company. And the board sat on its tail. Frank Zarb did nothing. He was the goddam chairman. What did he do?

Did he understand what was happening?
Well, he was chairman. Shouldn’t he have known? What did he get paid for as chairman? Just to go to a meeting?

And if I remember correctly, the board increased their salaries.
Yes, they did. They were working so hard, they increased their salaries.

If you had still been at the helm of AIG during that black week in September 2008, and it became clear AIG needed a bailout to survive, would you have gone to the government or tapped into your connections in China and elsewhere?
I’d have done everything I could to keep the government out. Absolutely.

Since you left AIG, there have been a string of executives in charge: Sullivan, Robert Willumstad, Edward Liddy, and now Robert Benmosche. How would you rate the job Benmosche is doing?
From what I can see, he’s doing a pretty good job. He’s an experienced executive. He ran MetLife (MET). I think he’s a better leader. But if you can’t pay reasonable compensation, I don’t care how good you are.

Treasury Secretary Tim Geithner was asked on Meet the Press on Nov. 1 if he would like to see AIG prosper. And he said: “I’d like it to be successful enough that the taxpayer can get out.” After that, he said he didn’t care what happened.
That’s a really great statement, isn’t it?

What’s the government’s goal here?
To liquidate the company and pay the taxpayer back. But the taxpayer will never be paid back by liquidating AIG. The only way to get paid back is to rebuild the company so it becomes viable again. Why was it decided AIG would be the sacrificial lamb?

Was it to save Goldman Sachs?
Maybe. But I think there’s got to be a complete investigation of who did what and why.

How significant has this been in terms of wealth destruction for you?
Considerable. Not just for me, but for every one of the employees and executives at AIG. And how many shareholders? AIG had a market cap of $180 billion when I left. Goddam near worthless today.

Maria Bartiromo is the anchor of CNBC’s Closing Bell and writes the blog, Maria Bartiromo’s Investor Agenda, at http://investoragenda.cnbc.com.