Midwest FEATURE: Market Spotlight on Illinois and Ohio

Although the insurance industry – and the rest of us – are waiting for the other shoe to drop in the wake of Hurricane Katrina’s estimated $20 billion to $35 billion in insured losses, business in the heartland states of Illinois and Ohio continues to perk along in a very satisfactory way that benefits insurers, agents and consumers.

While legislatures may focus on budget crunches, DOIs undergo regime changes, and scandals like the Spitzer bid-rigging affair cause the political spotlight to hit the industry, both states share an uncommon stability – attributable to sensible rating laws, cooperative regulators, and legislators who understand the importance of insurance as a provider of employment in the state.

“Ohio has traditionally had a good insurance climate, even compared with neighboring states,” said Thomas H. Hardy, CEO of the Independent Insurance Agents of Ohio. “We’re lucky to have an enlightened legislature that understands the importance of insurance, and so many good, solvent companies doing business in the state.”

Even agent relationships with their carriers, sometimes volatile at best, for the most part seem pretty rosy in these states. “Our members’ relationship with their carriers is good and improving because the companies are making a profit,” said Luke F. Praxmarer, government relations chairman for the Professional Independent Insurance Agents of Illinois, who held their annual convention in Springfield last week.

Part of the stability of these two states lies in their topography, Hardy said. Although anecdotal numbers say that 70 percent of the U.S.’s population lives within 30 miles of a coastline, Illinois and Ohio are traditionally farmland and flatland. While the occasional tornado can blow through and do significant damage, as it did last month in Wisconsin, Illinois and Ohio aren’t known for the devastating type of weather that plagues the Gulf Coast and the Eastern Seaboard. It may not make for good surfing, but it sure does make it popular with insurance companies.

The climate’s even good in the cities, where congestion, crime and overpopulation can sometimes be a deterrent to underwriters. According to statistics compiled by the National Association of Insurance Commissioners (NAIC) and the Property Casualty Insurers Association of America (PCI), Illinois had 186 domiciled insurers in 2003, and a total of 856 property/casualty companies writing in the state, the highest in the country. In Ohio, there were 128 domiciled companies, and 808 total companies.

All these companies mean lots of competition, and the insurance consumer is the real winner in these states. In Ohio, the market is “almost too healthy,” with a waiting list of companies wanting to get in, said George Haenszel, executive vice president of the Professional Insurance Agents of Ohio. “We’ve got probably the lowest insurance rates of any industrialized state, in spite of our urban areas.” For private passenger auto, for example, Ohio drivers in 2002 paid an average annual premium of $713.67, compared with a countrywide average of $879.99, according to the NAIC. Illinois average premiums were $801.75.

A softening market

Although it’s a far cry from the whipsaw market changes of the 1980s and ’90s, property and casualty markets across the country – and in Illinois and Ohio – are seeing prices softening, although whether Katrina will have an impact remains to be seen.

In Ohio, property coverage rates are still hard, but commercially, “the price wars are on,” Haenszel said. Commercial lines pricing began softening in third-quarter 2004, with pricing decreases on top of three consecutive years of increases, he said. Even the surplus market is shrinking as coverages, even the traditional surplus lines mainstays like errors and omissions and directors and officers, are migrating back to the traditional market.

However, sources maintain that carriers are still upholding stringent underwriting standards, in spite of softening prices. “We’re inching into the soft market instead of making a headlong dash,” said Hardy of the Ohio Big I, who says his members are mostly seeing softening in professional liability areas.

The situation is similar in Illinois, said Praxmarer of the PIIAI, where the average property and casualty account pricing has shown significant declines from last year. A year ago at this time, pricing was flat to 3 percent increases; this year, members are seeing 2 to 4 percent decreases on average. Although there are exceptions, such as contractors, medical malpractice and habitational, even these lines are seeing more writers jostling for business, Praxmarer said.

Part of the reason for this is changes in the economy, he theorized. Insurance companies who were cleaning up on investments in the 1990s are now tying most of their income on premiums, with investments comprising only about 5 percent of most insurers’ profits.

Meanwhile, at the statehouse…

The industry’s relationship with state legislators is an important part of the stability equation. In Ohio and Illinois, the insurance market stability seems to carry over into this relationship as well.

Ohio operates on two-year legislative sessions, and is currently nine months into the first year, said Vaughan Flasher, president of Capital Strategies Group, the external lobbyist for the Ohio PIA. The state budget dominated this odd-numbered year, and the big issue in Ohio was the governor-proposed budgetary changes that would move from corporate franchise tax to gross receipt tax, a system known as the “cat tax,” short for commercial activities tax. Only a few states have adopted a similar system and the jury is out on whether it will help or hurt the Ohio economy, but Ohio PIA has determined that its implementation will have a minor impact on their members, Flasher said.

Beyond the budget, probably the biggest ongoing legislative issue in Ohio is the ongoing investigations into bid rigging in wake of Spitzer, Flasher said. The Ohio DOI is currently investigating several insurers, primarily large insurance brokers placing health lines, asking for in-depth information on company policy. Although the organization has a good relationship with state regulators, they’re warning them against taking a “shotgun approach” to the commissions issue, and asking them to focus on gleaning targeted information that will provide real information, Flasher said.

Ohio already has a statute that prohibits fee charging in addition to commissions, as well as a disclosure requirement, so “the last thing this organization will stand for is any onerous, exceedingly burdensome regulation,” especially since their membership is primarily agents who write personal and small commercial business, Haenszel said.

However, the issue seems to be losing steam, according to Hardy of the Ohio Big I. Support at the DOI has shifted to the less invasive and effective model developed by the National Conference of Insurance Legislators (NCOIL), Hardy noted.

“I don’t really see a (legislative) crisis because the public, their customers, just don’t care,” and as the market softens further, there could be less interest, Hardy said.

Of more concern is a legislative focus on credit information protection, in the wake of the ChoicePoint breach. Currently pending in Ohio is H.B. 104, which resembles California legislation that requires credit information companies to notify consumers when there is an information breach. The bill, which has passed the House, is fully supported by the Ohio PIA, Flasher said.

A touchier subject is insurers’ use of credit scoring in underwriting and rating, a practice that has in some ways undermined the Ohio agents’ relationship with their carriers, according to the Ohio PCI. Agents find complying with insurers’ credit demands burdensome, especially in light of the fact that some legislators want to ban it completely. Although regulations are on the books limiting credit use and directing how it’s used, this issue is bound to come up with lawmakers, Haenszel noted.

For agents, it has increased workload, making it longer to process applications – where it used to take 10 to 15 minutes to process a single application, now it takes over an hour. Problems lie in the use of proprietary systems and duplicate data entry – because of the confidentiality of credit information, agents can’t use competitive rating systems. And carriers’ differing credit criteria mean a lack of standardization, must enter to each different insurer’s web site.

“Credit use has increased agent workload, political backlash, and yet companies are collecting fewer premiums to offset all this,” said Haenszel. “Agents are doing more of the company’s work for less money. This has seriously damaged the relationship between carriers and agents in Ohio.”

Partially in response to this schism, the Ohio PCI recently formed Market Source, an aggregator owned by 50 member agencies with contracts with up to seven insurers. The program provides smaller agents with access to markets they didn’t have before, providing them with 100 percent of commissions and no fees.

In Illinois, traditionally a good place for insurers to do business, observers are understandably concerned about maintaining the good regulatory environment that attracts business, said Phil Lackman, vice president of government relations for PIIAI.

The state recently passed a workers’ compensation bill which was developed primarily by Illinois businesses. Effective February of 2006, it introduces among other provisions a comp fraud unit and a badly needed 7.5 percent increase in compensation for lost wages.

And the state’s new medical malpractice bill, which establishes a $500,000 caps on noneconomic damages for physicians, could be legally challenged, Lackman noted. The Illinois Supreme Court twice rejected the caps concept. Still, the reform is badly needed as although there are officially six medical malpractice writers in the state, only one or two do most of the writing, he added.

Currently the only insurance-related bill pending in the Illinois legislature is S.B. 11, the “Healthy Illinois,” which would require insurer assessments to maintain a pool for those without health insurance. The association opposes the bill, believing that Illinois consumers would be better served by a variety of health savings accounts (HSAs) than an unwieldy pool program.

Rating the regulators

Another important aspect of why these states are good insurance markets is a solid working relationship with state insurance regulators, and this is the case in both Illinois and Ohio. Of primary interest is solvency, especially in light of a softening market, and the ongoing spotlight of Spitzer fallout.

PIIAI has expressed concerns about understaffing at the Illinois Division of Insurance, said PIIAI President James W. Ander. With retirements, budgetary cutbacks and other attrition over the past three years, the Department has been left with a “brain drain.” The organization has met with the Division and its new director, Michael T. McRaith, who was a featured speaker at the group’s annual convention last week.

At the Ohio Department of Insurance under director Ann Womer Benjamin, things seem stable, said Hardy of the Ohio Big I. Over the past several years, there have been only two domestic liquidations – one company was undercapitalized, the other was a medical malpractice carrier, he noted. Even the state’s urban areas are good investments for insurers such as Progressive, which maintains a home office in Ohio. Even in areas like the state’s assigned auto risk pool, the last he heard there were 27 vehicles, out of 80 million vehicles in the state.

Hardy attributes Ohio’s success to both its regulatory climate – which, like Illinois, is geared to open rating. Filings in the state are made for informational purposes rather than approval, he noted.

In the final analysis, though, is the state’s unique marketplace stratification that makes it tick, according to Hardy. From small mutual companies like Sandy & Beaver Insurance Co., to regional carriers like Cincinnati, Westfield and the Grange, up through the national carriers, Ohio has “a unique market structure that has worked for many years,” he said. “That’s why companies are lined up to get into the state.”

“I’ve been in the business 30 years and have seen market cycles come and go, but in Ohio there’s stability,” he said. “It’s a great place for insurance buyers and beneficial to insurers and agents alike.”