September 11 Attacks Fuel Insurance-Rate Increases

Since the terrorist attacks, reasonably priced insurance has become harder to find.

Premiums on all insurance-personal and commercial-have increased since September 11. Commercial property lines and commercial umbrella insurance premiums have increased an average of 30% to 50% over last year, according to a survey by the Council of Insurance Agents and Brokers in Washington, D.C.

The council survey, taken after the terrorist attacks, reported that premiums on one customer's $5 million trucking policy went from $45,000 to $157,000. A $10 million commercial umbrella policy quoted at $8,900 jumped to $27,000 this year.

"It seems consumers don't find and can't get the same coverage they got a year ago, even with higher rates," says council President Ken Crerar.

The September 11 attacks are not primarily to blame for all the insurance hikes, although they may have hastened the increases. "This is a classic cycle turn," declares Bob Hunter, director of insurance for the Consumer Federation of America in Washington, D.C. The increases, he says, are "just an opportunistic grabbing for money at a time they know people are going to be afraid not to have insurance, and competitors are not going to seek market share."

"Rates have been going up incrementally for some time," says Rita Nowak, assistant vice president for the Alliance of American Insurers in Downers Grove, Ill. Commercial line increases, she adds, came after premiums had been lower than they were in the 1990s.

Besides monitoring client price increases, advisors need to watch for new terrorist exclusions on all types of insurance. "It could be anything at this point," says Kevin McCarty, who chairs the National Association of Insurance Commissioners' (NAIC) catastrophe group. "It's up to the state jurisdiction."

There have been requests in a number of states about group-life and individual-life insurance exclusions for war, terrorism and bioterrorism, he notes. "There will be a number of states where they're going to approve it. There are a certain number of states where they don't have authority to disapprove it."

Terrorist exclusions already are being added to commercial property-casualty insurance, including commercial umbrella-liability policies.

The Insurance Services Office Inc. (ISO) in Jersey City, N.J., which words property-casualty policy exclusions, also has filed language for terrorism exclusions on personal property-casualty lines. The exclusion does not affect personal auto, but would apply to personal property and personal umbrella policies.

State insurance regulators initially resisted the ISO's terrorism exclusion for personal property-casualty lines.

"When you look at commercial properties-like Disney World or Mall of America-you can easily understand the catastrophic risk," says Montana Insurance Commissioner John Morrison. With personal homeowners, auto insurance, life and health insurance, "it's much more difficult to envision a scenario where the liquidity of the industry will be in danger."

The majority of state insurance regulators-excluding New York and California-already have approved limited terrorism exclusions on commercial property-casualty lines. If an insurer invokes a terrorism exclusion on such a policy, it's apt to kick in when insured losses exceed $25 million or if there is serious physical injury to at least 50 people. But nuclear, chemical or biological terrorism may be excluded from coverage. Most terrorism exclusions are slated to be eliminated if Congress approves an alternative financial solution.

Don't assume the $25 million terrorism threshold automatically exempts small businesses, warns Morrison, who heads the NAIC legal-issues committee. The reason: The $25 million threshold refers to total insured losses resulting from an event. If a city block is blown up in a terrorist attack and insured losses total $50 million, your client's $1 million business could be left out in the cold.

Also, new terrorism exclusions could render moot a court decision that limited act-of-war exclusions to acts committed by "sovereign states," Morrison says.


Hedge Fund Of Funds Start To Proliferate

Montgomery Asset Management of San Francisco says it soon will be offering a hedge fund.

The "hedge fund-of-funds" will be the first in a series of rollouts of alternative-investment products, the company says. Other multistrategy hedge funds, and private equity, venture capital and real estate funds, also are planned, it says.

"The inclusion of diversified, high-quality alternative investments can improve portfolio returns while reducing overall volatility, since alternative investments have a low correlation to traditional investments," says Montgomery Managing Director Bill Santos.

Many investment companies are turning to alternative products to make up for dismal performance in traditional mutual fund sectors.

Neuberger Berman Inc., AIM, Putnam Investments, OppenheimerFunds Inc., Franklin Resources Inc., State Street Corp., Wells Fargo & Co., Bank of New York Co. and Phoenix Cos. Inc. all have announced plans to enter the alternative-investment business through acquisitions or alliances in the past year, according to Dow Jones News Service. And Undiscovered Managers of Dallas is also expected to unveil a fund-of-funds platform of its own.

Montgomery's first product will be an absolute-return hedge fund-of-funds that is diversified across multiple strategies and funds, with lower-than-average investment minimums, Santos says.

"There's a lot of misunderstanding about alternative investments, their risk-return characteristics and how best to employ them as portfolio diversifiers," Santos says.

Montgomery's offering will have investment minimums of $25,000, which is at the low end of the $25,000-to-$250,000 range required by other registered hedge funds, according to Dow Jones. Santos says future Montgomery funds may carry even lower minimums.


Royal Alliance Buys California Brokerage

Consummating a courtship that started eight years ago, Royal Alliance has closed a deal to buy the assets of PIM Financial Services.

The San Marcos, Calif.-based broker-dealer has a network of 100 financial advisors, with commission revenue of about $7 million in 2001 and about 12,000 clients.

Royal Alliance originally approached the company in 1994, but a deal was never struck. Negotiations, however, were rekindled by Royal Alliance President and CEO Mark Goldberg, who took the job in spring 2001 with the goal of growing the business.

Goldberg says it's his first significant acquisition since taking the job, and it probably won't be his last. "There are others in the offing of similar and quite a bit larger size," he says.

Royal Alliance, with sales of more than $300 million in 2001, is looking to grow both internally and through acquisitions, he says. "I would say over the past few years we've been out of the market in terms of aggressively growing the business," Goldberg says. "At the time I took over this firm back in May, we kind of reinvigorated our growth and recruiting activities."

PIM's top managers will be staying on after the deal, which is expected to close early this month, Goldberg says. PIM officials say after rejecting a buyout offer in 1994, they felt the time was now right for a merger. With the business booming for virtually an entire decade, many broker-dealers were content to let the good times roll. Now, with growth slowing down and the costs of regulatory compliance and technology continuing to rise, more firms are amenable to considering an acquisition.

"An alliance with Royal provides us with the technology and resources to be more of a presence in the brokerage community," says PIM Financial President Mary Limoges. "The resources and deep pockets of a big firm, personalized service, close working relationship and the ability to maintain our culture will give us the best of all possible worlds."


CPAs Reject 'Super-CPA' Designation By Wide Margin

A controversial effort to create a new "super-CPA" credential was overwhelmingly defeated by members of the American Institute of CPAs.

Members voted 83,980 to 50,034 against the proposal, which required at least a two-thirds majority to move forward. About 41% of the AICPA's membership voted.

The proposal called for the creation of a new global credential, called Strategic Business Professional (SBP), that would have encompassed business skills and competencies often performed by CPAs, but not included in the CPA credential.

The vote represented a setback for the AICPA, which spent nearly $5 million over the last three years to research the proposal, which would have required the creation of a separate organization to administer the credential.

"We believe we took the right course by putting this proposal into the hands of members," says Barry Melancon, AICPA president and CEO. "The members have spoken, and we will not move forward with this initiative."

Among the contentious aspects of the proposal was that it would have enabled non-CPAs to earn the global credential. Critics claimed the new credential would dilute the integrity of the CPA designation. Proponents, however, argued that because of the rigorous requirements for receiving the credential, it was expected that it would be mostly CPAs who would receive it.


Schwab Study Urges Advisors To Expand Services

Financial advisors looking for success in the coming years will need to expand beyond just financial planning and asset management. Advisors who expect to grow their businesses will need to cater to affluent investors who are looking for a broad array of wealth-management services, Schwab Institutional says in its latest industry report.

Clients will be looking to advisors for access to private banking and tax preparation, charitable giving, insurance, client-education, business-advisory, wealth-counseling and concierge services, the report says.

"Wealth management will play a major role in the financial services industry going forward and generate a lot of growth for advisors," says Mark Tibergien, a principal at Seattle-based Moss Adams LLP and a consultant to independent financial professionals who was interviewed for the study.

The report notes this is a key time for financial advisors because of the growth opportunities that lie ahead. The investment advisory business is expected to more than double to $2.3 trillion over the next five years, and much of the growth will be driven by affluent investors, the report says.

These investors represent a growing demographic. The number of investors with at least $5 million in assets has quintupled since 1994, the report notes. Yet only 25% of affluent investors have formal financial plans.

That creates wide opportunities for financial advisors, but growth won't come easy, the report says. That's because much of the market is made up of the "newly affluent," self-made people whose needs go beyond simple planning and asset management.

"Entrepreneurs need advice on valuing and selling their private or closely held companies, or how to pass these illiquid assets to the next generation in a tax-efficient way," the report says. "Corporate executives, on the other hand, find their wealth often is tied up in complicated executive compensation structures such as equity grants, stock options or other deferred compensation plans."