The FSA (Financial Services Authority) is considering options including the mandatory disclosure of broker commissions to solve continued concerns over conflicts of interest and transparency in the Commercial Insurance market.

The FSA has been looking at broker fees for more than a year, but a report in December found rules forcing insurance brokers to be more transparent could not be justified on cost-benefit grounds.

Under current rules, insurance brokers are not required to disclose how much they receive for arranging cover for risks unless specifically asked to do so by their clients.

The FSA said, however, that it was concerned a lack of transparency was hurting customers and creating market inefficiency. Customers, it said, were still poorly informed about elements including the cost of mediation services, or the commissions, and whose capacity the intermediary is acting in.

In a discussion paper, which the industry can respond to until June 25 2008, the watchdog said it was looking at options for addressing its worries, including a more rigorous enforcement of existing rules, an enhanced regime for disclosure on request by the customer and mandatory, automatic disclosure.

“It is important that insurance buyers know what they’re paying for when they use an intermediary. We remain concerned that for some buyers of commercial insurance this is not the case,” Dan Waters, the FSA’s director of Retail Policy and Themes, said. “Our discussion paper offers some potential regulatory solutions, but the door also remains open for an industry-led response.”

Broker fees have been a subject of controversy since a 2004 probe in the United States by New York Attorney General Eliot Spitzer, which showed some brokers had rigged bids.

NEW YORK – For many people, the first thought that comes to mind when they think of insurance is costly premiums. But as April 15 approaches, remember that some insurance products come with tax advantages that can save you money.

Consider these five insurance tax reminders by the non-profit Life and Health Insurance Foundation for Education (LIFE). Some of the benefits include using various types of insurance to pay your estate taxes, helping you accumulate money on a tax-free or tax-deferred basis and even lowering your taxable income.

• Life insurance death-benefit proceeds are generally income-tax-free. As long as your beneficiaries are specifically named, they won’t have to pay income taxes on the proceeds they receive from your life insurance policy.

• Sixty-five percent of 65-year-olds will require long-term care services at some point in their lives. For the many who will require services for several years or more, the cost can be astronomical, so it often makes sense to consider long-term-care insurance. Depending on your age, adjusted gross income and other medical expenditures, the premiums you pay may be tax deductible on your personal income tax. If you are self-employed, there are even greater tax advantages by paying your insurance premiums through your business.

• The annual gains you earn from traditional investments and savings vehicles must be claimed as income on your tax return. However, the gain in cash value that builds up over time in permanent life insurance policies can be tax-free or tax-deferred, depending on how you withdraw the money later on. What’s more, these gains are not subject to the alternative minimum tax.

• An annuity can provide you with a guaranteed lifetime income and thereby deliver some much-needed stability and predictability to your retirement security plan. Moreover, with an annuity all gains are tax-deferred until you retire – at which point you may be in a lower tax bracket than you are currently. The portion of the funds paid out that are made up of previously taxed principal will be received tax-free. If you’ve hit maximum limits in other tax-deferred retirement savings accounts, an annuity can be an attractive option.

• An irrevocable life insurance trust (ILIT) can help minimize estate taxes. While life insurance proceeds at death are almost always free from income tax, they may be subject to estate taxes if they bring your assets over the exemption limit set forth by the IRS. An ILIT immediately removes new life insurance policy proceeds from one’s taxable estate by setting up an independent legal entity that is the owner and beneficiary of the policy. The ownership of an existing policy may also be changed to an ILIT, but the death benefits won’t be tax-free until three years have passed from the date the ownership was transferred to the ILIT.

Between 2001 and 2005, homeowners insurance rates in Alabama jumped by 69.1 percent — the second-largest rise nationally — pushing the state’s average premium for the most common kind of homeowners insurance well above the national norm, according to figures from the National Association of Insurance Commissioners.   

Only Minnesota, with a 70.3 percent increase, was worse.

The high prices come despite the fact that Alabamians have lower incomes and are typically insuring less expensive homes than in most other states.

Since 2005, the pain for homeowners in Mobile and Baldwin counties has continued to worsen, although there have been signs of improvement in the state’s other 65 counties, said Insurance Commissioner Walter Bell. The commissioners’ association has yet to release data for 2006 and 2007.

It’s not clear when rates might moderate. Bell said that “if we don’t have a catastrophe this year,” he expects costs to rise “at a slower pace” beginning next year.

Bell, a former Mobile insurance executive who has been the state’s insurance commissioner since 2003, said he understands that consumers are unhappy about rising prices. But he noted that private companies are still shouldering all risks of hurricane damage in Alabama, unlike in other places where state government has taken on risk or insurance is unavailable.

“If we maintain a market in a very high-risk area and other states can’t maintain a market in other high-risk areas, I would call that successful,” Bell said. “All of our risks are still within the private marketplace.”

Another viewpoint Others, though, say that a regulatory approach that focuses most on whether private policies are available, and secondarily on price, ignores the realities facing homeowners.

“If it’s not affordable, it’s not protecting people,” said Amy Bach, the executive director of United Policyholders, a California-based group that advocates for consumer-focused insurance policies nationwide. “If they can’t afford it, then they’re going bare.”

In 2005, Alabamians paid at least 67.76 cents per $100 of coverage, around 40 percent more than nationwide numbers, a Press-Register analysis of commissioners’ association data shows. This was the sixth-highest rate in the country. The median Alabama policy covered less than $125,000 in value.

Nationwide in 2005, a typical homeowner’s policy cost 1.65 percent of the income of a median household of four. In Alabama, it cost 2.22 percent.

State Sen. Ben Brooks, R-Mobile, who is pushing a package of bills meant to entice more private insurers to write policies along the Gulf Coast, said high prices and State Farm’s plan to cut back on new business in Mobile and Baldwin counties should show that the market hasn’t healed itself. State Farm, Alabama’s largest property insurer, joins No. 2 Alfa and No. 3 Allstate in such action.

“For those out there in the world of state government who say that this problem is improving, this reinforces that perception is wrong,” Brooks said.

The biggest jump in prices came even before 2004’s Hurricane Ivan. In 2003, prices in Alabama went up 27.8 percent, the country’s steepest rise. Nationally, rates climbed 12.6 percent that year.

From 2003 to 2004, Alabama’s average premiums jumped 16.4 percent, also top in the nation. The national average rose by 9.1 percent.

Increases in 2005 were more moderate, 6.8 percent in Alabama, compared with 4.8 percent nationwide.

Ninth-highest average

The result was to make the average total premium in Alabama the ninth-highest in the nation in 2005. And that’s before the impacts of Ivan and 2005’s Hurricane Katrina were fully factored into rates.

Alabama is a high-risk state compared with many, said Bob Hunter, director of insurance for the Consumer Federation of America. Like others in the same neighborhood, it not only has hurricane risk on its coastline, but tornado risk as well.

For Bell, the bottom line is that people near the Gulf will always pay more.

“It’s the cost of living where you live,” he said, noting that people in New York pay high rents and high auto insurance rates.

Some observers put it more bluntly.

“Another legacy of Hurricane Katrina is the growing realization that living on or near the coast is a luxury that not everyone can afford,” wrote Michael Walters in 2006. Walters is an actuary for Tillinghast, a leading consulting group to insurance companies.

Growth affected?

High prices could stunt the growth of coastal counties, said Gregory Squires, a George Washington University sociology professor who studies insurance pricing and availability and advises the commissioners’ association.

“It makes the cost of housing and development higher,” Squires said. “At the margins, at least, it has to have an adverse impact on property values.”

Bell said he judges the health of the coastal market in part by the growth of the Alabama Insurance Underwriting Association — the “Beach Pool.” That insurer of last resort provides coverage for people who can’t find it from private companies by forcing firms that write less than a proportionate share of business in Mobile and Baldwin to shoulder the risk in exchange for expensive premiums.

When private coverage is unavailable, Beach Pool policies go up. The pool saw big increases in the value of property it was insuring in 2006, but that growth began to slow in 2007.

The commissioner also says key indicators for him are whether companies are pulling out of the market, and how many complaints the department gets from people who have their policies non-renewed.

Others say that declining rates would indicate a healthy market.

“Right now, in your state, when prices are higher, you would expect to see smaller companies coming in and undercutting the big ones,” said Bill Newton, executive director of the Florida Consumer Action Network, based in Tampa.

Some rates fall

Rates have come down for commercial properties and large condominium associations, according to brokers, condo managers and Bell. That improvement has been driven in part by wider availability of reinsurance, a secondary level of insurance that primary insurers buy to pass off risk to others.

Those gains could eventually trickle into the homeowners market.

“The commercial market is a leading-edge barometer, always is,” Bell said. “It will go up faster and come down faster.”

Consumer advocates Bach and Newton are among those who suggest that Alabama should consider stronger intervention. But Bell has been averse to public interference with private companies, or setting up a publicly run insurer, as Florida has done.

“If we replace the free-market system, then we put the taxpayer on the hook,” Bell warned.

“Would you rather sit in this chair?” he asked. “It’s not easy. It’s a very complex situation.”