Collective clout: purchasing coalitions are helping insurers spread the risk and offer employers and employees substantial premium savings.

Proving yet again that there's strength in numbers, companies have been combating rising insurance-coverage costs by forging partnerships, often within their own industries, to leverage the insurance-buying clout of their combined employee numbers.

Their coalition insurance purchases, which range from property damage and business interruption to prescription drugs, workers' compensation and long-term care, can amount to significant savings. For example, the seven companies in the National Prescription Drug Coalition said they were able to achieve an average annual drug-spending increase of 10% in 2002, compared with the national average of 17%.

For employers, coalition purchasing for benefit plans can translate to premiums among the lowest in the marketplace. And for member companies, there's no need to spend valuable time negotiating for the best deal. "The product has really been defined for them, and they can feel comfortable that there's been a solid due diligence conducted on the program," said Scott Beck, national sales director, MetLife long-term care. "In many ways, that's an enticing opportunity for organizations."

The concept of coalition purchasing isn't new. But mounting insurance costs, together with the prospect of improving the quality of benefit programs and boosting employee satisfaction, are spurring many companies to join these groups. Major broker Aon Consulting Inc. manages several of these coalitions, including the National Long-Term Care Coalition, the National Prescription Drug Coalition, the National Group Homeowners and Auto Insurance Coalition, the National Group Legal Plan Coalition and the National Dental Coalitions.

With four of these coalitions--long-term care, homeowners and auto, legal services and dental, MetLife is the exclusive product provider.

In the case of the National Long-Term Care Coalition, MetLife provides long-term-care insurance to employees of 29 member-companies, including industry giants Chevron/Texaco, Anheuser-Busch, Disney Worldwide Services, Kellogg Co. and United Parcel Service. This coalition got started in 1998 when officials of the former Mobil Oil Corp. began approaching other large organizations with the idea of forming coalitions, in this case to purchase long-term-care insurance. The initial managers, Coalition Purchasing Group, went out to the dominant long-term-care providers in the market and, through competitive bidding and site visits, narrowed down the carriers in the running.

Although MetLife hadn't proposed this plan in the first place, it immediately recognized its value. "We put all our efforts behind being the carrier that was endorsed by the coalition," Beck said. And ultimately, the member companies did choose MetLife as the sponsor. In the United States, this is the only employer organization of its kind in long-term care, Beck said.

Achieving a Critical Mass

"For MetLife, a coalition is a meeting of critical mass in terms of the number of eligible employees who would possibly purchase long-term-care insurance," Beck said. "So with the coalition, we were looking at a potential population of over one million eligible employees. The immediate benefit of that is dramatic."

Also, distribution costs for MetLife are much lower through the coalition arrangement. The insurer benefits by not having to go out to the market to attract individual organizations to equal those million eligible lives, Beck said.

Since the coalition's creation, there's been substantial growth in the number of companies that have signed on. The number of eligibles currently totals 1,050,000, he said. So far, 44,600 of those are participating, for a total annualized premium of $23 million.

Aon said that long-term-care benefits are quickly becoming a standard component in the benefit programs of major companies. In fact, sales of long-term-care insurance seem to be benefiting from the proximity of baby boomers to retirement and improvements in mortality. In April 2003, industry researcher LIMRA International reported that through the third quarter of 2002, long-term-care insurance sales rose more than 5% over sales in 2001. During that time, more than 366,200 policies were sold, with $662.8 million in new premium.

The industry believes that the target market lot participation of employees in long-term-care insurance within employer plans is in the 40-to-59 year age range, Beck said. "Participation is rising slowly, but it's still not at a level that we would like to see," he said.

Protecting the Business

Earlier this year, several U.S. and European pharmaceutical and medical products companies, working with insurance broker Willis Group Holdings, joined forces to establish Pharmaceutical Insurance Ltd., or PhIL, a mutual insurance company, that provides excess property damage and business interruption insurance for its members.

PhIL provides a broad policy covering all risk perils including terrorism, wind, flood and earthquake. There are no sublimits, and the insurance provided is $150 million excess of a retention of $50 million per member, per occurrence, said Gordon Prager, a director of Risk Management Consulting for Willis Risk Solutions, North America.

PhIL is an assessable mutual, one in which the members can be assessed in the event that accumulated funds are insufficient to meet expenses, including those of claim settlements. There is an annual premium that is apportioned to members based on their respective proportionate shares of ratable assets, an asset measurement publicly available through the annual reports of the different companies.

PhIL was formed in Bermuda in May 2003 and began underwriting insurance for its members effective July 1. Its seven founding owners/members are AstraZeneca, Aventis, Baxter, Becton Dickinson, Bristol-Myers Squibb, GlaxoSmithKline and Sanofi-Synthelabo.

The gestation period for PhIL stretched back nearly a year, Prager said. The effort began when a group of risk managers from pharmaceutical companies invited a number of consultants, insurers and brokers, including Willis, to meet with them to discuss product liability insurance.

In the soft market of the 1990s, one would have expected to see the development of a facility that could address "the 600-pound gorilla of products liability," but it never happened, Prager said. Willis had done some research and had found that major pharmaceutical companies, which were being charged substantial premiums for high-capacity property damage and business interruption insurance, had produced very few large property losses during a l0-year period.

"So we met with this group of risk managers and suggested that we undertake a study to validate some of the underlying assumptions--not only the loss experience but also the strong assumption that being pharmaceutical companies, and generally subject to Food and Drug Administration rules and regulations that require fairly significant property-risk protection environments, this was a group that would have a superior risk profile," Prager said.

Willis combined the pharmaceutical companies' superior risk profile with their historical loss experience, then saw that they had paid enormous premiums into the commercial insurance marketplace for layers of risk for which the marketplace had not sustained any losses over that 10-year period, Prager said.

"We believed that there was some sort of a mousetrap that could be built," he said. "And the proposition that there could be a good long-term economic model for a property mutual insurance company amongst an industry group that had a superior risk profile, that vision stood independent of the severe hard marketplace experienced in virtually all lines of insurance, particularly in the year 2002."

If anything, he added, the hardening market just brought this issue into sharper relief for these companies.

PhIL was established to provide long-term premium and coverage stability to member companies that have experienced significant volatility through the insurance market cycles. Interestingly enough, in the run-up to PhIL's launch and in the months afterward, Willis, the members of the facility, and other pharmaceutical companies, observed an unanticipated development, Prager said. "The very fact of the formation of this company moved the commercial insurance marketplace," he said. "Terms and conditions, capacity and pricing, all moved visibly and significantly in a positive direction."

Willis recognized that underwriters had treated pharmaceutical companies as a distinct sector or class of business with a loss by an individual company often deemed to reflect on a loss potential of all companies, Prager said. The broker also believed that the models the underwriters were using assumed that there could be a natural catastrophe loss in every year. "Of course, we haven't experienced natural catastrophe losses in every year, that is, not the sort that would impact these companies," he said. "We also validated our a priori informal homework and determined that there had been no losses in excess of the $50 million retention threshold--that is, no losses that would have impacted this facility."

Considering all the premiums that these companies had paid to commercial insurers, the pharmaceutical industry, at least in terms of catastrophe property risk, had been "something of a cash cow for the commercial property insurance market," Prager said.

In forming a mutual to take a significant layer of their excess property catastrophe risk, these pharmaceutical companies would, by ceasing to pay those premiums into the marketplace, cease subsidizing poor underwriting results for other industries, he said. Finally, Prager added, they could structure a facility that reflected their unique historical loss experience.

"The end game for all of this is to reduce long-term cost of risk and do so while managing the potential year-on-year volatility of the marketplace," he said.

It's still too early to judge PhIL's impact. But even if the facility were to sustain losses in its first year, it would not change the perspective of its founding members, Prager said. "These companies are philosophically married to the belief that this is the right long-term economic model," he said.

Other similar property mutual companies exist. One of the oldest and most successful is OIL, a Bermuda-based facility formed in the 1970s for the oil and gas exploration industry. And within the past two years, about a dozen of the insureds in OIL formed a similar company; sEnergy, to handle business interruption for their industry, Prager said.

Bringing Competitors Together

Willis is seeing increased interest in the coalition model from other common-interest groups--companies that are otherwise vigorous competitors in an industry, but which have shared interests and common ground in risk-management objectives.

There are direct and indirect benefits in joining forces to form a facility, Prager said. "In coming together in a formal fashion, a group can acquire what I term 'voice presence,'" he said. "So often we see associations that are simply that--loosely knit aggregations of companies that may unite to enjoy some bulk purchasing power but, more often than not, have conferences in which they talk about themes in common. There's nothing wrong with that, but they aren't necessarily driven by a compelling need or a great goal."

So if these companies want to act collectively, they don't have the punch or force or influence that they would have if they were bound together in some more formal fashion, Prager said. Uniting in the form of a mutual gives voice presence and the opportunity to influence marketplace behavior. Further, such competitors have an opportunity to build relationships of trust and confidence, he said.

"You can also presume if the mutual behaves according to plan, its members have the opportunity to accumulate capital that can be deployed to achieve other objectives in the future," Prager said.

Participating in a coalition also allows members to share ideas and concerns, Beck said. For example, with the long-term-care coalition, MetLife organizes conference calls twice a year with all member companies. "We discuss issues impacting their plans, how the program is running, and then they get to share ideas and thoughts with each other," he said. "So we believe that providing a forum for benefits folks is very beneficial to them."

Beck said the biggest challenge for MetLife is maintaining the coalition's growth. "We've attracted 29 organizations over a five-year period and we certainly want to see that grow over the next planning cycle." he said. The big question, he added, is how the insurer will attract additional organizations to join the group.

He sees a time when this approach will not only interest other large organizations but will hold broad appeal to middle-market companies. It will take a focused group, however, to pull in the midsized firms, he noted. "That's why the large market coalition worked--because there was a group of people focused on finding companies that wanted to be members of this coalition and then they went out and negotiated," Beck said. "As long as there is a facilitator, then it can get done."

Within a few years, he expects to see an expansion in coalition insurance business in general. "I think the rise in interest in voluntary benefits will result in more interest in coalition purchasing," Beck said.