Special report on sponsored insurance programs.

Get answers from this latest survey on types of coverage, program operations, association remuneration, and more.

It's beginning to sound like a broken record: Association executives are being asked to provide more member services and opportunities even as economics force them to depend less on dues to finance their operations. This is a tremendous challenge and one that most association management experts believe will never go away.

In the belief that association-sponsored insurance programs are one very important answer to this challenge, ASAE and the Aon Specialty Group's Risk Management Services consulting unit, Washington, D.C., are producing the 1993 Association Insurance Program Guide and Survey Report (see sidebar, "For All the Facts"). This publication contains how-to instruction for implementing and managing a successful program, as well as statistics from our broad survey (conduced in fall 1992) of ASAE members. The statistics allow association and insurance executives to compare their programs with those of other associations. Specifically, you'll be able to compare coverage forms, program operations, business structures, association remuneration, and coverage types.

We have no doubt that insurance-related program opportunities hold real promise for the association executive in search of new and better member services and additional income. The benefits are certainly borne out by data gathered through his and previous ASAE surveys (see "Sponsored Insurance Programs Come of Age" in the November 1988 issue of ASSOCIATION MANAGEMENT). For example, the average sponsored insurance program

* produces between $200,000 and $300,000 a year in income for the sponsoring association;

* requires fewer than $10,000 annually in expenses to the association; and

* requires less than 25 percent of one staff member's time per year.

Obviously, some association executives are realizing enormous benefits from their insurance programs. Yet we know that many others haven't even investigated their opportunities. With this article, which previews early information gained from the survey, we'd like to take some of the mystery out of association-sponsored insurance programs by providing some facts about them.

When to begin

Some association executives mistakenly believe that association sponsorship of insurance programs is a new phenomenon. In actuality, many such programs have been in existence for well more than 20 years. Our many years of consulting for associations confirms that the most successful association-sponsored programs are those that have continually undergone change to adapt to evolving insurance and association management trends.

Often the decision to launch a new sponsored program can be traced to market forces triggered by the cyclical nature of the insurance industry. Several years of relatively inexpensive, easily available insurance coverage will be followed by difficult market periods during which some lines of insurance become almost unattainable. It is during "soft" insurance markets that associations can negotiate the most attractive contractual arrangements with commercial insurance carriers and brokers.

Most associations, however, begin offering programs during difficult market periods, which suggests that they are reacting to market forces, rather than fulfilling long-range planning goals, when they launch a such programs.

The health insurance industry has been in a "hard" market for many years. Member difficulty in obtaining appropriate health insurance coverages has led many associations to adopt sponsored health insurance programs. For the last four or five years, however, the property and casualty insurance market has been quite soft--and the rush for sponsored property and casualty programs has leveled off.

Indications are that this will change in 1993. Net after-tax earnings for the first nine months of 1992 for the property and casualty insurers fell 37.1 percent to $6.3 billion when compared to the same nine-month period in 1991.

Third-quarter 1992 results generated a net after-tax loss of $1.1 billion compared to a $3.6 billion profit realized during the third quarter of 1991. This earnings decline was certainly in part due to the large hurricane losses suffered by the industry in 1992.

Most experts, however, believe that the real, underlying problem is inadequate rates and understated reserves. They believe that the property and casualty insurance market is due for a change. Consider that the property and casualty industry's annualized nine-month 1992 return on equity of 5.2 percent is at its lowest point since 1985--the midpoint of the insurance crisis we all remember too well.

When return on equity is this low, it seems certain that many investors will look elsewhere to invest their funds. We believe this is a harbinger of the hard property and casualty insurance market to come. This hard market should provide an opportunity for association executives looking for new member services and sources of income. When members have difficulty purchasing insurance on their own, association-sponsored insurance programs, which use the leverage of group buying power, can become particularly attractive and valuable. There is every reason to believe 1993 will bring significant opportunities for sponsored property and casualty insurance programs.

Survey results

Of the 5,113 surveys mailed, 18 percent, or 922, were returned. Of those returned, 289 associations reported sponsored program operations. Here are some of the most interesting findings:

* An association's budget size does not have a significant impact on the association's propensity to sponsor an insurance program.

* Twenty-four percent (234) of those associations responding had a sponsored life or health insurance program, while only 16.6 percent (162) had a property and casualty insurance program. We believe this reflects the very soft property and casualty insurance marketplace and the extremely difficult health insurance environment.

* Medical insurance was the most frequently association-sponsored life and health program.

* The largest premium volumes were generated by workers' compensation and professional liability insurance coverages.

* Associations earned remuneration from their sponsorship averaging between $200,000 and $300,000 per year. A frequent form of remuneration was royalty income from sponsorship agreements.

* More than three fourths of those associations sponsoring a property and casualty insurance program realized some form of remuneration.

* Most of those associations having sponsored life and health and/or property and casualty insurance programs indicated that they were generally satisfied with those programs and that the programs were extremely valuable in attracting new members.

* About half of the associations sponsoring property and casualty insurance programs indicated that some revenue was developed for member insureds, most often in the form of dividends.

* The great majority of associations sponsoring property and casualty insurance programs (86.3 percent) had tailored insurance coverage for the particular needs of their members; tailored coverages were rarely reported for life and health programs.

* Approximately 80 percent of sponsored property and casualty programs employed some form of association-sponsored loss-control assistance (i.e., assistance in reducing or preventing losses covered by the sponsored program). These loss-control efforts generally took the form of written material, seminars, or on-site inspections.

* The trend among associations to initiate their own insurance agency operations remains strong. Captive insurance initiatives have, however, leveled off--probably because of the soft property and casually insurance market conditions. (See the table of definitions of types of association-sponsored insurance programs.)

* More than 90 percent of the respondents indicated "member service" as the primary reason they initiated programs.

* Respondents' interest in sponsored workers' compensation programs has increased dramatically.

Noteworthy trends

Most survey respondents (both those with property and casualty and life and health programs) sponsor insurance programs offered by commercial insurance carriers--most frequently mentioned were CNA, AIG, Lloyds, Dodson Group, Sentry, CIGNA, Continental, Federated, and Kansas Bankers Surety. Only 12.7 percent had captive insurance alternatives and 10.2 percent had self-insured pools.

This trend is not surprising, because captives and self-insurance pools usually require considerable investments of association resources and the adoption of aggressive risk-taking philosophies. Moreover, the soft property and casualty insurance market of the past few years has not been conducive to captive or self-insured alternatives.

Associations can generally sponsor the insurance programs of existing commercial carriers without significant investments of either time or money. Associations do not, however, usually exercise a large degree of control over these programs.

Captives and self-insurance pools, on the other hand, require significant association involvement but in turn offer considerable control as well as rich returns in terms of member services and association revenues. These types of operations, for example, had the highest median property and casualty premium volumes--$4 million and $10 million respectively.

Past surveys confirm that membership activity often determines the types of property and casualty insurance an organization offers. Historically, for instance, professional liability has been one of the most popular types of property and casualty insurance programs in the fields of insurance, real estate, utilities, health care, and finance. Construction and manufacturing groups have traditionally been most interested in programs involving broad packages of basic property and casualty insurance coverages.

With the recent problems in workers' compensation, however, workers' compensation programs are becoming increasingly popular. Financial services has in recent years been the only industry group with a marked interest in crime insurance programs--a finding that has reflected the problems bankers and savings institution managers have had with their fidelity and forgery exposures.

Contrary to the connection between membership activity and type of property and casualty insurance offered, our experience indicates that membership activity has very little influence on the type of life and health programs selected. Life and health programs appear to be generally attractive to associations with large individual memberships and/or memberships comprising a large number of companies or firms, each of which has only a few employees. The increasingly difficult health insurance marketplace has made the sponsorship of health insurance coverages particularly attractive in recent years. Of those associations reporting life and health products, approximately 82 percent offer medical or health insurance to their members.

The workers' compensation insurance marketplace has deteriorated badly over the past few years. This has caused a significant increase in interest among sponsoring associations regarding this line of coverage. For example, in 1991 approximately 64 percent of the self-insurance pools offered workers' compensation coverages. The current survey indicates that now more than 90 percent of these pools offer workers' compensation. We expect this trend to continue unless workers' compensation market conditions improve.

Types of coverage

Those associations reporting life or health programs offered the following coverages:

* medical insurance, 81.7 percent;

* vision care, 8 percent;

* prescription plans, 8.6 percent;

* dental care, 30.8 percent;

* accidental death and disability (AD&D), 25.7 percent;

* basic life, 61.7 percent;

* short-term disability, 29.7 percent;

* long-term disability, 32.1 percent;

* supplemental life, 8 percent; and

* supplemental AD&D, 7.4 percent.

Remuneration

Almost 76 percent of the respondents indicated that they receive some form of remuneration from their sponsored programs. The average level of remuneration for a life and health program was $261,000, and the average level for a property and casualty program was $221,000. Remuneration was returned to the association in the following forms:

* profit sharing, 7.1 percent;

* dividends, 18.9 percent;

* royalties, 30.7 percent;

* management fees, 32.3 percent; and

* expense reimbursement, 50.4 percent.

Forty-five percent of property and casualty insurance programs also provide some form of remuneration to participating members. The most common method was through dividends--80 percent of respondents took this approach. This trend is tied to the popularity of property and casualty "safety group" arrangements that provide dividends to participants when program losses are controlled or reduced.

The association's ability to minimize losses represents a critical element in sponsored programs. Direct ongoing communication with members makes it possible to develop and maintain loss-control initiatives, which explains why more than 80 percent of sponsored property and casualty programs maintain such efforts.

Insurers are generally willing to provide dividends to individual participants when the association can demonstrate that its loss-control efforts result in reduced losses and therefore increased profits to the insurance carrier. In turn, these dividends provide a valuable incentive to association members to control losses.

How to begin

We caution association executives not to begin sponsored insurance operations solely to obtain new income or because so many other organizations are doing it. Unless you are able to identify a very real need or desire among a significant number of the members, it would probably be unwise to ever initiate a sponsored program.

The really successful programs are invariably those that are started by the association executive who keeps a good and responsive ear to the ground for member complaints and requests. If an insurance-related problem regularly emerges at the center of these complaints and requests, then it is important to get more information.

You can identify the type and level of insurance needs of your members through surveys, focus groups, and committee meetings. These give you the opportunity to answer such important questions as the following:

* Do your members need forms of coverage not currently available in the insurance marketplace?

* Are your insurance premiums far higher than the losses you incur?

* Do you need some help in controlling or reducing your loss exposures?

With the answers to these and other questions you can then assess whether the identified needs are severe and/or universal enough among the membership to warrant a special insurance program initiative.

Association executives can look to knowledgeable staff members, insurance brokers and agents, insurance consultants, and insurance company representatives for research and investigation, for assistance in identifying and evaluating member needs, and for suggestions of appropriate insurance program responses. A number of insurance carriers have developed special association marketing departments. These departments are able to develop and market new products and services, design new programs, and provide specialized consulting services directly to the association.

Insurance carriers are willing to design specialized policy forms, develop unique underwriting methods, and entertain entirely new rating systems if the group in question has a large enough potential premium base. It would be economically impossible for the insurance service provider to do the same for individuals as they can do on a group basis. Associations have the potential to offer programs through the leverage of the large group that individual members could never obtain for only themselves. Likewise, insurers are interested in the association marketplace in part because they can develop and market products through associations or affinity groups much less expensively than they ever could on a one-on-one basis.

Key characteristics

The actual insurance product or service best suited to fulfill the insurance needs of your association is shaped by certain demographic, financial, and/or environmental characteristics of the membership. These characteristics vary for each association but would be similar to and probably include the following:

* the degree to which member insurance needs are unique or special;

* the degree of difficulty members have had in obtaining satisfactory insurance coverages or services from the existing commercial insurance markets;

* the willingness of the association's staff and officers to pursue new business opportunities;

* the degree to which association members are willing to join forces in cooperative efforts;

* the degree of variety in member sizes, operations, and geographic distribution (generally, the more similar, the easier it is to find a suitable program);

* the number and size of association members;

* the financial capacity of the association to absorb and fund new products;

* the frequency and severity of losses generated by the operations of members;

* staff size and typical financial solvency of association members; and

* the association's need for additional nondues income.

Sponsorship agreement

Approximately 85 percent of those associations sponsoring insurance programs for their memberships have formal, written agreements with insurance carriers, agents, or brokers. These sponsorship agreements are extremely important to the association in defining the operational aspects of the program and in protecting the association's rights. The sponsorship agreement is the governing document of the program. It should be entered into only after careful consideration and planning and with guidance from your legal adviser or counsel.

Each association program is different, and so, too, each sponsorship agreement or contractual relationship is unique. Two aspects of these agreements are, we believe, particularly important:

* First, the agreement should guarantee the association's right to continuing and complete information on the program, including loss statistics, premium income, insurer profit and expenses, and member participation.

* Second, a sponsoring agreement should contain some disincentive to the insurance service provider's canceling the program without cause once it has obtained the desired member penetration. The disincentive may be accomplished in a number of ways.

There may be a provision for the royalty to continue for some time period after cancellation. There may also be an agreement that the association and the service provider jointly own the list of insureds and the rights to pursue them at renewal. This would mean that if the service provider canceled, the association would have an opportunity to compete on a reasonably level playing field. And this should certainly give the service provider some cause for thought before canceling the program without cause.

Finally, an association must address the issue of the agreement negotiation itself. The survey found that 44 percent of respondents negotiated an agreement directly with the insurance company, whereas 39 percent worked through an insurance agent or broker (17 percent contracted with both). Contracting through an agent or broker allows an association to draw on his or her marketing resources and professional advice.

The main disadvantage to this form of agreement, however, is that it often limits the sales force to just one agent or broker. An association must decide for itself whether it is best to rely on one agent's expertise or contract directly with the insurance carrier and allow all qualified agents to sell the program to members.

Looking ahead

Association-sponsored insurance programs continue to offer significant benefits in terms of additional member services and association income. Before any program is launched, however, association executives must analyze key organizational characteristics carefully to pinpoint the program best suited to the association's needs.

The health insurance and workers' compensation markets continue to worsen. Members need all the help in these areas they can possibly get from their associations. It appears the general property and casualty insurance marketplace is also beginning to harden and that 1993 will bring a difficult market and more opportunities for association executives to help their members.

This would appear to be a very appropriate year for association executives not already involved in sponsored insurance programs to reassess opportunities. Those already sponsoring insurance programs may find this year provides an excellent environment for improving or expanding their offerings.

For All the Facts

For the definitive source of information on association-sponsored insurance programs, order the 1993 Association Insurance Program Guide and Survey Report, which covers property, casualty, life, and health programs and provides data on the prevalence and forms of sponsored programs, types of coverages offered, premium volume, remuneration, program costs, staff time, contractual agreements, and benefits to members.

Available from Association Management Press, 1575 Eye St., N.W., Washington, DC 20005; [phone]; [phone] TT; fax [phone]. The report is $75 for members and $90 for nonmembers, plus $5.25 shipping. Ask for catalog item #213711.

ASAE Services Corporation

Established by the ASAE Board of Directors in 1975, the ASAE Services Corporation began its insurance operations in 1990. It offers

* property, casualty (including association professional liability insurance) life, accident, and health insurance;

* financial services, such as the Association Investment Program; and

* deferred compensation programs for association executives.

In addition, the Services Corporation offers, in corporation with the Aon Specialty Group's Risk Management Services, consulting services to associations considering establishing sponsored property and casualty insurance programs or wishing to improve existing programs. The Services Corporation also provides, through an arrangement with W.F. Morneau & Associates, consulting services for associations wanting to provide health care plans.

For more information about the ASAE Services Corporation, call Chet Merritt, [phone], [phone] TT.

Insurance Program Alternatives

The following table provides an overview of program alternatives and describes association characteristics that favor the successful development of each type of program.

MOST POPULAR ASSOCIATION-SPONSORED INSURANCE PROGRAMS

CAPTIVE INSURANCE COMPANY

An insurance company established and owned by an organization or group of organizations for the primary purpose of underwriting insurance products for owner insureds.

Most often written line of coverage

1. Professional liability

2. Workers' compensation

3. General liability

Favorable association environment

1. A certain line(s) of coverage is unavailable to members.

2. There is either a large number of potential insureds, or if the number is limited, each insured is relatively significant in size and is knowledgeable about purchasing insurance.

3. Members are loyal to the association and have a propensity toward industry cooperation.

4. Member associations are homogeneous.

5. Association has an aggressive business philosophy.

6. Members are from services, construction, health care, or nonprofit industries.

7. Members have relatively unique operations.

8. Association has access to initial capitalization funds.

RISK-RETENTION GROUP

A special multiple-owner group program generally employing a captive similar to an association captive. It can be used to cover only third-party liability exposures (except workers' compensation) of member policyholders. This was made possible by the Risk Retention Act of 1981 and its 1986 amendments, which were intended to make it easier for companies to band together to cover their third-party liability exposures.

Most often written line of coverage

1. General liability

2. Automotive liability

3. Professional liability

Favorable association environment

Same as with standard captive.

PURCHASING GROUP

A group of businesses that band together to buy liability insurance (except workers' compensation) on a group basis. The purchasing group provisions of the Risk Retention Act preempt state laws that make it difficult or impossible for businesses to buy insurance on a group basis.

Most often written line of coverage

1. General liability

2. Automobile liability

3. Professional liability

Favorable association environment

1. Certain coverage(s) is too costly or unavailable.

2. Member operations are homogeneous.

3. There is a fairly large number of potential insureds.

4. Capitalization for a captive is not readily available.

5. Members are from manufacturing, energy and natural resources, or health care industries.

SELF-INSURANCE POOL

A group of organizations (often public entities) pay actuarially determined premiums to a pool or trust fund and, in turn, are insured through the pool or fund. Excess insurance is often purchased to protect the pool's resources, and various professional services are contracted for by the group.

Most often written line of coverage

1. Workers' compensation

2. Professional liability

3. General liability

4. Automobile liability

5. Property (fire)

6. Medical and dental care

Favorable association environment

1. Certain coverage(s) is too costly or unavailable.

2. Member operations are homogeneous.

3. Need not have a large number of insureds if each insured has many exposure units.

4. Insureds have geographical proximity.

5. Initial funding for pool is available.

6. Members are from nonprofit (public), health care, and financial and general service industries.

SPONSORSHIP OF A COMMERCIAL INSURANCE CARRIER PROGRAM

Endorsement and/or sponsorship of an existing commercial insurance carrier program(s) by the association. The association deals directly with the insurer/underwriter and generally allows any licensed/qualified agent to actually sell the insurance to members. The association may, however, establish its own insurance agency operations.

Most often written line of coverage

All lines

Favorable association environment

1. Need for specialized policy forms and marketing expertise.

2. Association desires program income.

3. Member operations are homogeneous.

4. Capitalization funds for captive or pool are not readily available.

5. Members are from all industry groups.

6. Association has a large number of relatively small-to-medium-size members.

7. Association has conservative business philosophy.

8. Association is fairly large and has staff members who are capable of dealing directly with an insurer on a knowledgeable basis.

SPONSORSHIP OF AN INSURANCE AGENCY PROGRAM

Endorsement and/or sponsorship of an insurance program developed by an agent or broker and underwritten by an established insurance carrier. The agent or broker may not allow other agents to sell the insurance programs to members or may insist upon a share of any commission income earned by other agents/brokers.

Most often written line of coverage

All lines

Favorable association environment

Same as with an established carrier except staff size and insurance expertise are not adequate to deal directly with carrier.

Edgar W. Armstrong is managing director and John W. Weisner is a consultant with the Aon Specialty Group's Risk Management Services, Washington, D.C.