The new insurance market.

THE NEW INSURANCE MARKET

It's the right time to start a risk management program.

Associations depend on insurance programs to protect their members. Traditionally, employee benefit plans like health and life insurance are most prevalent and have proved an enduring, popular member benefit. It's easy to see why. An annual report from the Detroit Tooling Association, for example, identifies the insurance and benefit savings for members compared to dues paid. Some years, DTA's insurance programs saved members $40 for each dollar of dues paid.

In recent years, forward-thinking associations have developed new forms of coverage and plans answering specific member needs: The second ASAE/Wyatt Company Association Sponsored Property and Casualty Insurance Program Survey Report says one in four associations offers some form of liability or property insurance program to its members.

Known as the alternative insurance market, these programs provide better, less expensive coverage than traditional property and casualty policies. A standard insurance policy provides the same coverage to any type of business. Through owned or partly owned captive insurance companies, risk retention plans, purchasing groups, and self-insurance pools, associations can design industry-specific policies. The Bowling Proprietors Association of America, Arlington, Texas, for example, offers specialized coverage for scoring computers used in bowling centers.

In addition to association-owned captives, three common insurance alternatives are * Risk retention plans, in which a group of prospective policy holders agrees to share risk. Under federal law, these groups are in effect small insurance companies owned by the policy holders. They often cover product liability. * Purchasing groups, in which similar businesses can be pooled by an insurance company for a specific coverage. These programs are not limited by state; one local insurance company can cover every member of a national association. And while the financial risk falls on the insurance company, the association has some control over rates and coverage and reviews loss experience and dividends paid from any unused premium amounts. And, * Self-insurance pools, in which similar entities share their liability. Pools are subject to some state insurance laws. Policy holders own the program, sharing losses and dividends; the association may assist by contracting with a provider on behalf of members.

Market realities

Does one of these alternative insurance market programs fit your needs? Here are six questions to help you decide. You'll need a membership survey to get some of the data and an insurance administrator or consultant to interpret it. 1. Do you have a sufficient number of members (or prospects) to support a risk management program of your own? There are two aspects to this question.

First, like everything else, insurance costs less if purchased in volume. Administrative costs don't vary much regardless of the number of participants, so to achieve economies of scale you need at least $1 million in combined premiums. (Keep in mind that dollar amounts in such a variable field are hard to specify.) If the present total premium paid by your membership is very low, you'll need a substantial number of participants. However, if they pay large individual premiums for the coverage you're considering, as few as 15 participants may suffice.

Second, an association- or member-owned program usually needs insurance itself--called reinsurance--to prevent devastating loss through large claims. You need substantial combined membership premium for a liability or product liability program to attract a reinsurer.

A typical program might offer a $1 million policy to association members. To cover that $1 million of liability, the association buys a reinsurance policy that could reimburse up to $750,000 above the first $250,000 of coverage. Additional capital requirements, which vary depending on the type of business a policy insures, should be analyzed by you or your consultant. 2. Is competition from the traditional insurance industry for your members' business very intense?

In some classes of insurance business--such as homeowners or retail store programs--insurance companies offer a product that must be competitively priced to succeed.

Use my rule of thumb to test the competition. The insurance market runs in a four- to six-year cycle. In a hard market, insurers write few policies and rates go up. Insurers thus stabilize their income and eventually begin to seek more business, bringing rates down and softening the market. When the pricing of policies threatens income, rates rise and the market hardens again.

According to my rule, your future program holds promise if in the soft cycle there are 10 or fewer regular insurance company competitors and in the hard cycle one or two competitors.

The current soft market--three years old and predicted to last another year to year and a half--is opportune for starting an insurance program. Competition is usually hotter in the soft cycle, but a specialized association program can win customers now and keep premiums low when the hard cycle hits. Reinsurance is readily available now. You can't guarantee your reinsurance rates won't go up come the harder market, but reinsurers continue programs based on profit; if your program gets off to a good start during the soft market, chances are your reinsurance will be renewed in following years. 3. Do members' current premiums swing unpredictably?

This is a marketing question. If rates are level, your members are probably content. Insurance buyers become very unhappy when they are subject to unexplained insurance cycles that cannot be built into their product or service costs. Find out with your member survey. 4. Does your competition combine exposure inherent in members' business with more hazardous classes of business?

Some insurance companies do not write a sufficient volume of coverage in a particular trade group to develop a creditable statistical base to assess risk. These companies may pool in one rating base several groups they believe have similar characteristics. As an example, a tool and die shop might be premium rated for insurance in the same category as a shop that manufactures a more hazardous product. An average rate is not fair to the less hazardous product manufacturer.

Your insurance administrator can deduce this detail from your survey. It is to your advantage to offer a policy in an exclusive category--especially for a high-risk group. Where one high-risk manufacturer isn't likely to find reinsurance, 10 almost certainly will because their risk is shared. A program for this group can do particularly well, since * as an association, you have unique access to the group; * you'll have little competition from the general insurance market; and * rates can be as reasonable as possible in your single rating base. 5. Will members respond to loss control activities?

Firm control of losses is at the heart of every alternative risk management program. While an insurance company spends money assessing risk--are people wearing protective gear and taking other precautions?--the association has an edge in its familiarity with the industry. Your safety or standards-setting committee can help control losses and keep rates low. 6. Would your prospective participants pay premiums sufficient for individual experience rating?

Individual experience rating is a method of crediting or surcharging normal premiums based on the losses of an individual company. The loss experience of individual members can vary greatly over a period of time. Members of a group want to benefit from their own good insurance loss experience as well as be assured that they will not suffer from someone else's poor loss record.

You need a minimum of approximately $10,000 of individual premium and 100 individuals to estimate likely losses and offer individual experience rating.

Some disqualify 

If you answered yes to most of those questions, you are a real prospect for an alternative risk management program. Your membership has the advantages of common need without excessive barriers or competition. Such groups, like the members of the Detroit Tooling Association, have produced some spectacular results and membership benefits. Now you have three additional questions to consider. 1. Is your association geographically widespread and made up of small retail businesses?

Generally this class of business is subject to intense competition from hundreds of insurance carriers and thousands of local insurance agents. Improvement, not duplication, should be the goal of your association property and casualty program. 2. Is the group or association potentially short-lived?

When the price of gold and precious metals skyrocketed, for example, dealers flourished as a group but dropped out of sight when the market fell. An alternative risk management program takes time to build member participation and commitment to the long-term goal of leveling insurance costs and bringing expenses down to the lowest possible level. A stable association can reap great rewards for its members over the years. 3. Is there a catastrophe exposure inherent in your members' business that might prohibit buying sufficient reinsurance coverage?

Some exposures, such as those in the nuclear or pollution control industries, are so great that the exposures need to be insured by multi-industry pools or government funding. Such liability risks are insurable but only with massive amounts of pre-funding or capitalization.

If you answered no to these last three questions, you're in good shape to consider a new member program. Your association can offer management and cost-control measures that add up to a great member benefit.

Robert A. Engle is president of Meadowbrook Insurance Group, Southfield, Michigan.