NICHE MARKETING: ATTRACTING ASSOCIATIONS GOING CAPTIVE
by Raymond T. King, Jr.
The letter below recently was received from the executive director of a trade association who had endorsed a Marketpac Safety Group insurance program.
Gentlemen:
This is a tough letter to write. You will recall that during the convention in Montreal , we were doing a survey for a possible creation of a captive insurance program for our association.
This idea has bloomed rapidly and now is a fact. We have established a captive insurance company headquartered in Bermuda ; named a board of directors; and have premium pledges totaling better than $3 million.
For this reason we will be severing our relationship with Marketpac and this letter is to officially advise you of this fact.
I'll be looking forward to visiting with you from time to time at ASAE and other industry functions. As I said, this is a tough letter to write but now we seem to be headed in the right direction so far as our insurance program is concerned.
The point made in the last sentence of the letter is the springboard for this article: 'We now seem to be headed in the right direction as far as our insurance program is concerned.' But what is the right direction for an association insurance program to take?
Before addressing this question, let me point out that association insurance programs are our niche-our specialty-in the insurance industry. The association market is comprised of nearly 40,000 professional and trade associations including national, regional, state and local groups. It is laced heavily with the medium-sized commercial accounts so sought after in today's insurance world. It is a dynamic market, with many brokers and carriers aggressively pursuing it with new and creative techniques.
Why Go Captive?
What happened to make this association change directions? Conventional wisdom would suggest no need for creating a captive (an association-owned insurance company). First, the market is soft. Second the competition is keen. The normal circumstance is that association members would already be getting the best coverages available at the least cost. There should be no need for a member to turn to his association to solve his insurance problems; and if there are problems, is an association captive the answer?
Why did this particular association decide to go captive? There are many possible explanations: The insurance consultant is earning his fee, an aggressive broker is selling an unbundled package of services, an association executive is trying to make his mark, or an unusually imaginative insurance committee has done its work.
In this instance, none of these explanations apply. This association has had a sponsored insurance program for several years. It has changed insurance companies several times. And it has changed its insurance group manager several times. While the process has been frustrating and difficult, the association learned some lessons about the realities of the insurance market.
Member Needs
Most importantly, the association has learned what its members really want in an insurance program. It learned from its own experience, from shared experience with other associations, and from a parade of prospective insurance suppliers presenting proposals to the association. This association also learned from one-on-one discussions and from conducting insurance surveys of its members.
What are members interested in when buying insurance?
(1) Sixty percent of the members are concerned with cost. This comes as no surprise and is one of the constants of business life.
(2) Forty-nine percent of the members want coverages designed for their special needs. They are tired of being asked to learn the insurance business. When prospective insurance suppliers talk about a package designed for their industry, the immediate and enthusiastic response is, 'Thank heaven, someone in the insurance industry has taken the time to learn about us, and we are not being asked to learn the insurance business.' The Scott Seed people put it another way: 'Don't talk to me about your grass seed, talk to me about my lawn.'
(3) Forty-seven percent of the members want a single source for their business insurance. The implications here are enormous for the independent agent in terms of a mental set, suggesting that he or she is in an excellent position to write both the property and casualty as well as the life, group, and employee benefits coverages.
(4) Fifty-six percent of the members do not want coverage limitations in their policy. If the insurance company cannot handle, or does not want to handle what the insured perceives to be an exposure of concern, then the inclusion of sublimits, special conditions, or outright exclusions are of grave concern to association members. An example within the convenience store industry: The underwriter is concerned about holdups. The operator is concerned about loss of food in the freezers. By talking to both parties, it becomes evident very quickly that the underwriter is perfectly willing to expand a coverage extension in the policy for food spoilage, and can exclude holdups (as this coverage is self-insured by most operators anyway).
Cost Not Only Concern
It is interesting to note that cost alone is not the answer. It is the blending of customer concerns into an attractive package that is the key. It is also interesting to note that over the years, the association under discussion was able to package its member concerns into its sponsored insurance program.
When it comes to discussing the cost issue, the safety group dividend program must be mentioned. It is the most common type of program sponsored by associations-members can save money on their insurance through competitively priced premiums and the potential to earn dividends.
A safety group program works like this: All members are written into the same insurance company by their own agent or broker. This grouping of insureds helps spread the risk over a larger premium base. All safety group policies have a common anniversary date. Approximately nine months after the anniversary date, the numbers are analyzed and a retention applied. The money left over, if any, is returned to the participants in the form of a dividend.
It is at dividend time that the association receives a continuing education about how insurance companies account for their money. What was once a well-kept secret on retention build-up is now familiar to many association insurance committees, either through a self-learning process or because they have hired consultant actuaries of their own to review retention in detail. They have become quite expert in such things as 'tax and board,' 'direct commissions,' 'other acquisition costs,' 'loss reserves,' 'IBNR,' 'bulk reserves,' and the always mysterious 'insurance charge,' not to mention the 8% loading in the rate filing for loss control.
Record of Dividends
Many associations, like the one under discussion, have been fortunate enough to have established a rather fine and consistent record of dividends, and have asked themselves one question. Could we have done better by our members if we managed this money ourselves? Could we buy the different skills required to make the program even more member responsive, and less reactive to the heavier overhead of a multi-line insurer?
In many cases, the answer is yes. And so we are witnessing a trend within the association market to sponsor insurance programs for their members. Associations may start with a simple safety group dividend plan and then, charting membership participation and dividend track record, progress to a rent-a-captive, and then on to a full captive of their own.
Participation of the membership is central in whatever program the association sponsors, be it safety group or captive. Without participation, all the numbers are interesting, but academic. If the sponsored program does not generate interest and participation by the membership, even the most basic plan will fail.
Much has been written about trade association insurance programs. And the woods are full of people who can massage the numbers on a theoretical basis. Very little has been written about the amount of sales/marketing effort it takes to get members on board. It is hard and difficult work that requires persistence, staying power, and the critical resources of time and money.
Successful programs are backed by intense direct-response mailings, advertising in association journals, attendance at conventions, and personal contact with members. There is a need for a whole range of promotional services to ensure membership awareness and participation.
Finally, to close the marketing loop, a personal call is needed. Marketpac has an organized network of independent agents throughout the country who have agreed to call on local members of sponsoring associations. These agents present the program to members and report to us on the results of the call so that we, in turn, can report to the association on membership interest and participation.
This new breed of companies, such as Marketpac, also includes Market-Dyne, Famex, MMI, and a few regional concerns, whose entire purpose is based in the successful marketing of association insurance programs. In addition, many of the national brokers have in place or have announced full time divisions or development departments to cater to this growing market.
Loss Control
No discussion of the association market is complete without reviewing the important and member-responsive subject of loss control. Loss control can and does work for an association. Experts generally agree that to implement a loss control program for owner-operated businesses on an individual basis is very expensive and time consuming. Instead, the reality is that for small- to medium-sized businesses there is no consistent education or application of any loss control techniques, particularly in today's market.
However, loss control can be handled through the association, with demonstrated results, provided the following two conditions are met:
(1) The loss control program must be simple in its application and reflect the kinds and types of losses that are common to the association's industry. For example, if lifting has traditionally been responsible for both the frequency and severity of losses, promoting proper lifting techniques to member firms of the association can reduce losses.
(2) The loss control program must be funneled through the normal communication methods used by the association to communicate to its members. By using the association as the focal point, effective loss control programs can be implemented on a cost-effective basis. Consistent messages in association publications, communications from the insurance committee, inclusions in operational or procedural manuals and bulletins, and workshops at state, regional or national meetings all work to reinforce the importance of the loss control program.
Association leadership today recognizes what impact losses, even insured losses, have on their members' bottom line. They're willing to cooperate (some even insist) on the implementation of loss control programs customized to the known experience of their industry. For marketing to be successful it is important to remember that:
- Associations are becoming sophisticated and member-responsive in undertaking insurance programs on behalf of their member firms.
- Successful insurance programs must be designed to be responsive to the specific needs of the industry involved.
- The program should combine the elements of cost, customized coverage, a minimum of coverage limitations as they impact on the targeted industry, and a simple, yet customized, loss control program.
- Membership participation is critical, involving an increased amount of marketing specialization. There are a growing number of marketing companies like Marketpac whose full-time job is dedicated to solving the problems of membership participation.
The association market is enormous, and the potential for profit is staggering. There is a great deal of experimentation and research now being done in many quarters as more and more people look to this market as the way to attack the small- to medium-sized commercial account. It is, indeed, an attractive niche.