ABCs of Association-Sponsored
Insurance Programs
Presented to the
2006 NCCAE Insurance Conference
by
Dubravka Romano,
Associate Executive Director
Texas Association of School Boards
April 12, 2006
A short history lesson…
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First evidence of “risk sharing” found in 3rd millennium
B.C. among Chinese traders who spread wares among
many vessels to minimize loss if one vessel capsized.
In 1750 BC, Babylonians developed a system of charging
an additional sum (“premium”) to fund a loan to finance
shipments. In exchange for the premium, if shipment
was lost, lender agreed to cancel the loan.
In 600 BC, inhabitants of Rhodes invented concept of
“general average.” Merchants whose goods were being
shipped together would pay a proportionately divided
premium which would be used to pay any merchant
whose goods were lost during the journey.
A short history lesson (cont.)
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In 600 AD, the Greeks and Romans introduced health
and life insurance by creating guilds called “benevolent
societies” to take care of families and funeral expenses
upon the death of their members.
Insurance contracts are found in 14th century Genoa.
In 1680s, Mr. Edward Lloyd opened a coffee house
popular with ship merchants. There, interested
individuals could negotiate insurance for their ships.
First insurance company in the U.S. was formed in
Charleston, SC in 1732.
Benjamin Franklin popularized and standardized the
practice of property insurance, specifically for fire risks.
Associations and Insurance—
What do they have in common?
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Both concepts include individuals
coming together for mutual benefit.
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Associations—to provide training and
information to members and represent
members before governing bodies.
Insurance—to reduce individual risks and
pay for losses if they occur. Collect small
sums from many, to pay large claims of
few.
Why on earth would an Association
get into the insurance business?
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Associations get into the insurance
business for two primary reasons:
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To respond to a need from their members;
To obtain additional revenue that allows
them to provide other services.
A few statistics…
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1 in 4 associations endorses a property and
casualty insurance program.
Association executives consider insurance
programs to be “valuable tools in recruiting
members and increasing income to the
Association.”
Associations whose members are corporate
entities, rather than individuals, are twice as
likely to offer an insurance program.
A few statistics (cont.)
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More than 50% of programs are offered through
existing commercial carriers.
Other options include: captives, self-insurance pools,
retention groups and group purchase arrangements.
81% of Associations receive compensation from their
insurance programs.
Prevalent types of compensation are reimbursement
of expenses, management fees and royalties.
* From ASAE survey conducted by the Wyatt Company (1991)
Types of coverages offered
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Workers’ Compensation
Property
Liability
Employee Benefits
Owner Controlled Insurance Program
Personal lines
Others
The range of options…
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Endorsed insured programs
Group-purchase programs
Exclusive marketing arrangement with
broker or agency
Risk-sharing pools
Mutual or captive insurance companies
Endorsed Programs
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Association endorses a fully-insured product from an
insurance company.
Insurance company usually agrees to some preferred
underwriting criteria for Association members.
Association receives revenue from insurance company
(usually % of premiums written)
Pros: Relatively easy to administer; very little or no
involvement by Association; provides coverage that
might not otherwise be available to individual entities, or
at costs below what they would find on the open
market.
Cons: Little control over quality of service or product;
“black eye” to Association if something goes wrong.
Group-Purchase Programs
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Association members join together to purchase a master
insurance contract.
Association may be involved in gathering underwriting
information and providing other services.
Association gets revenue as % of premiums and/or a
share of underwriting profit.
Pros: Association assumes no risk; gets revenue.
Provides coverage that might not otherwise be available
to individual entitles, or at costs well below what they
would experience on the open market.
Cons: Little or no control over quality of service or
product. “Black eye” problem if something goes wrong.
Marketing Arrangement with
Broker or Agency
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Association selects one broker to market
coverages to members.
Association gets commission split or % of
premiums earned.
Pros: Very little involvement or cost to
Association.
Cons: Politics of local agents and brokers.
No control over quality or service delivery.
State laws may limit whether this option is
viable.
Risk-Sharing Pools
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Associations help create or sponsor governmental risksharing pools. Most pools are separate legal entities
from Association
Association may or may not provide any services.
Revenue to Associations vary widely.
Pros: Pools are usually not-for-profit and tax-exempt.
Committed to meeting member needs. Interests more
aligned with Association’s interests. Provides coverage
that might not otherwise be available to individual
entities, or at costs below what they would find on the
open market.
Cons: Many pools subject to sunshine laws. Relationship
between Association and pool can become strained.
Mutual or Captive Insurance
Companies
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In some states, where pooling is not
permitted by law, associations have created
mutual or captive insurance companies.
Revenue to Associations varies by company
and state.
Pros: Meets regulatory requirements. Can be
as member-focused as pools.
Cons: Heavy regulatory burdens. Less
flexibility than pooling.
More about pooling…
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First pools created in early 70s.
Today, over 500 governmental pools in
existence.
Pooling is the most prevalent form of
providing insurance coverages by local
government associations (i.e. cities, counties,
school districts.)
AGRIP publishes Advisory Standards for Pool
Governance and Management that provide
guidance on sound practices.
A typical pool…
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Separate legal entity with its own Board
May or may not have sponsoring Association
If there is a sponsoring Association, pool often
pays royalty or endorsement fees.
Coverages usually involve some level of selfinsurance
Most pools purchase reinsurance
May contract for services with outside vendors;
have services provided by Association staff; or
hire pool staff.
Things to consider….
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While an insurance program can bring additional
revenue to the Association, it is not a panacea for
long-term or fundamental financial difficulties in
the Association.
Sponsoring an insurance program exposes the
Association to potential problems with
membership (When your president’s claim gets
denied, who do you think s/he is going to call?)
Beware of slick brokers, promising a quick buck.
Do your homework before you endorse a
program!
Getting it right…
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Only get into the insurance business if it responds to a real and
continued need of your members.
When choosing the best option for your Association, consider the
following:
 How much expertise do you have on staff oversee the program?
 What are the legal limitations in your state for getting into this
kind of business? (Beware of the unauthorized practice of
insurance!)
 What are the tax implications for your Association?
 What option best fits your Association and your membership?
 What are the political/organizational realities you may need to
address in formulating a program?
 What are the market conditions?
And finally…
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It CAN be done right!
Many Associations have successfully
met their members’ needs and
increased their revenues by offering an
insurance program.
Be smart, be thoughtful, be careful and
you will be successful!
Other Resources
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Association of Governmental Risk Pools
(AGRIP) at www.agrip.org (excellent
resources)
American Society of Association
Executives (ASAE) at asaenet.org
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Association-Sponsored Insurance
Programs, 5th Edition
Allbusiness.com (good articles)