Say the words “exciting” and “insurance.” I think that’s the third time in history they have appeared in the same sentence. Our loss. Investors don’t want to lose money and, thus, take a full enterprise view in due diligence, enabling informed decision-making not just at the point of investment but also in the management going forward. The same factors drive insurance underwriting, in the tight frame of minimizing risk. So, what’s exciting about that? 12,500+ nonprofits insured – with success defined in terms of the user experience, not by an exercise in business analysis.
In this interview with Markets For Good, Pamela E. Davis, Founder, President and CEO of the member companies of the Nonprofits’ Insurance Alliance Group shows how getting the data and facts right can lead to a viable market presence. A lot to take in here, but grab a coffee: You’ll want to read all of it.
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Eric J. Henderson, Markets For Good (EJH): While it is impossible to reduce a master’s thesis and over 25 years of work to one question and answer, could you give us the frame of the problem you set out to solve and why solving it was so important for nonprofits?
Pamela Davis, Nonprofit Insurance Alliance (PD): When I wrote my master’s thesis in the mid-1980s the US was experiencing a massive crisis of capacity in the insurance industry. Poor underwriting and pricing decisions over many years had finally “come to roost” and many insurance companies were on the verge of insolvency. In response to their difficulties, they had to dramatically reduce the amount of risk on their books and so they non-renewed and cancelled insurance on types of accounts they perceived to be the most risky. Nonprofits were identified as one of the high risk groups. At the time, the insurance industry purported to have data to indicate the “riskiness” of nonprofits, but refused to release it on the basis of confidential business information.
Because of the operations of Nonprofits Insurance Alliance Group, we now know that nonprofits are actually less “risky” than main street business.
In fact, in 2013, the California insurer in our Group, Nonprofits’ Insurance Alliance of California (NIAC), is charging rates on its main type of insurance coverage, general liability, that are significantly lower than we were charging for the same coverage in 1990! Why can we do this? Because we have probably the best database about claims against nonprofits of anyone in the country.
Using this data, we have developed robust loss control and educational resources to help minimize injury and accidents. And, we are not only saving our member nonprofits money on their insurance costs, we are acting to stabilize pricing across the insurance industry for nonprofits. When commercial insurance companies overcharge for nonprofit risk, we stand ready to write that insurance policy. In fact, we presently insure 12,500 nonprofits in 31 states and are growing at the rate of nearly 1,000 new member-insureds every 12 months.
As for profit operations face the growing operational risks from climate change, the cost of risk is going to go up. We are now in a position for nonprofits to pay their “fair share” of risk, but not have to subsidize the accelerated risks from the operations of commercial activities.
EJH: Having cleared many legal hurdles and won support from major foundations to sustain the startup phase, are there any specific data infrastructures you had to set up to make the case? (Looking for types of data you had to produce and be able to replicate to trigger funding or clearing of other hurdles as well as how you structured them to deliver consistently to key audiences)
PD: When I started the first company in our Group, NIAC, we had virtually no data to be able to know what the right price would be to charge for a given liability insurance risk.
The funders that gave the original $1.3 million in loan funding were acting to solve a problem that was significant and systemic, but there clearly was real risk of losing their investment. The risk was because we didn’t have good data, not because nonprofits are inherently risky. Perception was not reality, but we had no way to prove that in the beginning.
When we raised $10 million in grants to capitalize the second and third companies in the Group, we had 10 years of sustained success and a tremendous data base on which to base our pricing. Also, by then, the first company had $15 million in capital from retained earnings and had repaid the initial capital investment. Our data demonstrated that nonprofits could successfully pool together and share their liability risks at a lower cost than through the commercial market. The only unknown was whether the information we had gleaned in California was relevant to other states. After 24 years, we have shown this model works across the country. The companies in the Nonprofits Insurance Alliance Group have now generated retained earnings of $165 million as well as returned $31 million to nonprofits in the form of dividends. None of this, including the operational efficiency, could be achieved without the extensive database we have developed to help us estimate the appropriate cost of risk (and drive it down) for tens of thousands of nonprofits.
EJH: Now operating at national scale, how have the information demands that sustain your business model changed, e.g. describe the infrastructure then vs. now, especially where data-sharing is required between entities.)
PD: To operate on a national scale, our business model has had to change dramatically. However, our ability to adapt was made possible because of a decision we made early in our operations to develop our own operating software. We made that decision out of necessity because in the early 1990s, there was no software available that was at all affordable and yet met the needs of our surprisingly complex operation. In hindsight, the decision to retain that control of the software through developing our own was central to our ability to afford the flexibility required for a multi-state expansion.
The decision to expand outside California complicated our operations extensively. No longer one company in one state, we became a group of three 501(c)(3) insurance companies, managed by a supporting organization. We had to move all of the original California company’s staff to this supporting organization that could serve equally NIAC in California, as well as the new Risk Retention Group (Alliance of Nonprofits for Insurance) and the reinsurance captive company. These additional companies had to be created because of the way insurance companies are regulated. Now we have to prepare four of most every report every month, including financial statements monthly. And, we report and are accountable to four separate boards of directors.
Our excellent data and systems allowed us to do deal with this overnight complexity with only a small increase in staff.
Now, 10 years later we have staff in 9 states and operate completely paperless. We are the first nonprofit insurer group to receive an A rating from AM Best. And, parlaying our technological expertise, we are the first insurer specializing in insurance for nonprofits to transmit data electronically to and from insurance brokers—taking duplicate data entry out of the application and renewal process.
EJH: Given the Markets For Good prospect of coordinating the flow of high-quality data across the social sector and between many different types of actors, are there any parallels that come to mind with your experience in developing the NIA Group?
PD: Our focus always has been on the user experience. How can we make the insurance transaction, including gaining access to our considerable loss control resources, as simple and transparent as possible? When we interact with a nonprofit member or prospect or an insurance broker we want them to come away with the feeling of, “Who are those guys?” We are here to serve and we appreciate the confidence nonprofits and brokers have entrusted in us.
In our experience, high quality data does not necessarily transfer into a high quality experience for the user. So often companies hide behind technology and data as a reason for producing a poor interpersonal interaction. We insist that data serve us and our customers. We are constantly asking ourselves whether we can reduce the burden of information we ask for from prospects. If we aren’t going to use the information in the underwriting and rating process, we should not ask for it.
Too often, those with the stronger bargaining position ask for information just because they can. We believe that sort of arrogance diminishes all of us. It is incumbent on the “asker” to hone the application process to be as efficient as possible, given business necessities.
The best way to do that is for organizations to review and analyze their data to determine what really matters. Most organizations in a power position don’t feel obligated to do that. In my opinion, we all need to improve the quality of the questions we ask, limit what we ask for, and only ask for actionable information before sharing of data will be of much value. There is a lot of data “noise” that is not adding value, but is costing our sector a lot in staff time.