A Shot Across the Bow…
November 6, 2013As the primary regulator of fraternals in the state with the largest number of domiciled societies, Steve Johnson, Pennsylvania’s Deputy Insurance Commissioner embodies the tag line from those old E.F. Hutton commercials – when he talks, people listen. And one of the characteristics I like most about Steve – and the entire Pennsylvania Insurance Department – is that while he understands, respects, and appreciates the unique organizational structure and mission of fraternals, he’s not going to jeopardize the financial security of consumers in his state because of societies’ inability to effectively manage their operations. His recent presentation to the Pennsylvania Fraternal Alliance Annual Meeting was a shot across the bow to those society leaders who think that doing what they have been doing for the past 100+ years and trying to stay below the regulatory radar is going to be enough to make their organization sustainable on a long-term basis. His comments are worth noting by every fraternal executive and board member – whether you are domiciled in Pennsylvania or not. Here are a few highlights: On the impact of RBC regulation…
- Johnson reported that of Pennsylvania’s 20 domiciled fraternals, one is currently at the regulatory action level, another is at the company action level, and a third is approaching the action level threshold.
- He advised fraternal leaders that “once [your RBC] is down, it’s hard to get up.” Rapid growth in premium means corresponding changes to the RBC ratio and potentially more expense for a society because this may trigger cash flow testing. To make it on your own, fraternals will need slow and steady growth and a substantial reduction in expenses, according to Johnson.
- For those societies that don’t have the resources – human and/or financial – to develop and implement a realistic plan to achieve slow growth and reduce expenses, Johnson had one important piece of advice: “Merge before you get a call from the Pennsylvania Department of Insurance.” The underlying message is clear: you’re better off consolidating with other societies on your own terms, not those dictated by a regulator.
- Johnson, like most regulators and business consultants, understands that antiquated governance structures – the process by which an organization makes decisions – are the root cause of most fraternal solvency and sustainability problems. If the process by which your board makes decisions is flawed, then it is very likely the decisions the organization makes will be flawed, as well.
- He suggested that societies move to appointed (hired) rather than elected officers; establish an audit committee; reduce the size of boards; and establish minimum qualifications for board members.
- The bottom line, according to Johnson, is that fraternals need to be much more flexible and adaptable to a business environment that has changed dramatically over the past five years and that is likely to continue evolving.
- Johnson takes great pride – and rightly so – in the Pennsylvania Department’s track record on preventing and dealing with insurer insolvencies. And he’s clearly going to continue to do everything possible to protect consumers and the DOI’s reputation from future insolvencies.
- In addition to RBC ratios, regulators are looking at several other key factors when assessing an insurer’s – fraternal or commercial – financial strength: the ability to generate a steady flow of new life insurance premium; the ability to control expenses; the ability to balance the amount of new annuity business with new life insurance business; the impact on organizations with an over-exposure to annuity business in the event of an increase in interest rates.
- If I could summarize Johnson’s comments in one sentence it would be this: It’s time to be honest about your society’s long-term sustainability and consider new ways to join forces with other similar groups to better serve both current and future members and protect the reputational integrity of the fraternal system.