How many fraternals should there be?
May 3, 2016Last week, I gave a presentation to a group of life insurance industry executives – many of them Alliance members – at an educational symposium conducted by an asset management firm that happens to be an associate member of the Alliance. The topic of my remarks was the increasing importance of corporate governance to any insurer’s (fraternal or commercial) sustainability. You can get the gist of my comments to this group from reading some blog posts on the topics here, here, here and here. Fraternals, as a whole, are making significant progress in modernizing their corporate governance structures. At the very least, almost all Alliance members understand the need to update the way their societies make important decisions and, equally important, update the process by which they select the individuals with decision-making responsibility. And many members have instituted wholesale changes to their organizations’ governance that put members in charge of electing a qualified board; the board in charge of hiring a qualified CEO; and the CEO in charge of hiring a capable staff and managing the operations of the society. I told the group that in my analysis of the nearly 30 Alliance member societies that have merged, exited the insurance business, or been taken over by regulators since 1995, it’s clear that the overwhelming majority of fraternal life insurers that encounter financial impairments share a common characteristic: an antiquated governance structure that made it almost impossible for these societies’ leaders to make good decisions about any facet of the organization – from product development to marketing strategies to fraternal activities, to asset management. These organizations’ fading relevance and weakened financial condition wasn’t the reason for their demise, it was only a symptom. I’m convinced that poor governance and flawed decision-making was the ultimate cause. During the Q&A session following my presentation, a fraternal executive asked me, “How many fraternals should there be?” I responded that by comparing the statistical data on those 30 societies that have closed up shop since 1995 to that of the Alliance’s current membership, there are 30-40 fraternal life insurers with a solid chance of long-term sustainability. But the real answer is: I have no idea. There is no reason that there couldn’t be 100 fraternal life insurers operating in North America. Well-governed and well-managed societies that offer solid financial services products and advice, that form communities of individuals with shared values, and that fund projects and engage members in community service programs that reflect those shared values have an excellent chance of success. The Alliance’s recent consumer research demonstrates without a doubt that consumers want to purchase products from companies who put people before profits. They want what we have – they just don’t know that we exist. Perhaps the question is not “How many fraternals should there be?” but “How many people should be members of a fraternal?” And if we have roughly 9 million members in the U.S. and Canada today, I think a reasonable number is somewhere north of 30 million. That would result in fraternal life insurers representing about 6% of the total life insurance market in the U.S. and Canada – just about the same as credit unions, a business model with a similar not-for-profit structure and appeal to consumers. There’s more than enough room to achieve that level of growth within the common bonds and shared values that current Alliance members reflect. And there’s still space for some new fraternals to be created based on “non-traditional” bonds. As for me, I’m going to worry less about how many societies there might be 10 years from now. Like airlines, pharmaceutical companies, and commercial life insurers, there will almost certainly be fewer. I’m going to turn my attention to how many new individuals – from all demographic sectors – we can bring under the fraternal umbrella. That’s a number that’s much more meaningful to the sustainability of our system.