It Was the Best of Times, It Was the Worst of Times
Pardon the shameless rip-off of Dickens’ famous opening line to A Tale of Two Cities, but nothing describes the situation facing fraternals with such clarity.
Worst of Times
Let’s start with the “worst of times” part of the equation. These are tough times for everyone and every industry. The precipitous drop in the real estate and equities markets, and the lingering uncertainty over just how long this economic malaise will last have hit the nation hard. You can’t pick-up a newspaper, turn on a television, or scan the electronic news bulletins sent to your email without seeing a story on falling prices, bankruptcies or layoffs.
The financial services industry – investment banks, commercial banks, life insurers, etc. – has been hit hard because of extensive holdings in real estate and stocks. Some would argue that mismanagement and greed have played a role in the debacle, but that’s another story. And while all life insurers have been affected, fraternals, some of which were on shaky financial ground prior to the October market crash, have felt the pain of their drop in surplus more acutely than others in this sector. I’m no actuary, but I do know that surplus is the lifeblood of any life insurer. Without it, your ability to grow by writing new business and your attractiveness as a merger partner are seriously diminished.
Moreover, significant drops in surplus trigger the interest of regulators, who are likely to have much shorter leashes in the current environment. No one wants to be the one that has an insurer become insolvent on his or her watch. And with the feds looking seriously at expanding their regulatory oversight of the insurance industry, state regulators will be even more aggressive in preventing insolvencies.
No matter how I look at it, I can’t picture a scenario that doesn’t include further consolidation in the fraternal industry. This shouldn’t be a surprise as it’s been going on for years. And this phenomenon is not limited to fraternals; the entire financial services industry is experiencing tremendous consolidation, as are other sectors of the economy, such as manufacturing and retail. We’re not alone out there.
From where I sit, consolidation is not a four-letter word. In fact, I think it’s one of the most crucial components to the survival of the fraternal system. If done correctly, and while societies have assets to bring to the table (surplus, a healthy lodge system, strong and viable connection with members, meaningful fraternal activities, etc.), consolidation can help preserve both a society’s fraternal identity and its ability to provide its members the financial security they are counting on. However, denying or delaying a merger may result in a further decline in the value of a society, lead to a society assessing its members (never a desirable option), and leave the entire system with a black eye and a regulatory target on its back.
You don’t have to look far to see very real examples of the risks of not changing the way we do business. Societies that are shrinking due to the lack of competitive products and a competent and motivated sales force to distribute them, fraternal programs that don’t resonate with members or the community, increasing overhead that can’t keep up with revenues, and, most important, the absence of a realistic business plan that can correct these ailments have limited options. They can go out in a blaze of regulatory intervention; they can slowly rust and fade away; or they can look for ways to better protect members and serve their communities by seeking innovative options to merge or form alliances with other societies. If I’m making that decision, I’ll take door number three.
Best of Times
OK, enough of the “worst of times.” Believe it or not, I am an optimist by nature and a true believer in what the fraternal system does and what it can do. So what make this the “best of times?” Try these on for size:
President Obama has made community service and volunteerism one of the cornerstones of his Administration. That is exactly who we are and what we do. We have an opportunity to make ourselves known to our new President and a wider network of community service and faith-based organizations that fill the gaps in government programs that can only be addressed at the local grassroots level. NFCA leaders will be meeting with the leaders of the President’s faith-based initiative (see WSJ article on Joshua DuBois) in the coming weeks to lay the groundwork for a more extensive role for fraternals in this project. Increased awareness of the fraternal system can only serve us well.
The current economic hard times may actually result in a “re-set” of values and expectations for many Americans, particularly the middle class consumers that comprise the vast majority of our members. Their lack of confidence in the financial system may spur an interest in the stability of the lower risk, longer term products that are the bread and butter of fraternals. Did you know that fraternals experienced their greatest growth in the years immediately following the stock crash of 1929? In the words of Yogi Berra, this might be déjà vu all over again.
Boomers. There are millions of them approaching their “golden years” who don’t plan to spend it in a condo in Florida or Arizona. These people are going to stay closer to their communities and families and make ideal prospects for both our financial products and our fraternal activities. How is your society preparing to capture your share of this market?
One of the most important parts of NFCA’s vision is “to lead the evolution of the fraternal benefit system.” The economic meltdown may make this more “revolutionary” than evolutionary. I want to work with you to make sure the fraternal system that emerges from this economic “dark age” is composed of societies that have the ability to provide consumers a viable, transparent, and well-understood option for their financial service needs, that have the financial strength to meet more rigorous regulatory tests, and that have the ability to organize members in a way that delivers meaningful community services that fulfill our fraternal mission and validate our tax-exempt status.
Is your society positioned to be a part of this new fraternal system? How can NFCA help you get there? I’m listening, so don’t be shy about sharing your views.