Insuring Nonprofits as Markets Harden

As recession looms and claims costs associated with the terrorist attacks on September 11 add up, insurance markets are beginning to harden for the first time in nearly a decade. Many major property and casualty carriers, facing the prospect of losing their reinsurance coverage, will likely reduce capacity and take a more cautious underwriting stance. For many private sector clients, maintaining current levels of coverage could prove challenging enough—obtaining new coverage could be prohibitively difficult.

But will a hard market affect the nonprofit sector, and especially social service organizations, in the same way? In the face of economic slowdown and rising unemployment, increasing demand could tax the resources of food banks, soup kitchens, charities, and other nonprofits. A potential issue is whether increased demand for nonprofit services could eventually increase their exposure to certain risks.

Even in more stable economic times, many major carriers consider nonprofits difficult to cover, leaving the market largely to specialty carriers and excess and surplus lines. In Texas, such nonprofit carriers include Ze/USI, Charity First, a subsidiary of Arthur J. Gallagher & Co., and ACE.

Structural differences, similar needs
The Texas Association of Nonprofit Organizations (TANO) assists the state’s 35,000 nonprofits in finding insurance. Marc Ogden, insurance advisor to TANO and a 30-year veteran in the industry, has noted that fundamentally, the coverage needs of nonprofits mirror those of private clients. The structural differences between nonprofits and corporations, especially regarding volunteers instead of employees, however, are what can cause headaches for carriers.

“Nonprofits,” he explained, “have a different complexion. Different professional roles mean different professional liability exposure.” The essential difficulty for many carriers, according to Ogden, is that “From an underwriting standpoint, it’s harder to understand true risk exposure” when it comes to these organizations. Coupled with the lack of homogeneity among most nonprofits, which requires more specialized policies, this can complicate efforts to provide adequate coverage regardless of how soft or hard the market is.

As far as actual policies are concerned, however, Ogden points out that coverage for nonprofits barely differs from that for the private sector. Premium prices are also very similar between the two groups, as are fluctuations in those prices, both nationwide and in Texas.

A case in point is the Capital Area Food Bank (CAFB) in Austin, which distributes more than $17 million in food every year to recipients in 21 Central Texas counties. According to Judy Carter, executive director for 16 years, the organization has a $3 million liability policy, obtained with the help of an independent agent who formerly sat on its board of directors. Coverage includes directors and officers, auto, general commercial liability, and workers’ compensation, all at a reasonable premium. Carter noted that the real difficulty in obtaining coverage for CAFB was figuring out how to value the products in its inventory. “Product liability coverage is unique for food banks,” she noted, considering how perishable their inventories are.

CAFB may be an exception to the rule in some cases, though. Its workers’ compensation coverage is bought directly from its carrier. According to Ogden, increased workers’ comp claims from both nonprofit and private sectors are causing many carriers to significantly reduce or even drop this form of coverage altogether. This may have a more severe effect on for-profit policyholders overall, though, as many nonprofits do not obtain worker’s comp insurance directly from carriers. Because these organizations are seeking coverage for volunteers rather than full-fledged employees, Ogden explains, many obtain occupational accident plans through life insurance companies rather than standard workers’ comp through property and casualty carriers. Nonprofits may also choose to cover volunteers through self-funded arrangements, in which the organizations are themselves responsible in case of injuries.

Purchasing groups grow in importance
Ogden noted that as markets harden further, potentially restricting access to other insurance lines besides workers’ comp, a more likely option for many nonprofits will be joining purchasing organizations to obtain coverage. For both nonprofits and for-profits alike, these organizations provide insurance to groups of businesses with similar risk exposures. According to the Texas Department of Insurance, 297 such groups currently exist statewide. Through purchasing groups, Ogden said, “Carriers can develop policies specifically for nonprofit liabilities, especially volunteer coverage.”

The growing importance of purchasing groups was also noted by Cindy Hawley, senior vice president at San Francisco-based Charity First, the Arthur J. Gallagher & Co. subsidiary and managing general agency (MGA) that works directly with A+ carriers and agents to provide nonprofit coverage nationwide. Managing about 10,000 accounts throughout the US, Charity First offers property, auto, directors and officers liability, umbrella, general liability, and workers’ compensation lines, as well as specialty lines such as student and volunteer accident coverage and liability for counselors and other social service professionals. Premium rates can range from $1,000 to more than $100,000 based on a nonprofit’s size, type of operation, and the type of coverage it wants. In addition, risk management information and loss control resources are available to nonprofit clients.

“Purchasing groups will grow as markets harden,” Hawley predicted. She also emphasized, however, that nonprofits won’t be at any greater disadvantage than for-profits when it comes to obtaining coverage at low capacity: Increasing demand won’t necessarily affect existing coverage, and premium prices for nonprofits are increasing at the same rate as those for private clients. In a previous interview with the Insurance Journal-Texas (Vol. 7. No 18), Hawley stated, “We’re not aware that any of the major players are shying away from writing nonprofits.”

Now the opposite may be true, but for the private sector, as well. As for the diminishing capacity for workers’ comp insurance, Hawley noted that this trend is affecting for-profits just as much, if not more, than nonprofits. As it becomes harder to obtain coverage through carriers, nonprofits and for-profits alike may be able to buy coverage through state funds set up as “insurers of last resort.”

In Texas, the Texas Mutual Insurance Company, a domestic mutual insurer formerly known as the Texas Workers’ Compensation Fund, provides such last-resort coverage. The company will likely prove a valuable resource as workers’ comp capacity shrinks further.

Property rates rising
RSI International is a managing general agent that provides property coverage for nonprofits in Texas and Missouri, as well as commercial and personal lines. Its markets include Century Surety, St. Paul Re, Southern County Mutual, and Union America, as well as Lloyds of London syndicates in the UK. Company president and founder Colin Rainey noted that property coverage is another line likely to become less and less available in the Texas market, but like Ogden and Hawley, he made no distinction between nonprofit and for-profit policyholders.

Rainey anticipated that premium prices would increase for both types of clients because “Texas property is in the toilet due to hail and floods.” Coupled with many property carriers’ newfound leeriness after Sept. 11, weather problems specific to Texas could cause premium rate increases of 50 to 100 percent. As property capacity decreases, Rainey expects potentially double deductibles for wind and hail exposure, especially in North Texas. Despite this difficult forecast, however, RSI and its partner carriers intend to increase renewal business by 15 percent next year, and 20 percent in 2003.

Another major provider of insurance coverage for nonprofit organizations is Ze/USI Insurance Services, a joint venture partnership between Zurich North America (Zurich N.A.) and USI Insurance Services Corporation. Operating as a managing general underwriter for Zurich N.A., Ze/USI offers a full line of coverage for nonprofits, including property, directors and officers liability, workers’ comp and accident insurance for students and volunteers. It has also developed a series of enhancements called ACEAdvantage that provide specialized coverage for nonprofit organizations that is approved in most states. Coverage is provided by Maryland Casualty Company and other Zurich N.A. member companies.

In spite of the hardening market, or rather because of it, ZeUSI president RodneyHarvey senses a real opportunity for specialty carriers to increase business: “Non-specialty carriers will jettison nonprofits faster, leaving the market more to specialists.” This would occur as many standard insurers refocus on core lines as capacity falls. As their excess and surplus lines are reduced, niche carriers like ZeUSI could actually increase offerings to nonprofits.

Despite the organizational differences between nonprofits and corporate policyholders, representatives of the insurance industry have indicated that their fundamental coverage needs are the same.

While this fact seems to dispel the notion that obtaining adequate coverage for nonprofits is a monumental undertaking, it also suggests that in a hard market, nonprofits may not fare any worse than commercial clients in finding insurance, but they likely will not fare any better.

Topics Carriers Texas Workers' Compensation Excess Surplus Property Market Insurance Wholesale