Article

Locking up a new partner

The National Propane Gas Association (NPGA) and insurance giant Lockton Affinity are teaming up to launch a group liability insurance program for NPGA’s 2,700 marketer members beginning this year.

The association has signed a three-year contract for Lockton to implement and manage the program. It will offer general liability, vehicle and property insurance underwritten by AIX Specialty Insurance. The Hartford, Conn.-based company insures homogeneous businesses in under-served markets. AIX, a subsidiary of The Hanover Insurance Group, has not serviced the propane industry to date.

Lockton Affinity specializes in implementing programs for trade groups, associations, franchises and professional organizations. It is an affiliate of Lockton Companies, the world’s largest privately held broker of insurance, employee benefits and risk management services. That company represents intrastate marketers Ferrellgas, Heritage, Blossman and Inergy.

The NPGA-endorsed affinity program aims to pool demand of smaller retailers to entice more underwriters into the propane market. Proponents contend that more competition could drive down premiums and help stabilize dramatic price swings in the ever-changing insurance market.

The number of liability insurance carriers serving the propane industry sways from a half dozen to as many as 20, based on the market’s hard and soft cycles. There currently are about 10, including small regional firms and various captive programs.

The low frequency/high severity nature of propane liability limits the industry’s attractiveness to insurance carriers. The number of accidents may be relatively small, but they usually are severe and therefore expensive to settle. Implementing a successful affinity program comes down to stability in an industry perceived unfavorably by insurance companies, according to Lockton officials.

“Insurance companies in general are not falling over themselves to get into the propane market. Many are scared of it. Propane doesn’t have the greatest reputation within insurance markets,” explains Kirke Dorweiler, executive vice president at Lockton Affinity.

“Our conversations to secure carriers were difficult and took a lot longer than we hoped. Some had minimum premium considerations that would have defeated the goal [to serve all qualifying independent marketers]. They had to be comfortable with the risk and be willing to come to the table with a program that was open to consider even the smaller members. That was always the target that NPGA wanted us to have on our radar screen.”

The goals of the Lockton program are to:
• Mitigate the risk of wildly fluctuating premiums during insurance market cycles;
• Collect industry loss data previously unavailable to NPGA;
• Integrate the industry’s safest practices into the design of the program;
• Create some degree of exclusivity for the association’s safest members;
• Reward responsible members with lower premiums;
• Base rates on member claim experience rather than conditions in the general insurance market.

Lockton plans to begin marketing the plan at the Southeastern Convention & International Propane Expo on April 10-12 in Atlanta. Dorweiler declined to say how much will be spent on promotions, which the NPGA will not pay for.

Pooling purchasing power
Insurance woes are nothing new to the propane industry. A half dozen committees or task forces have reviewed insurance concerns since the earliest days of NPGA’s predecessor organization in the 1940s. Group studies in 2002 and 2005 concluded that there was inadequate support for a self-funded accreditation program or a captive insurance option. A similar conclusion was reached in the mid-1980s, but an independent group of propane marketers formed a risk retention group that operated for about five years before it folded.

The Lockton deal has been planned and debated within NPGA’s Member Services Committee since 2006 in response to renewed marketer complaints about high premium prices and limited coverage options. After rejecting the idea to create a self-funded insurance program under the NPGA, the group became intrigued with the affinity model.

Randall Doyle, chief financial officer for Blossman Gas, has been pushing it for four years. The current Member Services Committee chairman is convinced the new offering will provide pricing stability that small marketers have been unable to generate on their own.

“The propane industry has struggled for years with this question of how we can stop the wild price spikes in certain market cycles. This is what this program is intended to do,” Doyle says, noting that a marketer’s cost for insurance can range from 2 to 6 cents per gallon.

“When you become part of an affinity program, your premiums are driven more by the [claims and loss] experience of the group than the general financial market. Both are still at play, but it helps smooth out the price spikes we historically see every 10-15 years.”

A 2006 policies and procedures guide by the American Society of Association Executives claims 48 percent of trade associations offer members an affinity liability insurance program. Lockton Affinity services about 90 such plans from a wide range of industries nationwide.

“Our experience offers a good road map for what we are trying to do: provide stability, benchmark, develop competitive pricing over the long haul, and create a resource base to improve loss data. Those were lots of the same objectives as were laid out for us by the Member Services Committee,” Dorweiler says.

That experience was a major factor in choosing the type of plan and broker to implement it, according to Doyle.

“We’re not blazing new territory here, so it made sense for that reason. This is not a new concept. Lots of other associations have affinity insurance programs in place,” he says.

“The more I dug into it and talked to other associations, one question kept nagging at me: If they can all do it, why can’t we? It’s one of the reasons I kept working on this.”

NPGA estimates that 48 percent of marketer members sell 1 million gallons or less annually.

“These are small guys who have to go out and negotiate [rates] on their own. An NPGA-sponsored affinity program puts the negotiations with underwriters in the hands of Lockton. That will make a big difference,” Doyle says.

Adds Dorweiler, “In general, an affinity plan works for any group that has a large number of companies that are smaller in size. If we bring them together to negotiate for coverage collectively, we carry a much bigger stick. You can go to a carrier and say you have X-dollars in hand or potentially in hand, which is exactly what we do with a start-up program like NPGA. That’s what we do; we are specialists in that.”

Show me the data
Sweet talk alone won’t help the industry shrink premiums, of course. Carriers demand mounds of documentation on accident claims, employee safety training, operational and hiring practices, customer site inspections, injuries, property damage and court settlements. Historically, that data is exclusive to the policy underwriters.

AIX will collect claims and loss data for participants in the affinity plan and share it with NPGA and Lockton. It will be a critical tool to negotiate future rates and help target industry safety efforts, supporters say.

“Our industry has no ongoing loss data,” Doyle notes. “We make safety a high priority, yet we have no data that measures what the risk of the industry is. We need that data to drive our loss mitigation tactics.”

There is no guarantee that the program will lower premiums or provide coverage to marketers having trouble getting insured in the open market.

“There is a belief by responsible propane marketers that they may be subsidizing those who have chosen not to invest in safety practices. We are trying to develop underwriting criteria that will separate them from those that are not operating as safely. To the extent that we can do that, we hope we can be competitive,” Dorweiler says of rates.

“In this market cycle, I don’t suspect we will go in and miraculously have these cost savings to offer. The whole premise of the program is to offer premiums that are commensurate with risk and, over time, be able to continue to charge fair premium rates regardless of the insurance cycle. We have to have competitive premiums, but we also need stability and good coverage plus a sense of connection between the rate and losses.”

Can the program fly without low premium prices to lure marketers away from their current carriers?
“My personal expectation is that the additional competition will have an impact on prices. That said, it’s my experience that our industry makes its decisions based on price. I think the proof is going to be in the pudding,” says NPGA President and Chief Executive Officer Richard Roldan.

“We certainly understand and will strive to have as competitive a premium structure as we can,” Dorweiler adds. “That being said, if members are just looking for a cut-rate price and they discount the other objectives of the program – long-term stability, etc. – it will definitely be a tougher sell. That’s one reason we made a long-term commitment to NPGA. It may take several years.”

Lockton will earn a standard broker’s commission on premiums paid to AIX. Dorweiler would not specify the rate.

Cash for the coffers
The affinity plan carries the added incentive of churning a new revenue source for the association. NPGA will collect royalties for allowing Lockton to use its name, logo and membership list to promote the program to marketers.

Roldan says it will earn a flat fee for each marketer that enrolls in the program. The fee schedule is tiered to reward a higher volume of participants. Fees will be less for marketers that retain existing insurance agents rather than enroll with Lockton directly. Roldan declined to identify fee amounts.

Although NPGA has no revenue from the program budgeted this year, Lockton projects it can realize $30,000 to $200,000 annually based on a marketer participation rate of 50-275. Assuming an even split between marketers enrolling through their agents and through Lockton, Roldan says 150 participants would earn NPGA $45,000 annually. It would hit $100,000 if 300 marketers sign up, he says.

The enticement is timely. Like many associations reeling from the fallout of a brutal economy, NPGA has had to pare operational expenses while tackling some of the most daunting industry issues in 40 years.

A 9.5 percent drop in total membership since 2006 has cost the association hundreds of thousands of dollars in dues revenue. It has fallen more than $300,000 since 2008 due in large part to marketer consolidation and the two-year withdrawal by Ferrellgas.

The association is expected to ask its multi-state marketers for a temporary special assessment to help balance its 2010 budget. NPGA’s Executive Committee also has approved a 3 percent across-the-board dues increase for 2011. The bump is expected to generate another $70,000 annually.

Yet Doyle and Roldan adamantly deny the insurance program was initiated to fill strained association coffers.

“This is not about NPGA making money; this is about providing a service to members. From the beginning, that’s what this has been about,” Doyle emphasized.

“The real driver of this program is the perception by marketers that their [insurance] choices are inadequate. One aspect of association management is to address the needs of the membership, whether real or perceived. We know we are doing something that is driven by the membership, based on what we have consistently heard from the Member Services Committee and from past surveys,” Roldan added.

“We also have an obligation in how we manage the association to keep dues as low as possible. One way is to allow members access to programs like this that benefit them and generate revenue.”

Unfair competition?
Marketer participation will determine the affinity plan success. Lockton officials say they need 30-50 marketers paying a total of $3 million to $5 million in annual premiums to start the program. Sustaining it will require $10 million to $20 million (about 12 percent of the industry’s estimated premium total) each year, they claim.

Lockton has conceded to use insurance agents already engrained in the propane industry to bring marketers into the program.

“We intend to work with the local agents of propane marketers, if that’s what they want. We have no intentions to disrupt relationships with those agents,” Dorweiler says.

If the program flourishes, it will serve as a valuable benefit to attract and retain NPGA membership. The rub is that those accounts will come at the expense of competing insurance providers, most of which are dues-paying NPGA members. Not surprising, many of those carriers and brokers are crying foul over NPGA’s decision to endorse one member over others.

Harry Lyons has served the propane industry for 22 years as an agent with LP Gas Insurance Specialists of America. His company represents clients in 39 states for a number of the major carriers. He also ran a small propane company in northern Georgia for 25 years.

“We have never taken a position where we endorsed something that is directly in competition with members, and I don’t think this is a good time to start,” says Lyons, a member of NPGA’s board of directors for 30 years.

NPGA has a growing list of affinity programs that offer members discounts on uniform rentals, office supplies, employee background screening, credit card processing and human resource services. Lyons believes the Lockton contract oversteps the parameters of those deals.

“Insurance is different than credit card processing or uniform rental services. It’s a vital part of the industry – like tanks and regulators – that is state and federally required. It seems like our Executive Committee is just looking for money in whatever crack they can find it,” he says.

“I wonder what Trinity would say if NPGA endorsed another tank manufacturer. I wonder what Exxon would say if we endorsed another producer, or RegO if we endorsed another regulator manufacturer. Would they think NPGA should be doing this? We ask these members to support our industry and then we turn around and . . . It leaves an unpleasant feeling with me.”

Tommy Donovan is president of LPG Insurance Services Inc., which has been an agent to the propane industry for Travelers Indemnity Co. since he founded it in 1996. He was surprised to hear about Lockton’s contract through the industry grapevine, rather than a formal notification from NPGA. He’d heard no details of the arrangement.

“I just don’t know what NPGA felt was the need to do this,” he says, admitting he suspects it was driven by a need for revenue.

“A well-run, well-managed propane operation has seen the cost of insurance in the last three to five years decrease on a per-gallon basis. The price fluctuation of their product [propane] and steel has fluctuated far more wildly as their insurance costs have been going down. Yet I don’t hear a hue and cry over the cost of their product and cost of their steel.”

Donovan would not disclose his number of clients or the volume of premiums sold. In addition to paying association dues, he routinely buys booth space at five industry trade shows each year. But that level of support is something he says he might reconsider.

The affinity program will need to generate enough cash to build reserves to cover losses that are inevitable to the business. It also has to pay the markups to AIX, Lockton and NPGA, which will limit the pricing discounts it can offer participants, Donovan observed.

“I just don’t see where they are going to be able to offer something so much cheaper than what is already available in the market,” he says.

Donovan says Lockton’s estimate of business volume needed to succeed is reasonable. He knows it means competing insurance providers will lose a piece of the pie.

“They’re going to have to take that business away from somebody, because there’s certainly not going to be $15 million to $20 million in new business coming along,” Donovan says.

“I can’t see where those businesses that have supported the industry will let their books of business go away. They’re going to fight to retain their market share. I would hope there would be some loyalty to those that have been loyal to the propane industry.”

Stephen Strange Jr., vice president/marketing at American Management Corp. (AMC), is frustrated with the lack of transparency and communication around the NPGA contract.

“It has all been very hush, hush. It’s a done deal, yet nobody has seen the coverage being offered. There are lots of questions,” he says.

AMC is a managing general agency for Zurich with 500 propane accounts. It has served the industry since 1990.

“We have faced all the issues Lockton will face 25 years ago, and we are committed to the propane business regardless of NPGA’s sponsorship,” says AMC President Stephen Strange Sr.

AMC was one of five NPGA member insurance companies that bid to administer the affinity program after five outside agents already had been solicited. AMC’s proposal, which eventually lost out to Lockton, included no payments to NPGA.

“We feel we got an opportunity to get in late to a deal that was already done,” laments Strange Sr.
“We’ve been passionate for this business for over 20 years, and we are going to continue to be passionate. We don’t care who comes in; the best guy will survive at end of day.”