Guilt by Association
Goldstein, Bonnie
Guilt by Association by Bonnie Goldstein Suddenly everyone from trade associations to department stores wants to sell you "bargain" mail-order insurance. They're bargains, all right—but not for...
...In that case, refunds are in order, and it would seem logical for them to go to the individual members who paid the premiums in the first place...
...I wanted to make a comparison between ABA's experience and the American Institute for Certified Public Accountants, which passes refunds directly to members and isn't hesitant about discussing hard numbers...
...It also sends ANA another five per cent "as a courtesy...
...But examination shows that almost all of the "$250,000" in benefits comes from an "extended hospital stay clause...
...Collins and Endowment attorneys explained that money from the insurance refunds supports "legal research and public service projects...
...The answer—pried out of the Endowment only after days of siege—turns out to be $5.4 million for fiscal 1978, down slightly from the $6 million in fiscal 1977...
...and a dismemberment policy that pays off only when the victim loses one foot and his tongue in a riverboat boiler explosion is, actuarially speaking, no risk at all...
...a university professor is the same kind of risk whether he insures himself through the American Association of University Professors or on his own...
...Two members die, so you pay out $20,000 in benefits...
...They receive a 48-page "Super Services Catalog" describing the plans ANA has for them—covering everything from dental work and cancer coverage to vacations in the Caribbean...
...Whoever heard of an insurance company determining that somebody's premiums were too high...
...The more favorable the experience (the fewer the claims), the greater the refund...
...Free Association The proliferation of associations—most of them based in Washington, where they can at least appear to have access to the great gears of government—has made association insurance important business...
...Could you give me those insurance terms again...
...The new frontier for direct-mail insurance involves peddling "policies" to "groups" that may have nothing more in common than their shopping habits...
...Although statistics have been compiled by actuaries on almost every category of human being known to the deity (firemen working the night shift, firemen working the day shift, rural firemen, urban firemen, diabetic firemen, firemen with varicose veins, firemen who like boats, on and on and on), the industry takes a cautious—and highly profitable—approach to new association accounts...
...Max Keeney, insurance administrator for the 130,000-member Air Force Association, explains: "Suppose you have a thousand members, each buying a $10,000 policy at $10 a month...
...Sins of Commission Different associations handle the administration of their group plans in different ways, and here again the regulations don't help, because there aren't any...
...Some forms of insurance are notoriously easy to sell and highly profitable— including life, "supplemental" health, cancer "protection," and various kinds of dismemberment coverage...
...They would present— without changing or adding a word, Stone insisted—a "proven success speech" about the policy, then sign up buyers on the spot...
...But it's the association alone that holds the policy...
...The Encyclopedia of Associations lists 14,019 active organizations...
...It sounds like an irresistible deal, because of the concurrence of low premiums and high benefits, and the high likelihood that any given person will get cancer...
...If you have a charge card at Hecht's, you're part of a "group...
...If you dropped in on a typical association headquarters in Washington a generation ago, you found a rabble of wizened industry veterans, cranking out a mimeographed newsletter on pending legislation and planning the annual banquet...
...In fact, it happens all the time with group coverage...
...This promises to pay up to $5,000 a month, to a total of $250,000— beginning on the 91st day of a cancer victim's hospitalization...
...He hired aimless but eager men to walk door-to-door flashing rolls of preprinted policies...
...The industry has been able to keep regulation out of the grasp of the federal government and within the domain of state insurance commissions, largely dominated by former industry people and easily controlled...
...of Kansas City—pays a "maximum (total) lifetime benefit of $1,500" for x-rays, isotopes, and chemotherapy, among the most common cancer expenses...
...By selling insurance...
...But you also know that most associations don't charge their members much to belong...
...The Endowment is the ABA affiliate that carries group life insurance and keeps the proceeds...
...ANA uses Kirke Van Orsdel, Inc., a Des Moines broker, to administer its life, "supplemental" health, dental, and cancer coverage...
...Worst of all, there was serious risk that ANA would have to increase premiums— not the kind of thing calculated to endear the association to its members...
...It all recalls Groucho Marx's routine about a high-powered insurance salesman, said to be inspired by Stone...
...Organizations like the National Rifle Association devote themselves first and foremost to pressuring Congress...
...The Endowment gave $3.2 million in 1978 to support such work...
...The "policyholder" who wants questions answered about his coverage had better be ready for a long winter...
...The American Bar Association doesn't control the Endowment, Collins said...
...It would be leaving too many doors open," she said cryptically...
...The fraternities invite members to name them as beneficiaries—a bold move which certainly cuts out the administrative inconvenience of locating your survivors...
...Oh, come on, Lou, what's with all these no-comments...
...With this type of arrangement, an association generally pockets less—because it isn't collecting an administrative fee—but then it doesn't have to do any work, either...
...When an insured member dies, the underwriter pays benefits to his estate...
...Here's how the deals work...
...mild-mannered businessmen who exercise regularly are low-risk...
...But the refunds go to the policy-holder—the association, not its members...
...Not all accountants, it should be said, are as well-rewarded as the members of AICPA...
...In their spare time they sold cuff links and coasters emblazoned with the association's crest...
...Actuarial tables, which the insurance industry has been compiling and revising for more than a century, determine with great accuracy the relative risk factors for any particular individual or group: coal miners and private pilots are high-risk...
...Pauline Fergusson's message doesn't mention it either...
...No comment...
...But the rising whirlwind of direct-mail promotions through associations suggests, at the very least, the need for a comprehensive federal disclosure law...
...He didn't mention the possibility of returning it to the nurses...
...Some of them were dying—well, a lot of them, actually...
...Associations and their sophisticated mailing lists represent large blips on the radar screen of profit...
...No comment...
...No comment...
...They're bargains, all right—but not for you...
...An "Accidental Death and Dismemberment" group policy sold through the State Bar of California offers to pay one quarter its principal sum for loss of "thumb and index finger of either hand...
...An Endowment official told him: "You have to compute the amounts yourself...
...Consider: • Since no law requires associations to disclose how much they take in as refunds, an estimate of the total involved is hard to come by...
...Mass marketing appeals to associations for the same reason it appeals to insurance underwriters...
...Stone also pioneered another insurance concept—mass marketing...
...This is good news to ANA's officers...
...Fraternal groups like the Scottish Rite of Free Masonry are basically social clubs...
...We didn't know what to do with it, so we asked our lawyers...
...Along with AICPA, the National Automobile Dealers Association (NADA) returns refunds to its members...
...Phi Delta Phi and the similar Phi Alpha Delta legal fraternity go a step beyond the Endowment...
...Hecht's and Hefner don't administer these programs—they just act as conduits for other companies...
...This may seem like idle theorizing...
...such clauses pay out about $1 in benefits for every $1,000 in premiums, the agency says...
...Although the price of group insurance is low, and the promise of "guaranteed acceptability" is appealing, the real deal on group insurance goes not to the buyer but to the association that sponsors it...
...The director doesn't want you to have this information," said an official of the American Bar Endowment when I asked about refunds...
...shall become the property of Phi Delta Phi...
...But many other groups, including ABA and the American Nurses Association, shroud their insurance plans in Q-clearance secrecy...
...Association insurance "policies" are not really policies at all—not in the usual sense of the word...
...Indeed...
...The American Bar Association, not normally a tight-lipped group, had no interest in enlightening The Washington Monthly about its group insurance surplus...
...The money ended up as a "charitable contribution" to something called the American Bar Endowment, where it appears to have been largely consumed by administrative expenses...
...Tropez...
...But many associations simply put the refunds into their coffers, never advising the members in any plain-English way that the surplus exists...
...and at the non-profit status of the Endowment itself...
...The 79,000-member Phi Delta Phi legal fraternity, for instance, offers this fine-print statement at the bottom of its insurance applications: "I understand that all dividends...
...It doesn't much matter how...
...Keeney says the AFA uses its refunds to buy more coverage—so members do get it back, after a fashion...
...The evercautious insurance company makes no retroactive refunds, of course, and it holds some of the premium money in a contingency fund—against the possibility that the bowlers might be wiped out en masse by a roof collapse while assembled in convention...
...Fergusson doesn't have a license to sell insurance, but then, they don't license carnival barkers either...
...True, it is an "affiliated organization" with the same members as ABA, but it has a different board of directors—one over which ABA has "no control whatsoever," according to Collins...
...Most associations, according to an insurance consultant, simply use it for operating expenses...
...Instead, they get a small computer printout telling them the percentage of refund for the year...
...The association keeps the money, and since the members were never expecting to get any money back, they never miss it...
...Among self-administered plans, for example, the fees associations pay themselves vary, from the approximately three per cent charged by the AICPA to the nearly ten per cent levied by B'nai B'rith...
...Through the years Stone parlayed these ideas into Combined Insurance Co., a large public company which still sells inexpensive travel insurance door-to-door—lots of good jobs for people who couldn't get a break from anyone else...
...Associations further inflate the cost of group policies by pyramiding "fees" and "commissions"—sometimes for nothing more than the use of the association's logo...
...Whenever the actuaries satisfy themselves that the association members fit the tables, the group passes over into the promised land of refunds...
...The catalog opens with a message from Pauline S. Fergusson, ANA director of membership services...
...NSPA, for instance, uses a third-party broker who obtains and administers the policy...
...ABA members are not given any hard dollar figures...
...one top official said he "couldn't remember the sums involved" but thought it was "somewhere in the million-dollar range...
...If you lose a leg," Groucho's salesman promised, "we'll help you look for it...
...ANA's former broker wasn't aggressively marketing its insurance package, especially to its younger members, so the median age of the policyholders was increasing steadily...
...When the 22,000-member National Automobile Dealers Association got its first "experience refund," it was as surprised as a used-car buyer who finds a fresh spare in his trunk...
...And If an Advancing Glacier Crushes Your Garage...
...The association gets it back, as an "experience refund...
...A spokesman for the Missouri Division of Insurance warns: "Technically, as policy holders, the associations can even change the beneficiaries on life insurance...
...The insurance plans often sound too good to be true...
...You've probably been irradiated by the affluence of association executives riding in elevators with you...
...he wouldn't even confirm whether NSPA gets "experience refunds" at all...
...The association buys a single "master policy" from an insurance underwriter, such as MONY or New York Life...
...Associations wouldn't be so excited about selling cheap group insurance unless there were something in it for them...
...The cover letter makes only a vague allusion to a "20 per cent bonus insurance" available free "due to good experience under our Life Plan...
...The little-known mechanism of the rake-off—several insurance industry authorities interviewed for this article were unaware of it—is, once uncovered, disarmingly clear...
...There's virtually no limit to What you can do," a leading insurance broker says...
...you've noticed them swarming like lemmings to Le Bagatelle at lunchtime, and usually "out of the office" starting about noon every Friday...
...If it also goes into salaries and long lunches and walnut-veneer offices, who's to know...
...Given the silence that surrounds the system, there's no way to be certain...
...A Premium on Secrecy No law compels associations to reveal the extent of "experience refunds"—or even to tell their members clearly that such things exist...
...Nurses, like everybody else, get older...
...How, then, can they get the money to cut such a wide swath through Washington...
...I assumed lawyers might be just as eager as accountants to recover their money...
...Whatever the IRS decides, the ABA's chief spokesman, public affairs director Richard Collins, claims ignorance of the Endowment's arrangements...
...Chances are it's filling up with offers of inexpensive group insurance plans—offers pumped out with computerized gusto to you and the millions of other Americans who belong to these associations...
...They do offer the benefit of automatic acceptance, an important provision for older buyers...
...There's nothing illegal about any of this, but the fact remains that an organizaLion like AICPA performs all of its administrative functions for three per cent, while ANA members are spending 20 per cent of their premiums just to get their money delivered to Prudential...
...The idea is to get as many people as you can under one policy...
...Prudential takes ten per cent of the total value of the life insurance as its profit—a "reasonable" rate by industry standards...
...You qualify even if all you've done is buy a shower curtain...
...That's because they are too good to be true...
...Observe the insurance arrangements of the 190,000-member American Nurses Association...
...They have accurate mailing lists...
...You can buy group life insurance through the Boat Owners Association, but you don't actually need to own a boat to qualify...
...It compensates them, Kirke said, for "staff, time, and intangible costs...
...Most associations opt for microfiche-size type for disclosure...
...These must be intangible indeed, since ANA does none of the administrative work...
...At the American Bar Association, for example, nobody's volunteering nothing about nothing...
...by Bonnie Goldstein If you belong to a trade or professional association, check your mailbox carefully this year...
...The American Bar Association's affiliate, American Bar Endowment, derives almost all of its income from "experience refunds...
...Kirke Van Orsdel to the rescue...
...The modern manifestations of massmarketing coupled with insurance against nothing are "cancer" and "dismemberment" insurance...
...Why not talk...
...It happens, however, that both organizations share the same building, in which they are the sole tenants...
...They said the only purely legal thing to do was rebate it to the members...
...It's attractive because "regulations" governing association policies are as relaxed as a sunbather at St...
...Printing and mailing the catalog is paid for by companies using it to sell to nurses...
...The Trust for Insuring Educators, for instance, directmails offers of cancer insurance to the 28 associations it comprises, including the American Theatre Association, the National Association of Educational Secretaries, and the National School Public Relations Association...
...This provides them with a helpful competitve edge in keeping dues low...
...B'nai B'rith, for example, openly promotes the use of refunds as a way for members to support the organization...
...The idea is more than 30 years old—entrepreneurs like Kansas City's Forest T. Jones and Chicago's Charlie Finley made their fortunes on it—but major insurance brokers and underwriters have only recently been attracted...
...The insurance is not promoted to them by Kirke Van Orsdel or Prudential...
...What happens to the other $60,000...
...The underwriter, New York Life, eventually refunded nearly $100 of his money...
...For the first few years of an association master policy, there is no refund, and the underwriter makes a great fuss about watching nervously to see whether associated duck-pin bowlers are more death-prone than unassociated ones...
...Long ago, most of these organizations existed primarily for purposes of camaraderie among colleagues with similar interests...
...Jones & Co., which handles only association policies (see "Take a Lawyer to Dinner" on page 13), claims to be the largest broker-administrator...
...Figures like these suggest the total refunds to the thousands of associations in America could amount to hundreds of millions of dollars a year—money their members never see...
...In fiscal year 1979, AICPA says it collected $32 million in group life insurance premiums and returned $13.5 million...
...The underwriters were having to pay off...
...Shhhhh How much money is lost to association members this way...
...Phi Delta Phi officials wouldn't say what they do with the money they won't say they get...
...Although ABA's 260,000 members are informed when they buy group life that refunds will go to the Endowment, the ABA is much less straightforward about telling them what the total comes to...
...What the future holds for directmail marketing of insurance is clearly: More...
...How are they used...
...That means its members got back 42 cents out of every dollar they paid in...
...If you've spent much time downtown, you've observed the glittering new buildings being erected pell-mell, one after another, by associations you've never heard of...
...IRS investigators are believed to be looking both at the ABA members' practice of computing for themselves the value of their refunds and then deducting those refunds from their taxes as charitable contributions...
...Most people assume group life insurance is cheaper than individual coverage because their group constitutes a betterthanaverage risk...
...Using an apparently legal but highly questionable combination of whitewashed information, mumbojumbo fine print, and melodramatic marketing, many of them have taken the old concept of a reasonable profit margin and wrenched it beyond recognition, to the point Where they are pocketing millions of dollars a year in premium refunds that could—and should—be returned directly to their members...
...As you contemplate the way this game is played, you will come across one of the apparent contradictions of Washington...
...Instead, she tells her members that "the group has an administrator who handles ail the billing and other administrative costs—thereby saving the insurance company 'a bundle.' " What Kirke Van Orsdel actually did was to salvage ANA as an insurance risk...
...We weren't expecting any money back," a NADA official says...
...Nowhere is the word "dividends" defined...
...You're a legitimate association, aren't you...
...Nowhere is there any mention of the $430,000 in refunds absorbed by Phi Delta Phi last year—a figure obtained from PBA, Inc., the association's broker-administrator...
...his deputy, Melverene Stevens-Gibson, said she would speak "only if we could edit whatever you publish...
...It is now said to have "favorable experience...
...But what if the underwriter decides that the association's members are paying unnecessarily high premiums...
...Until recently, association insurance brokering was the province of small, unheralded firms...
...By contrast, the Trust for Insuring Educators policy—provided by broker-administrator Forest T. Jones & Co...
...Endowment director Richard Breiner refused to be interviewed...
...ANA members send their premiums directly to Kirke Van Orsdel, which uses the money to buy life insurance from Prudential...
...Direct-mail promotions continue to emphasize the personal touch (see "You're In Good Hands With Betty M. Cryer" on page 18) but there is nothing personal about them, and that's precisely their attraction for insurance companies...
...I've never heard of this question before," he said...
...Why should Kirke Van Orsdel send five per cent to ANA...
...Most associations don't administer their own plans...
...Association insurance used to be a pretty rarefied field," says a spokesman for the American Council on Life Insurance, "but it's rapidly becoming big business...
...It makes part of its profit by investing the contingency fund and collecting the dividends...
...The low-priced ($48 a year) policy is promoted as a "$250,000 plan...
...4,000 have been formed since 1975...
...It took a fusillade of phone calls to blast loose the simple fact that ABA received $5.4 million in refunds in 1978 alone...
...Applicants would have to be pretty current in insurance terminology to "understand" what that means...
...We've come a long way...
...the Internal Revenue Service is investigating the Endowment's insurance-refund uses...
...In shOrt order, the association signed up many of its newest members— younger, less dead nurses who have improved the group's "experience" so much that the refunds are expected to be flowing again soon...
...Association members should be told the details of coverage, the risks, and—most of all—where their premiums go and how to get "experience refunds" back...
...The image lives on, but the reality today is very different...
...According to the council, about two million people currently carry $40billion worth of group life insurance through associations...
...It's also, of course, what successful insurance marketing is all about: maximizing the ratio between the living and the dead, and minimizing the payout...
...Although AAUP's membership gives the actuaries a large data bank to help finetune the risk factors, the real savings come from mass-marketing...
...Associations can peddle insurance cheaply and still have lots left over from the premiums to rake off for themselves...
...At the same time, associations which claim to be dues-financed should be compelled to operate as such, instead of using insurance refunds as a concealed way to increase income without increasing dues...
...How many of Hecht's shoppers, actuarially speaking, do you suppose lose both feet...
...Lou Garcia, a spokesman at NSPA's Washington headquarters, was just as amiable and forthcoming as the American Bar Endowment...
...Anything that's being published," an ABA representative told me, "would have to be approved by any number of individuals—maybe even the board of directors...
...But Alexander & Alexander and Marsh McLennan, the largest independent brokers, are now aggressively going after association business...
...pany comes up with a refund, the association— not the members—pockets the difference...
...Then members could decide for themselves what they want to do with their refunds—and whether they really want to pay for the glittering headquarters buildings in Washington...
...How much...
...The insurance industry may well be the nation's most effective grassroots lobby, able to deploy legions of agents in practically every community at the first sign of unfriendly legislation...
...The way the insurance industry operates this system is intriguing...
...One account executive, backed up by a computer, can cope with dozens of association policies, which, in turn, are "covering" hundreds of thousands of people...
...In plane crashes, of course, you generally lose more—or less...
...The American Association for Retired Persons (AARP) may sound like a collection of front-porch philosophers, but it is actually an 11million-member catalog store selling travel packages, road service, greeting cards— and insurance...
...A BOA spokesman explains that the association only requires you to pay your dues and like boats—and one of these requirements is not strictly enforced...
...it's their very own ANA that's looking out for them...
...Miscellaneous general membership groups like the National Duck Pin Bowlers Congress are out on the frayed fringes of specialization...
...During the Depression, Stone sold low-priced coverage covering accidents like losing a leg while "on a train, boat, or aeroplane...
...Trade groups like the American Public Works Association draw members from general job categories...
...But even lawyers—the inventors of fine print—play the group insurance game, and lose, Last year, for example, a Minneapolis lawyer who belongs to the American Bar Association paid $240 for group life insurance offered to him as a "service" by an ABA affiliate...
...The agency developed a slightly different plan for ANA and a full-blown marketing program...
...But he never saw it...
...Other group policies offer "dismemberment" guarantees...
...ANA's "experience" went sour...
...In short, the Endowment appears to have spent 43 cents to administer each dollar in grants...
...If the association folds (as 2,000 did during the past five years), the "insurance" vanishes without warning or recall...
...What does the Endowment do with its money...
...By their very nature, they are cheaper to administer than individual plans and therefore cheaper to buy...
...But before the money gets to Prudential, Kirke Van Orsdel takes out a "nearly" five per cent "commission" and a ten per cent "administrative fee," according to company president Gary Kirke...
...What members get is a "certificate of insurance...
...So we did...
...One of the time-honored strategies for insurance profit is to sell an inexpensive policy against something that almost never happens...
...According to the Massachusetts Insurance Department, uninterrupted hospital stays of longer than 30 days are almost unheardof for cancer patients...
...Hecht's, a large Washington department store chain, offers supplemental health insurance to its credit-card holders, and readers of Playboy can insure their lust for life by buying plans offered to subscribers...
...Groups come in many packages with different purposes...
...At the moment, ANA is not getting an "experience refund," according to Kirke, because it has not yet established "favorable experience" with Prudential's actuaries...
...But its financial statement shows that it also spent $1.4 million in "operating expenses...
...Some associations avoid temptations this brazen by simply suggesting that you name them as beneficiaries in the first place...
...It turned out there may be good reasons for her reticence...
...You would collect $120,000 in premiums every year...
...Endowment officials refused repeatedly to disclose a figure...
...That same year, the American Institute for Certified Public Accountants (AICPA), one of the few associations that returns refunds directly to its members, distributed $13.5 million...
...This idea was first hit upon by W. Clement Stone, now a conservative philanthropist and author of motivational books...
...Into The Showers The logical next step is already being taken—the selling of group insurance to people who hadn't even thought of themselves as belonging to a group...
...Other lawyers are not surprised by refunds, nor filled with resolve to return them...
...the actuaries muttered and clicked their pencils against their teeth...
...even the traditional earrings and cufflinks with the ANA logo...
...Some of the country's most prestigious associations use group insurance plans in perfectly ethical ways, taking pains to inform members about what happens to the refunds...
...So are the major insurance underwriters themselves...
...they are big on conferences, trade expositions, and publicity...
...With these bookkeeping details safely out of the way, the insurance company goes about the business of refunding money to the association...
...Assume you spend $15,000 on operating expenses and $25,000 goes into a contingency fund...
...ANA simply sprinkles on its blessing...
...One ABA member reports that his last printout showed 41 per cent of his premiums as having been returned to the Endowment...
...she proclaims...
...Individual policies require, at the outset, individual salesmanship, and then individual account servicing...
...and lots of policies that never have to pay a claim...
...Are there refunds, Lou...
...The basic formula is simple: the association charges its members a bit more than the coverage really requires, and then, when the underwriting insurance cornBonnie Goldstein is a freelance reporter and research director for the Washington Center for the Study of Services...
...Professional associations like the American Medical Association make much of their membership rules and the quasijudicial role they play within the profession...
...If a refund becomes available, he says, ANA will have the option of using it to buy more insurance or simply keeping it...
...Group insurance plans, as such, have certain legitimate and undeniable advantages...
...She goes on to suggest it's not far enough—the conscientious nurse, in her view, should be buying life insurance...
...No comment...
...You're on Hecht's computer-updated mailing list, and that makes you a member of a "group" to the insurance industry...
...and the association's logo lends credibility to almost any enterprise...
...Deep in the fine print you may be able to find cryptic descriptions of this exercise...
...That adds up to "nearly" 20 per cent...
...The supplemental health insurance policies sold through Playboy's Playgroup and Hecht's department store pay $10,000 for "non-fatal injuries resulting in the loss of both hands, feet, or the sight in both eyes...
...Association executives have recognized that their organizations are magnificent marketing machines...
...But group life discounts have little to do with the actuarial differences between the aligned and the nonaligned...
...This is not the impression nurses get when they receive mailings...
...It works like this: Members buying life insurance pay their premiums to the association, receiving a "certificate of insurance" in return...
...The amount of the refund, if any, is determined by the group's "experience"— the track record of its members' mortality, compared against actuarial tables...
...their members are generally affluent...
...Thus, your total expenses for the year come to $60,000...
...But there's no legitimate reason to throw camouflage nets over the finances of these plans...
...The 15,000-member National Society of Public Accountants was recently named in a review by Missouri insurance auditors for allegedly skimming unsubstantiated administration "fees" from its group life funds...
Vol. 11 • February 1980 • No. 12
