By Richard Jungman
Manager - Claims, Client Education & Risk Management, Hobbs Group/Kirklin & Company, LLC.

The country's financial outlook is grim. Insurance companies can call the shots. The fraternity chapter is expensive to insure. So what can chapters do?

First, chapters must realize how hard the insurance business has been hit lately.

Men's general fraternities are the sixth-highest ranked underwriting risk.

The current state of the insurance market is best categorized as a hard market. A hard market occurs when underwriting capacity shrinks while the demand for insurance remains constant or increases.

It is simple Economics 101: as supply decreases and demand remains constant or unchanged, the price of the good or service increases. Supply is often referred to as "underwriting capacity" in the insurance industry. It is defined as the amount of surplus capital in the insurance market place. As the number of underwriting facilities decrease, so does the surplus capital.

The terror events of Sept. 11, 2001 still have a lingering effect on the insurance business. Insurers are increasing premiums to play catch-up with the losses paid. In addition, the explosion of toxic mold insurance claims both from a property and general liability perspective caught the insurance industry off-guard; they must make up for their losses somehow.

Like everything, the insurance industry is being hit by the poor performance of the financial markets. Insurance carriers became dependent on investment income to make money. They could payout more for losses and expenses than they collected in premiums and still make a profit during the stock market boom of the 1990s.

But when the bull market turned into a bear market, things changed: what once was an investment profit turned into an investment loss. Combine this with poor loss experience and many carriers became insolvent. Finally, the insurance companies continue to get hit by unpreventable lawsuits.

The lack of aggressive pursuit for tort reform in the United States means anyone can sue insurance companies at any time. Because of reform in Canada, chapters in the country pay an average of 35 percent less than their American counterparts.

Second, chapters must realize that they are a high-risk group to insure, and that the insurance companies are under increasing financial pressure.

The number of insurance carriers willing to underwrite fraternity risks has always been a significant problem and, in turn, the premiums have always appeared substantially high. This is not without justification.

Men's general fraternities are ranked sixth on the list of highest underwriting risks. Just like auto insurers, the underwriters in the fraternal insurance market recognize that 18-to-22-year-old males are a very high risk. Too many times, their behavior demonstrates a mindset of being "bulletproof". This is not an attractive quality to insurers.

First off, fraternity chapters are frequently sued: a number of headline losses which resulted in seven-figure verdicts and/or settlements have impacted all fraternities. Fraternities and sororities are increasingly becoming target defendants. They have developed, and some will say earned, a bad reputation for fostering a culture of alcohol and drug abuse.

They have numerous claims: if the insurance company pays more than 60 percent out on claims than it collects in premium, the account is not profitable!

For these reasons, fraternities are becoming more expensive to insure.

More and more college campuses are increasing the insurance limit requirements for fraternities and sororities from $1 million to $5 million. This is likely only going to become more common as juries continue to rule against fraternities.

The current hard market has done nothing but increase the insurance difficulties for fraternities. This year, some organizations have experienced increases as high as 100 percent from the previous year.

The increase in operating cost for property casualty insurance threatens the continued existence of a few fraternities and, sadly, has created a budget crisis for nearly all of them. Many chapters struggle to meet the financial obligations of their risk management assessment for general liability insurance and the commercial property insurance premium for their chapter houses. Simply put, the effect can begin to spiral. Due to the high costs of insurance, chapters can close and membership can decrease.

Finally, fraternities must take the steps to improve their situation:

Like all business cycles, the current hard market will eventually come to an end. When it will end is the unknown. To ensure fraternities and sororities survive it, they need to be develop an appropriate and achievable action plan. I suggest the following:

1. Don not stop investing in risk management initiatives and programming. If there ever was a time to be investing more in this area, it is now. One dollar invested in risk management can provide a $20.00 return by controlling or reducing insurance premiums.
2. Review the fraternity's organizational structure. Is it possible to allocate additional human resources to member education without adding to staff?
3. Review the fraternity's current insurance program and look for areas to help control costs, such as increasing their house's deductible or self-insured retention.
4. Stay ahead of the curve by being aware of changes in fraternity and sorority risks and look for ways to eliminate or, at the very least, reduce the exposure the risks create.
5. Encourage balance within the chapter. Identify chapters which seem to be only about the social benefits of membership, and work diligently with them to bring balance between academics, athletics, leadership, community service and social interaction.

By using preventative methods and staying in touch, fraternities can help avoid the financial effects that insurance brings.

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