Frankly Federated
A Wisconsin idea keeps co-ops covered
It was a classic, textbook situation: Traditional
providers were uninterested in delivering their service, or
interested but at an unbearable price. If enough could be persuaded
to join in and assume the responsibility, member-owned cooperatives
could provide for themselves, controlling the cost and designing
the service to meet their needs. Here was a problem tailor-made
to be solved by electric cooperatives, but this wasn’t
the 1930s and the product wasn’t electricity. It was the
1950s and the product was insurance.
As attorney Chuck Van Sickle explained in the
1990s documentary video A Member of the Family, electric cooperatives
needed workers’ compensation coverage and had a hard time
getting it at a reasonable cost, despite what he called “superior”
job training and safety programs. His Madison law firm of Wheeler,
Van Sickle, & Anderson did and still does a lot of work
for the state’s electric co-ops, so Van Sickle was well
aware of their low loss record—and that it went unrecognized
by the insurance companies of the day. In fact, the Wisconsin
co-ops’ approach to training and safety became a model
for the nation, but as Van Sickle noted, they “were not
getting the benefit in [insurance] rates.”
In the same documentary, Bill Thomas, former
statewide co-op association manager, said, “Electric cooperatives
were sort of a foreign operation to them [insurance companies]
and investor-owned utilities were putting out propaganda that
the co-ops couldn’t succeed, that they’d go bankrupt,
that they’d fail, and it created an image where the insurance
companies that were willing to write coverage did it at a considerable
high price.”
Thomas and others saw that as simply unacceptable.
In the words of Francis X. Fraas, who retires July 1 as president
and CEO of the Federated Rural Electric Insurance Exchange,
the Wisconsin organization “felt their job training and
safety program was better than anybody else’s and they
felt that was a direct correlation; that they had a safer lineman
and therefore they ought to be paying less for workers’
compensation insurance than the investor-owned utilities. That’s
how it started.”
The stage was set for the Wisconsin cooperatives
to invent new ways of applying things that had worked for them
before.
Fits and Starts
With an exemplary safety record and low losses
among member cooperatives, the Job Training and Safety Committee
of the Wisconsin Electric Cooperative (WEC, as the statewide
association was known in the mid-1950s) began looking into a
self-insurance program as an alternative to the high rates and
limited availability encountered in the traditional insurance
market.
Things moved quickly at first. In the spring
of 1956, the committee recommended the concept to the statewide
co-op managers association. By late summer a detailed study
directed by the University of Wisconsin School of Commerce indicated
a self-insurance plan was feasible and would save money. On
December 5, directors of the statewide association voted 23–5
to approve articles of incorporation for Federated Rural Electric
Insurance.
Organizational planning and appeals to individual
co-ops to support the venture occupied much of the following
year. But in the fall of 1957 things slowed down as various
players pondered the Federated project leaping from nonexistence
to nationwide insurance company in a single bound.
The National Rural Electric Cooperative Association
(NRECA) had indicated interest in taking over ownership and
operation of the still-theoretical self-insurance operation
and the next few months were given over to fleshing out a plan
to do so. But in February 1958, the NRECA board voted against
taking on the project and the ball was back in Wisconsin’s
court.
The WEC wasted no time in responding. On March
13, 1958, the organizational meeting of Federated Rural Electric
Insurance was held in Madison, with 15 co-ops subscribing to
capital stock. Before the month was over, Bill Thomas’
annual meeting report to WEC members noted, “A few years
from now, in looking back over our shoulder, we will regard
the formation of Federated Rural Electric Insurance Company
as one of our greatest assets in the service to our member cooperatives.”
He hoped actual operations could begin by mid-year, with policies
issued by the following January 1.
That target would fall by the wayside. By
the end of 1958, Thomas noted delays in obtaining adequate operating
capital, “a satisfactory reinsurance agreement, getting
the policies set up, obtaining a license from the [state] insurance
commission, and securing membership in the insurance rating
bureau.” Moreover, he reported, some of the member co-ops’
workers’ compensation policies had expired and had to
be renewed with the old carriers.
A new target date was set for June 1, 1959,
and it wasn’t missed by much. On July 20, 1959, Wisconsin
Insurance Commissioner Charles Manson (not a typo—ed.)
gave Federated its license to do business in the state. It was
the first insurance license in the nation’s history issued
to an organization of electric cooperatives.
The first policy was for coverage of WEC staff,
which for the time being also staffed the insurance company.
Fourteen distribution co-ops across the state announced they
would take out policies as their existing coverage expired.
Federated began taking on a staff of its own as state regulators
authorized the company to write additional lines of coverage.
Though organized as a stock company to meet
the requirements of insurance law, Federated’s articles
of incorporation and by laws specifically provide for cooperative
ownership and control. Only cooperatives could own its stock.
In 1999, it was reorganized as a “reciprocal” insurance
exchange and instead of stock dividends, the company’s
margins are simply returned to the member co-ops.
Growing Pains
Many would agree that the two most pivotal
roles in Federated’s history have been played by Bill
Thomas and Frank Fraas. If Thomas was a leader strong enough
to make the company a reality, Fraas has been a leader realistic
enough to make the company strong.
The 1956 UW study made clear that the Federated
program would work best with as many cooperatives as possible
and the greatest possible number of states involved. This objective
was pursued with all deliberate speed. In a paper titled “How
Wisconsin Did It,” Thomas reported to the 1963 NRECA annual
meeting that after two years’ operation Federated had
been licensed to offer coverage in Iowa and Minnesota, and it
was subsequently licensed in Kansas and South Dakota. He urged
the assembled delegates to bring their co-ops into a nationwide
pool, saying “it staggers the imagination to calculate
the enormous savings” they might realize.
But by the mid-1980s, there were setbacks.
In a wide-ranging conversation this spring with Wisconsin Energy
Cooperative News, Fraas recounted that the company took a double
hit when it lost out in mediation over disputed director liability
coverage and its reinsurance company filed bankruptcy. Meanwhile,
Fraas said, Federated was seeking to expand as rapidly as possible
“from border to border and coast to coast” and was
moving into some “difficult jurisdictions” where
its rates weren’t covering losses.
Amid all this, Fraas was chosen as president
and CEO in 1991. The next two years would see the company borrow
money from the National Rural Electric Cooperative Finance Corporation
to stay afloat, as its reserves continued to shrink.
As CEO, Fraas drew the unenviable mission
of raising money by convincing the roughly 700 co-op owner-policyholders
to buy more Federated stock. They came through, he said, on
the promise that the company would be turned around. That was
the easy part. The hard part was that the turnaround required
rates to be raised “immensely.”
Fraas says his message was along the lines
of “So not only, Mr. co-op insured, do we need your money,
we’re gonna raise your rates, too.” The goal was
set to achieve a 100-percent combined loss/expense ratio—in
other words, to break even. It was reached and has been sustained
since 1997.
Culture of Safety
More than one goal was set in the early ’90s
when Federated launched its turnaround.
“That’s when we really put the
thrust on for safety,” Fraas says. Deeply rooted in the
ideas that energized Federated’s creation, the concept
is dubbed the “Culture of Safety.”
As the Federated 2005 annual report says,
“Almost anything an electric utility owns, leases, or
does creates risk and potential for loss.” The company
deals with this reality, Fraas says, by “preaching and
preaching and preaching, about maintaining your system, training
your employees, insisting on safety; it’s just the right
thing to do.”
Every year, the company refunds a percentage
of premiums to statewide associations to support job training
and safety programs, and it pushes the doctrine that everyone
in a co-op organization—from the directors through the
management team through each employee—must cultivate habits
“so people don’t need to think about safety, they
just react; they do safety things just like they put on their
shoes in the morning. They don’t think about it, it’s
just natural that they do that,” Fraas says.
Reduced to plain economics, “It’s
your losses that determine what you’re going to pay in
the long run,” Fraas says, adding that people have “caught
on that we really do control our own destiny, and if we spend
time and money and effort on safety, it’s going to save
us money in the long run.”
Even Keel
Federated is now the dominant provider of workers’
comp and liability insurance for approximately 750 rural electric
and telephone utilities in 40 states. Written premiums that
totaled just under $59 million in 1994 reached $121 million
10 years later and almost $126 million in 2005.
Elsewhere, growth like that has often had a
less-than-pleasant side. Fraas says he’s proud of keeping
personnel counts steady at about 80—saving jobs for company
employees while benefiting policyholders with improved efficiency—while
vastly increasing the size of the business.
“We’ve scanned virtually everything
into computers; we have no paper to deal with for claims or
underwriting,” he says. “We did that and we never
had to release one person. Nobody got displaced by a computer.
Through the years of general turnover, that’s how we were
able to do that, keep the head count basically the same as we
grew the company exponentially.”
Sales people are salaried, not commissioned.
All claims are processed in the home office. In the words of
former Wisconsin Electric Cooperative Association General Manager
Leroy Rose, that is “where the decision-makers are, and
what this does is it eliminates a lot of the bureaucracy and
the red tape that you’d find in layer after layer in other
insurance companies.”—Dave Hoopman
