Still Nifty at Fifty
Co-op Insurance Plan a Life-saver
Wisconsin’s electric cooperatives have been responsible for a number of notable “firsts” over the seven decades of their existence. Among them are the nation’s first statewide electric co-op association, in 1936; the nation’s first statewide newspaper for electric cooperative members, in 1940 (you’re reading its present-day incarnation); and the nation’s first self-insurance organization for electric co-ops.
All three of those and several other Wisconsin cooperative firsts have managed to stick around long-term, but from the perspective of individual co-op members it would be hard to overrate the value of the Federated Rural Electric Insurance Exchange, for a couple of reasons: It helps keep people safe, and it saves them money.
The organization usually referred to by co-op personnel simply as “Federated” this month marks half a century of service, having received its license to do business from Wisconsin Insurance Commissioner Charles Manson in July 1959. No comparable entity—an insurance company made up entirely of electric cooperatives—had ever existed before.
The Why and the How
There’s nothing mysterious about why electric cooperatives decided they had to have their own insurance company. In fact the circumstances that prompted Federated’s creation are strikingly similar to the ones that convinced rural Americans to establish their own electric co-ops during the 1930s. Back then, there was no shortage of power providers, but they were decidedly uninterested in extending their lines to lightly populated rural areas. In the mid-1950s, there was no shortage of insurance providers, but they were decidedly uninterested in providing coverage at a cost co-ops could afford. The Wisconsin co-ops took it upon themselves to do something about that.
“In the mid-1950s, commercial insurance carriers thought cooperatives were not a good risk,” CEO Phil Irwin explained to participants in Federated’s 2009 annual meeting this past February. “Insurance rates for electric cooperatives during this time were 50 to 100 percent higher than those for investor-owned [utility] companies. In some instances, cooperatives were not able to secure insurance coverage, a requirement the [federal Rural Electrification Administration] imposed before they would release loan funds.”
The source of this difficulty in obtaining necessary worker’s compensation coverage was a fundamentally flawed assumption that cooperatives didn’t measure up to the safety standards of other utilities. Just the opposite proved to be true, Irwin said.
“Armed with an independent study that showed cooperatives’ losses actually were below industry average for utility companies,” he said, “Federated’s founders began the lengthy process of establishing an organization to insure cooperatives.”
Lengthy indeed. It started with the Job Training and Safety Committee of the Wisconsin Electric Cooperative (as the statewide association was called at that time) beginning to investigate a self-insurance program and recommending the concept, in the spring of 1956, to the electric co-op managers association. Within a few months a study directed by the University of Wisconsin School of Commerce concluded a self-insurance plan would be both feasible and a money-saver. Before year’s end, the statewide association’s board approved articles of incorporation for Federated Rural Electric Insurance.
Planning and appeals for individual co-op support continued through most of 1957, but momentum slowed that fall. The National Rural Electric Cooperative Association (NRECA) had become interested in taking ownership and running the proposed self-insurance operation, leading to several months of planning along those lines. But in February 1958, the NRECA board of directors demurred. The project’s fate was once again up to its Wisconsin originators.
Back in their hands, the enterprise gathered speed. The organizational meeting of Federated Rural Electric Insurance was held in Madison in March 1958. Fifteen co-ops subscribed to the capital stock. Later that month, Statewide Manager Bill Thomas predicted that in a few years, “We will regard the formation of Federated Rural Electric Insurance Company as one of our greatest assets in the service to our member cooperatives.”
Thomas hoped policies could be written by the beginning of 1959, but it took a bit longer to obtain adequate capital and a reinsurance agreement, get a state license, and secure membership in the insurance rating bureau. Complicating matters, some member co-ops’ workers’ compensation policies had expired and had to be renewed with the old carriers.
But on July 20, 1959, Federated received its license to do business in Wisconsin, the first insurance license in U.S. history issued to an organization of electric cooperatives. That very same day, Federated issued its first policy to Adams-Marquette Rural Electric Cooperative in Friendship, Wisconsin.
Steady and Strong
In 1959 Federated was providing insurance in one state for 16 cooperatives. By the end of 2008 the numbers had grown to 40 states and 765 cooperatives. Premiums, totaling $31,000 in 1959, reached $138.6 million last year. The assets of $270,000 in 1959 grew to $324 million by December 31, 2008. “I can assure you that the first $25 million was much harder to come by than the last $25 million,” Phil Irwin told the February annual meeting attendees.
But what does that mean for individual co-op members? In very direct and utilitarian terms, it means money kept within the cooperative system instead of being paid to outside providers. That means money reinvested to strengthen and improve the cooperative organizations. In more personal terms, it means a strengthened effort to prevent property losses and human tragedies.
Through the first 25 years of Federated’s operations, the company returned $2.9 million to member co-ops to support job training and safety programs. That number has since climbed to more than $31 million.
The money is used by local co-ops to advance a concept Federated refers to as the “Culture of Safety,” something the organization preaches with conviction and on a daily basis.
The economic reasoning behind this is summed up in the company’s 2005 annual report that says, “Almost anything an electric utility owns, leases or does creates risk and potential for loss.”
Frank Fraas, who retired as Federated CEO in 2006, says the organization confronts this harsh reality by “preaching and preaching and preaching about maintaining your system, training your employees, insisting on safety; it’s just the right thing to do.”
It’s the right thing to do not just for the economic interests of the co-op and its insurance carrier, or the well-being of line crews and other employees, but also for the safety of families and businesses served by the co-op and the quality of service provided. As Phil Irwin explained in February, “There’s no way you can prevent an active youngster from climbing a tree, but you can trim or cut these trees so you won’t have the [tragedy] of some child grabbing or hitting a hot line.”
And looking again at the practical side, Irwin added that besides preventing tragedy, rigorous attention to safe practices—exemplified by maintaining a clear right-of-way—can bring positive results “from less storm damage, less overtime for outages, and less line loss,” all of which otherwise mean greater expense for the co-op and its members.
Federated’s doctrine is that everyone in a co-op organization—the directors, the management team, and every 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.
He adds that the company’s experience has shown that people have “caught on that we really do control our own destiny” where safe practices—and the consequences of neglecting them—are concerned.
History Repeats
It’s not hard to see the parallel between creation of electric cooperatives because others thought it unprofitable to serve, and creation of an electric co-op insurance company because others thought it too risky to serve. Both ideas proved misguided.
More opportunities to compare the thinking of cooperatives and bigger rivals turn up in the financial chaos of recent years. Insurance companies far larger than Federated have suffered catastrophic losses both financially and in terms of public confidence.
And Federated has by no means been immune. As Phil Irwin noted in his annual meeting address, “Basically there was nowhere to hide in 2008 from an investment perspective.” In the sour investment market, the company realized $2.9 million in capital losses last year.
But while Irwin told his audience that 2008 “proved to be an incredibly tough financial environment for insurance companies,” he could add something that sets Federated apart: “I can tell you that unlike other property and casualty companies that I know, we did not have to ask the federal government for $150 billion dollars last year.”
Ask anyone who’s been there to see electric cooperatives and their insurance carrier hold on and stay healthy while bigger players with more exotic business concepts have crashed and burned, and they’ll probably say it works that way because a co-op sticking to its principles always makes sure it’s all about the members.
Wrapping up his annual meeting address, Irwin looked to a brighter future and told the crowd, “I hope over the next 50 years Federated will always retain its focus remembering the members we serve.”—Dave Hoopman |
