Personal lines program proves a multifaceted tool; Of benefit to employees and company alike.

(Risk Manager of the Year)(Verizon Communications Inc's Sheila Small)

Date: April 7, 2003 Publication: Business Insurance

Byline: DAVE LENCKUS

Call it her baby. Call it her legacy.

That is how Sheila Small thinks of the unusual personal lines insurance program that she created as a voluntary benefit for employees and retirees at Verizon Communications Inc. and as a tool for the telecommunication giant's risk management department.

Under the first-of-its-kind, coordinated program, which only a few other employers subsequently have implemented, Verizon employees and retirees can purchase discounted automobile and homeowners insurance as well as other personal lines coverages from among a choice of three insurers and pay their premiums through payroll or pension deductions.

Ms. Small, assistant treasurer-risk management and insurance at Verizon, developed the program at about the same time she created a cell phone insurance program for the company's wireless customers--with a common goal for both programs. Her plan was to create enough third-party risk for Verizon's captive insurance company to allow Verizon to take tax deductions on the premiums it paid the captive for its own various coverages (see story, page 14).

It succeeded.

But just as the cell phone coverage also was a means of retaining business by offering customers another reason not to look elsewhere for service, the employee personal lines program has aided Verizon beyond creating another source of plain vanilla third-party risks for the company's captive insurer.

Ms. Small was certain that employees would appreciate the opportunity to purchase personal lines insurance from highly rated insurers for less than they could purchase it elsewhere. She was sure that this employee benefit would help Verizon retain employees. And, at a time when employers are trimming costs by reducing benefits, Verizon could offer its employees an additional benefit at no cost to the company.

Verizon's human resources department initially had misgivings about the timing of developing the program, called ``Verizon Advantage: Your Source for Auto & Home Insurance.'' Meanwhile, the insurers Ms. Small tapped to participate in the program objected to sharing Verizon's group among each other.

But Ms. Small said she had too much faith in the program's promise not to address those concerns and generate support for the program so it would not get derailed.

``I like to call it bridge-building--a team effort.'' Ms. Small said.

But, clearly, she was the lead architect of the program, which she developed and implemented at regional telephone holding company Bell Atlantic Corp. in 1999, less than a year before the company merged with GTE Corp. to form Verizon.

``I just wanted to prove this was a great program,'' Ms. Small said.

``It had all the markings of a first-class program. It was great for employees and great for the corporation,'' she said.

The response to the voluntary benefits program has exceeded Ms. Small's goals.

Among the more than 355,500 eligible plan participants--about 40% of whom are employees and the remainder retirees--around 45,000 purchase coverage through the program, according to Mark B. Cohon, a vp at New York-based American Benefits & Compensation Systems Inc., the program's administrator, technical advisor and employee advocate. Program participants currently are covered by nearly 50,000 policies that they have purchased through the program, Mr. Cohon said.

ABC Systems, which draws its fees from program-generated premiums, coordinated the insurers' administrative requirements with Verizon and developed and maintains the toll-free telephone system that policyholders and those investigating the program can use to contact the participating insurers.

ABC Systems also serves as the liaison between Verizon and the participating insurers and is in charge of marketing the program to Verizon employees and retirees.

Employee and corporate benefits

The three insurers that participate in the program are Liberty Mutual Insurance Co., Metropolitan Life Insurance Co. and Travelers Property Casualty Corp.

Auto and homeowners coverages are the program's main attractions, but the insurers also offer all of the personal lines property/casualty coverages, such as boaters insurance and coverage options that they make available through their agents. But, for Verizon Advantage participants, the insurers offer a couple of notable advantages--lower rates and sometimes greater availability.

Automobile rates typically are 7% to 10% lower, and the insurers cut their homeowners rates 5% to 10%.

The insurers typically do not pare their rates, or offer only modest discounts, for other personal lines coverages. But insurer representatives said the program offers Verizon participants the convenience of purchasing those coverages at the same time they are buying other, discounted coverages.

The program reduces insurance costs in other ways for Verizon employees. The insurers drop their normal service fees and premium installment charges if employees elect to pay their premiums through payroll, pension or checking account deductions.

In addition, Verizon employees and retirees who reside in states where the insurers have limited their coverage offerings are not subjected to those restrictions.

Generally, Verizon captive insurer GTE Re, which is domiciled in Vermont, reinsures between 30% and 35% of the program's business, depending on the insurer, according to Ms. Small.

But all ongoing Verizon and third-party business is scheduled to be moved to Verizon's other captive, Vermont-based Exchange Indemnity Co., this summer, after Verizon completes a captive restructuring project. Exchange Indemnity underwrites most of the risk that Verizon self-insures as well as significant third-party risks that allow Verizon to take tax deductions on its own captive insurance premiums without fear of getting socked with huge, unrelated losses.

Verizon acquired GTE Re along with its parent company, GTE Corp., in the 2000 merger with Bell Atlantic. Exchange Indemnity was acquired along with its parent, regional telephone holding company NYNEX, in a 1997 merger with Bell Atlantic.

Fighting the good fight

Representatives of the programs' three insurers, ABC Systems and Verizon risk management and human resources gathered in February to review the program and address any concerns.

That amicable gathering, where no substantive problems were identified and the insurers agreed that they all were comfortably co-existing in and profiting from the program, did not reflect the misgivings the various players had when Ms. Small first suggested the program.

Ms. Small said she felt that dispelling those doubts quickly and pushing ahead with implementing the voluntary benefits program immediately was necessary to save her idea.

Despite the advantages the program offered the company and its employees, the program would have fallen behind higher-priority projects if it were delayed until after the Bell Atlantic/GTE Corp. merger, Ms. Small said.

She said she also was afraid that long delays would kill her own enthusiasm for the program. ``I thought the model was unique and a great idea. I wanted to see it happen.''

Bell Atlantic's human resources department liked Ms. Small's idea but not the timing of it.

In 1999, the company was in the midst of preparing to merge with GTE Corp. in less than a year. Human resources did not want to initiate any project that would have an impact on the merger.

Even more pressing for the company was its race with the clock to delouse its computer systems of any Year 2000 computer programming bugs. Human resources did not want to approach the company's payroll department as it was debugging its various systems and ask it to program a new payroll deduction that would begin the same time the department might have to respond to any payroll system debugging problems.

Referring to human resources, Ms. Small said: ``They were inclined to say, `Let's wait and see. Let's not make any major change''' while the company is juggling those other critical projects.

But Ms. Small refused to delay the project by what likely would have been years over concerns that she believed could be resolved without delay.

She argued that the voluntary benefits program would not have any impact on the merger. It would not create any additional costs for the company if underwritten properly. And while GTE employees would not be folded into the program immediately after the merger, the company already had established a voluntary benefit program that offered discounted personal lines coverages--albeit from a single insurer.

Ms. Small also dispensed of the millennium bug concerns handily. She approached the head of payroll, whom she already knew, and worked out a compromise. While ABC Systems and the insurers would work with payroll and run tests to implement the premiums deductions, the insurers agreed to wait until March 2000--two months after they began providing coverage through the program--to begin receiving their premium installments. That lag time would give payroll a couple months to resolve any potential millennium bug problems without also having to deal with any new payroll deduction issues.

The insurers collected the missed premium installments by spreading out policyholders' annual premiums over 10 months in 2000.

A big-enough pie

At the same time human resources was expressing misgivings, Liberty Mutual and Travelers, the original two insurers in the Bell Atlantic program, ``said we didn't know what we were doing,'' Ms. Small said.

The insurers protested that program would not generate enough business to satisfy all of the insurers and that one insurer would cherry-pick the best risks and leave the other insurers with an adverse selection.

But Ms. Small pressed her case with the insurers. ``People want choices,'' she said.

``The reality has been much different'' than what the insurers had anticipated, ABC Systems' Mr. Cohon observed.

With large national groups, the program has demonstrated that there is enough business for multiple insurers to profitably share, the various players agree.

``What we have subsequently learned, and Verizon was a catalyst for this, is that with really large employers...no one insurer is going to be competitive in all 50 jurisdictions'' where plan participants reside, said Wayne A. Tryon, a Hartford, Conn.-based sales director for personal lines business in Travelers' affinity business group.

Typically, just one of the insurers in a region captures most of the business in that area, because that insurer's underwriting guidelines and marketing plans make its coverage the most economical in that region, Mr. Cohon explained.

That scenario is repeated from region to region, with a different insurer capturing most of the Verizon employee business in a given region, Mr. Cohon said.

The less-attractive business that the market leader in an area does not underwrite may turn to one of the other two insurers, but their higher rates should factor in the higher risk associated with that business while still offering those buyers some price breaks, Mr. Cohon explained.

He noted that the program has generated comparable profits for the three insurers, even though their market shares are not evenly split. MetLife and Liberty Mutual each have captured about 40% of the program's business, but Travelers is more profitable on its 20% share, Mr. Cohon explained.

``Now we're all winners,'' Ms. Small said.

Lessons learned

Marketing the program with first the Bell Atlantic and then the Verizon brand and providing a single toll-free phone number where program participants conveniently could contact all three insurers to purchase coverage and file claims has set the program apart from voluntary benefit programs other employers offered.

Putting the company brand on the program showed employees and retirees that their employer performed due diligence in selecting insurers committed to providing program participants with good service, Ms. Small said. Without branding, an employer risks creating a perception among its employees and retirees that the employer ``just unleashed'' an insurer on them, she said.

Ms. Small noted that GTE created a similar voluntary benefit in the mid-1990s, but it was not branded. The program has garnered greater interest from among that employee and retiree segment since Verizon began branding it after GTE's merger with Bell Atlantic. Even more interest was generated after Verizon was able to offer Liberty Mutual's and Travelers' products to that employee/retiree segment in 2002. Due to payroll priorities, Verizon was unable to combine the two programs until last year.

Like GTE, most employers that earlier had offered their employees and retirees a voluntary personal lines benefit lined up a single underwriter to participate in the program. Others that had lined up two insurers did not coordinate the marketing of the program or provide a single toll-free telephone number that plan participants could use to contact the program's insurers, Ms. Small and Mr. Cohon observed.

The Verizon Advantage model is generating significant interest among ABC Systems' clients, and the company even has received a few unsolicited calls about the program, Mr. Cohon said.

Besides the importance of employer branding of such programs, Verizon's experience underscores some significant lessons for others contemplating a similar program, he said.

While program participants want coverage choices, three insurers is the optimal number, a recent internal study among some ABC Systems clients showed, Mr. Cohon said. More choices would lead to confusion among plan participants, respondents said.

Another important factor in sustaining the program was assembling a group of insurers that did not include a company that would ``throw the pricing out of whack'' in a significant number of regions in which plan participants reside, Mr. Cohon said.

And, in lining up support within a company for such a program, the payroll department is a key ally, according to Mr. Cohon. Among employers that have interest in such a program but have run into internal roadblocks, the most common obstacle is that their payroll department complains that arranging additional payroll deductions would be too difficult, he said.

Mr. Cohon applauded Ms. Small for overcoming that and other obstacles she faced.

``What made Sheila special was that she didn't take `no' for an answer,'' Mr. Cohon observed.

In addition, she had more clout within her organization than do others who typically try to spearhead such programs, he said.

The program is not offered to employees of Verizon Wireless because that majority-owned subsidiary is structured differently from other Verizon groups and has a separate human resources department and a different benefit structure. But it is developing a similar program, Ms. Small said

Some unions also asked Verizon not to offer the voluntary benefit to their members so it would not compete with union-sponsored insurance programs.