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Finding The Silver Lining Sometimes Takes Some Gold Reserves

Based on the title (“U.S. Fraternal Industry Facing Challenging Demographics,”) you might think the recent A.M. Best Special Report paints a gloomy picture of the future of the fraternal business model.  But dig a little deeper and you can see some very positive rays of light for fraternals with the courage and resources to address the challenges facing them – and virtually every life insurer – as outlined by Best’s analysts.

Silver lining

While the Special Report focuses on the small handful of societies that maintain a Best rating, its messages are directed at the dozens of smaller societies who struggle to grow their membership and remain relevant to the next generation of consumers.  These major obstacles are compounded by the lack of financial resources to invest in initiatives to address those issues.  The opening sentences of the Report’s conclusion summarizes the situation confronting many of these societies:

“Fraternals face increased competition, heightened regulatory and technological costs, spread compression, and membership growth challenges.  These trends will likely require smaller societies to merge given their modest resources and the need to achieve economies of scale.”

The Report is worth reading – and sharing with your management team and board of directors.  Here is a quick overview of some of the key findings:

• Urbanization – As American cities grow, the population of rural communities where fraternals have traditionally thrived is shrinking.  Internet-based marketing and distribution systems are allowing larger commercial insurers to cost effectively tap into rural markets of middle-income consumers – market segments they have typically ignored – threatening longstanding fraternal strongholds.

• Aging Demographics – The fraternal population is aging and we’re not bringing in enough younger consumers (and I’m talking 30 and 40-somethings, not millennials) to offset the loss of older members.  That does not add up to longterm sustainability.  ‘Nuf said.

• Technology – Fraternals need to invest in technology (interactive websites, online distribution options, etc.) to remain relevant to the next generation of consumers and to “leverage data analytics and predictive modeling.”  That means significant capital allocations.  Organizations that can’t afford such investments will be left behind.

• Strong Retention – On the bright side, fraternals outperform all other industry sectors when it comes to retention rates.  Once an individual becomes a fraternal member and purchases a life insurance policy or annuity, they’re going to stick around a long time.  The potential downside of this characteristic is that many fraternals have sold an abundance of high-yield fixed income annuities that, in an era of prolonged low-yield investments, can increase an organization’s risk profile and constrain access to capital.

I’d love to hear your thoughts on the Special Report.  Please post a comment here after you’ve had a chance to read it or email me privately at jannotti@fraternalalliance.org.

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