The Risk of Credit Union Vendor Consolidation

Because the credit union industry is constantly on the move, it is easy to forget the incremental changes of the past that have led us to the present.  New developments in technology have changed the way credit union services are delivered through online channels.  As a result, we have seen increased data security risks resulting in heightened compliance and vendor regulatory due diligence.  The financial services industry is being told that the more partners we have with access to our data, the higher the risk.  The insurance industry has also seen prominent carriers sometimes referred to as “too big to fail” (like AIG for example) falter and crumble while other carriers simplify their focus and exit specific market segments.  From the ashes of the recession rose the CFPB and a strengthened regulatory environment for all financial institutions unfortunately including credit unions.  The pressure from auditors and legal counsel to consolidate third-party vendors has become a notable trend.  For credit unions the result is that the cost of compliance has made it exceedingly difficult for credit unions to earn and grow. On the surface, it’s a logical solution for credit unions to consider consolidating vendors as a means to cut down the time and cost of compliance.  However, when looking at product/service providers, it is most prudent to first consider the total relationship value as well as their conversion strategy. Though it may be a tempting proposition, there is an inherent risk in vendor consolidation as it concerns insurance programs for members.

Over the coming months, Insurance Trust will introduce a series of articles to explore the specific insurance categories that concern Maine credit unions from both an employee and member perspective. Our focus will be to educate our partners and highlight resources that are presently available through our agency to help reduce the administrative & regulatory burdens of third party vendor/broker relationships.

A Brief History of Insurance for Credit Unions

When it comes to the topic of vendor consolidation as it concerns third party insurance providers, it is vital to understand the origins of insurance for credit unions.  The provision of low cost insurance coverage options for credit union members was one of the earliest goals of the leaders of the credit union movement. In fact, the Credit Union National Association (CUNA) endorsed the idea of organizing an insurance company at their very first meeting in January 1935.  As a result, CUNA Mutual was formed into what became the sole administrator of member insurance services accessible to credit unions for 23 years until 1958.  Additionally, only credit unions belonging to leagues that were affiliated with the national organization were allowed to sell the insurance coverages to their members.

In the late 1950s, the state leagues across America were caught in the middle of a battle that had formed between the credit unions and CUNA Mutual.  Many credit unions grew resentful of what they saw as high-handed actions and uncompetitive rates due to the lack of competition in the marketplace.  The situation came to a head in 1958 when the Michigan Credit Union League overwhelmingly rejected CUNA Mutual’s proposal for a new policy owner representative program, and voted to organize its own insurance agency.  Many other state leagues across the country followed the example set by Michigan.  When CUNA Mutual announced it would discontinue a popular disability insurance program, the Maine Credit Union League appointed a committee to investigate alternative ways that the insurance coverage might be continued.  The ultimate decision was to form an Insurance Trust to offer not only disability insurance, but to provide a full line of coverage options to serve the best interest of the Maine credit union community.  In retrospect, the story of our past conveys a cautionary tale of what can occur when an absence of options exists.

The Truth about Vendor Consolidation

The success of a particular insurance program is ultimately based on claims experience, carrier interest, market conditions and profit for the carrier.  The reality is that the vendor, insurance agency or credit union have little control over this.  That is why multiple competitive options and earnest due diligence are so vitally important. Our agency has seen many instances throughout our history where a lack of options has left a credit union in a vulnerable position as the administrator of a failed program with a contractually bound sole provider without a secondary option. Additionally, tying up many services into a multi-year contract in the absence of new and competitive options can be conducive to uncompetitive pricing and options.  The truth is, the free-market creates healthy competition in terms of pricing and service that is good for credit unions and their membership.  Competition also creates a heightened continuous effort from your provider.  We strive to have multiple competing programs for each of our product lines for this very reason.

 

The Importance of Competitive Options

Insurance Trust is intimately attuned to the role that vendor options play as a fundamental element in the past, present and future of our agency. We were created to provide competitive alternatives to serve the best interest of Maine credit unions. We believe that providing multiple options for each member insurance program has allowed credit unions to remain protected, successful and independent.  Competitive options are the cornerstone of maintaining cost effective and industry leading member services that yield the greatest overall benefits and long-term satisfaction for credit union members.   In this way, when the unexpected does happen with the insurance carriers we partner with, we have competitive options at the ready.  This independence has allowed credit unions to evolve with the changing needs of the movement as well as the dynamic landscape of the insurance industry.

The same reason why Insurance Trust was founded in 1963 is the very reason why we turn our lights on every single day: to provide competitive insurance coverage options for Maine credit unions and their members.