Fred R. Marcon, Chairman, President and Chief Executive Officer of ISO.
By Phil Zinkewicz
The buzz word today in the property/casualty insurance industry--and, indeed, the insurance industry overall--is consolidation. The economies associated with mergers and acquisitions have become apparent to company boards all over the world, and "mega-merger" mania has provided fodder for business writers in trade publications on both sides of the Atlantic.
In addition, rapid advances in technology and ever-increasing intense competition have brought about a demand on the part of insurance industry participants and customers for the delivery of more timely information. Those organizations that are not capable of providing that timely information--from the smallest insurance agency to the largest multi-line company--might very possibly be left behind in the race for new business.
For those reasons, and others, the Insurance Services Office (ISO) recently converted the company from a non-profit to a for-profit organization, complete with the issuance of stock (not for public trading) and with the promise on the part of ISO leaders that the conversion will benefit all ISO member companies from the smallest regional insurer to the largest national.
But Fred R. Marcon, ISO's chairman, president and chief executive officer, is quick to point out that the move to for-profit was not a decision made in haste or without careful consideration for all of ISO's members. "This latest development is part of an evolutionary process that began at the company's inception," he says. "Since ISO began in 1971, we have made carefully thought-out decisions that have altered the organization in a timely fashion and that have reflected changes in the overall marketplace."
In fact, says Marcon, ISO had its genesis more than a quarter of a century ago in the realization on the part of foresighted industry people that there was then a need for consolidation. "In 1971, ISO opened its doors, consolidating many existing rating bureaus into a single, multi-line information provider that offered property/casualty insurers greater economies of scale. ISO made insurance history by not requiring insurers to adhere to its advisory policy forms or rates as had prior rating organizations," Marcon says.
Moreover, the ISO chairman points out, the evolutionary process that culminated in the most recent announcement of conversion has registered a number of milestones along the way, milestones all of which were reflections of market conditions. They include:
* 1974--ISO developed the Fast Track Monitoring System to help insurance regulators quickly assess the effects of the gasoline shortage on private passenger auto claim costs. By 1976, the Fast Track System was expanded to cover all lines of insurance;
* 1975--ISO introduced the Commercial Fire Rating Schedule, the first uniform countrywide fire product provided by a rating organization. The new schedule replaced the various schedules of prior rating
organizations with uniform and
updated standards for surveying and evaluation risks to determine advisory rates for specific properties. The Fire Rate Class Manual was also developed in 1975, enabling more commercial properties to be class-rated.
* 1976--ISO simplified personal lines policies, consolidating them into the Personal Auto and Homeowners policies and using plain language so that consumers could understand the policies more easily.
* 1978--ISO introduced its Commercial Lines Manual, which incorporated common general rules and classifications for commercial lines. ISO also introduced the Commercial Statistical Plan, which replaced the various statistical plans for each commercial line.
* 1980--ISO's Computerization of Property Insurance Services debuted. The product automated the calculation of commercial fire advisory rates for specific properties, and electronically stored and distributed specific property information.
* 1984--ISO began giving insurers on-line access to its specific property underwriting information through its ISOTEL network. The network was gradually expanded to include agents, and today it provides customers with electronic access to 20 ISO products and services.
* 1986--ISO completed its Commercial Lines Policy and Rating Simplification Project, covering all of the major commercial lines. ISO also introduced a "claims-made" version of the commercial general liability form, which provides coverage of injury or property damage claims if they are first made during the policy period, regardless of when the injury or damage occurred.
* 1989--ISO's board of directors approved ISO's conversion from providing advisory rates to advisory prospective loss-costs--estimates of future claims payments. The conversion was completed in 1993.
* 1990--Christopher C. DeMuth, president of the American Enterprise Institute for Public Policy Research, was elected as ISO's first noninsurer board member.
* 1995--Insurers divested control of ISO to a board of directors composed primarily of noninsurers. ISO's new governance ensures an uninterrupted stream of ISO products and services, while reassuring the public, regulators and legislators of the objectivity of ISO's data and analyses.
"Without those developments," says Marcon, "we would not be ready to take the steps we've taken today regarding conversion to a for-profit company. "The conversion, which became effective in January of this year, is intended to retain and enhance ISO's value to customers and maintain ISO's leadership position in the industry," he adds.
A favorable vote of two-thirds of the members was necessary for approval; but back in November at a membership meeting, the proposal received 117,837,329 votes out of a total of 162,394,940. The plan to convert the company from a non-stock, non-profit membership corporation was unanimously recommended by the membership of ISO's board in September of last year.
The plan calls for creating two classes of ISO stock and an Employee Stock Ownership Plan (ESOP). "ISO's conversion to a for-profit corporation puts the company at the threshold of a new era marked by a strengthened partnership of shareholding insurers, managers and employees," says Marcon. "The ESOP provides employees with an even greater incentive to operate more efficiently and to reduce costs because they now have a piece of the action. They deserve it. We would not have come this far without the dedication of our employees," says Marcon.
The ISO chairman also points out that the conversion will give the company "the long-term, financial flexibility and access to capital needed to develop and support new products in a more technology- and capital-intensive business environment."
The conversion plan works this way: Roughly 85% of ISO's outstanding shares will be owned in the form of Class B common stock by property/casualty insurers that are ISO members under the company's non-profit structure. About 10% will be owned by the newly established ESOP in the form of Class A common stock. About 5% will be owned by ISO management, also in the form of Class A common stock, through purchases and awards under newly established management incentive plans.
Ownership of ISO's Class A common shares is restricted to the company's directors and employees, and to the ESOP. Ownership of Class B shares ranks equally with regard to dividends and economic ownership rights.
Under the conversion plan, holders of Class A shares will elect 7 of 11 directors to ISO's board. The seven will be individuals not affiliated with insurers and not employed by ISO. Holders of Class B shares will elect three directors--individuals who are senior officers of insurance companies. ISO's chief executive officer will serve as the board's chairperson. All of ISO's current directors will serve until its 1998 annual meeting.
Marcon says also that members' ownership of Class B stock will be limited to 10%, so that no one large member can exercise too much control over members. He also points out that the conversion will not put smaller regional companies at a disadvantage. "Smaller companies will benefit more than ever before," he says, "because the conversion provides for the continued availability of ISO products and services. We remain dedicated to serving the property/casualty insurance industry with accuracy, objectivity and professionalism."
What's next in store for ISO? "The new conversion gives us accessibility to capital markets that can help us grow, but grow within our area of competency. If the time is right and the fit is right, acquisitions are not out of the question. Also, we have to be ready to meet the changing face of the insurance industry globally. Around the world, the way the business is being regulated is being re-examined. ISO can be an effective organization worldwide, as it has been domestically," says Marcon.
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Free copy of agency cost study to participants
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