Imagine this nonprofit nightmare scenario. The deal is done -- a wealthy patron pledges millions of dollars to underwrite a new campus building. Cameras. Press releases. Ribbon cuttings. Contractors bring in backhoes and ... the donor goes bankrupt and the promised millions never materialize. Then what?
"We have what's called donation insurance, which is a coverage that if a donor pledges a donation and then doesn't fulfill that donation, we'll step up and fulfill it up to a certain limit of liability," James "Jamie" J. Maguire Jr., chairman of Philadelphia Insurance Companies told me during our Executive Q&A interview published in Sunday's Philadelphia Inquirer.
What amazed me about this company was the wide range, yet very specific set of insurance policies it sells. The entire ethos of the business is to think of everything that can go wrong and then try to convince business owners to hedge their bets with insurance. Churches can buy coverage for their stained glass windows. It's included in the same policy that protects them if someone slips and falls in the aisle en route to the altar for for Communion. Animal race tracks can buy "molestation" insurance in case some pervert gets weird in the bathroom.
Question: So explain to me how the donor policy works. How do you figure out what to charge for the insurance?
Answer: Well, every insurance policy has a deductible. So for commercial policies, they're generally $10,000 to $25,000 deductible. If it's above the deductible we're really careful about the limit. So we would offer maybe $100,000 limit for that coverage above a deductible.
Q: Then how much would that coverage cost?
A: Actuarially, we have to look at the losses over years on that coverage. Based on the losses we would charge for that coverage. When we first came out with the coverage we didn't charge for it. We just put it on. As we begin to get losses, which I'm not familiar with what the losses are or were; we would charge a premium. So it might be an extra $50 for that coverage based on the losses. But our actuary department tracks that. Our systems track that, and based on the experience of the coverage, we raise or lower the premium so that we have about a 10 percent to 15 percent margin on the product.
Q: That's what I was wondering. That's interesting.
A: Yeah. It's pretty heavy-duty. It's well above my ... that's why we have the actuaries, our math whizzes to figure that out.
Q: And tell me more about the abuse and molestation policy. How does that work?
A: The way policies are written they can file a claim 10 years later because it's on a current basis. So whoever was writing the insurance 10 years ago, the [company] was writing the insurance at that time is on the hook.
Q: Oh wow.
A: I mean you're only limited by the statute of limitations really.
Q: There's no getting out of the business.
A: There's no getting out of the business.
Q: Even if you get out of the business.
A: Yes, that's what known as a tail. It's an expensive line of business to write because you have to have reserves in the event that there's a claim made, you know 10 years from now. That type of business requires a little bit more of a reserve because of the risk factor and because of the severity of the types of claims. I mean the severity of that type of claim is going to be a lot greater than donation insurance.
Next: Giving employees the runaround, in a good way.