Madison firm insures against personal cash-flow cliff

Workers looking at computer

Originally published in InBusiness


America is a rich country. It’s also a savings-challenged country, as 26% of Americans have no emergency savings and 47% were unable to cover an unexpected $400 expense in 2015, according to a Federal Reserve study.

That’s not all — 67% of Americans do not have enough savings to cover just three months of expenses, says a Bankrate.com study, and 63% cannot afford a $500 emergency expense, notes MarketWatch.

What these reports boil down to is that roughly half the American population is living paycheck to paycheck, and it’s not limited to economically disadvantaged people. Thirty-three percent of middle-class Americans earning $75,000 or more also live paycheck to paycheck, according to a 2015 Harris poll, and 25% of Americans earning $100,000 or more live paycheck to paycheck, reports CBS MoneyWatch.

For the latter two examples, many will no doubt shrug their shoulders and note that smart money management is clearly lacking, but for the poor this is a problem in search of a solution. Enter the people at SafetyNet, a new business division of CUNA Mutual Group that is working to end the problem of living paycheck to paycheck in Wisconsin and possibly beyond.

Cliff notes

In working to address the “cash-flow cliff,” SafetyNet has developed an affordable insurance product that is still being shaped with feedback from the insured.

While divorce, a death in the family, and sudden fees can contribute to the cash-flow cliff, a lack of savings can be especially devastating due to a reduction of income caused by an unplanned job loss or a disability, which are the two scenarios this first iteration of the SafetyNet solution is designed to address.

Since marital and health problems can result from financial difficulties, cash-flow problems aren’t the only motivation. “The sole purpose is to improve the wellbeing of these Americans,” explains Mark Greene, director of innovation and product development for SafetyNet.

Greene and his colleagues have sold the product to about 100 consumers, and they are still collecting feedback to make sure they understand the problem. The collaboration also includes: Rich Fischer, director of innovation; Daniel Kaiser, division head and senior vice president of innovation and product; research and data analyst Qian Xia; and others working in CUNA Mutual Group’s payment security innovation center in Madison.

They described a low-cost policy, which pays out a lump sum benefit. The intent is to buy consumers some time to attain new employment or recover from a disability, and it can be tailored to meet the needs of individual consumers.

In fact, SafetyNet is not only selling the product and paying claims; it is also running about one test per week to ensure the policy remains consumer-driven.

The division has the full backing of CUNA Mutual CEO Robert Trunzo — along with the access to the capital, personnel, and data that his support entails — and it has been working with state governments in Wisconsin and Iowa, specifically the Office of the Commissioner of Insurance in both states, to develop this product “as consumers want to see it,” Fisher states.

The lump sum approach is one of the features that came from consumer feedback. “We talked to our consumers. They said give us the lump sum and we’ll manage it,” Fischer explains.

SafetyNet’s desire is to keep loss ratios at an almost unheard of 70% or higher. In insurance, a loss ratio is the relationship of incurred losses to earned premiums, and it’s expressed as a percentage. If an insurer collects $100,000 in premiums for an insurance product in a given year and it pays $50,000 in claims, the loss ratio is 50%.

In the case of SafetyNet’s initial insurance solution, a 70% loss ratio means that “70 cents of each dollar goes back to the consumer,” Kaiser notes.

Poor protection

In the view of SafetyNet’s creators, many existing solutions do not really solve cash-flow problems for consumers. For example, bill default causes credit-rating damage with long-term negative implications to a consumer’s financial options. High-interest, high-fee loans trap consumers in a vicious cycle of budget-busting debt, and other “protection products” are too narrow in scope, too high in cost, or too complex in their terms.

According to Kaiser, pure insurance pooling is efficient if done properly, and that’s what this product test period is about. If the model proves successful in Wisconsin and Iowa, SafetyNet will try to enter other state markets.

SafetyNet is well aware of potential hurdles to expansion, such as state governments protecting locally generated products and local insurance businesses, but they are counting on the power of consumers to demand insurance products that are designed to solve their problems.

The company’s business model is that of lean startup focused on one problem, but success here could lead to other product iterations and other products.

During a recent open house, SafetyNet explained its solution to various community leaders including Zach Brandon, president of the Greater Madison Chamber of Commerce, Paul Jadin, president of the Madison Region Economic Partnership, and Madison alder Shiva Bidar-Sielaff. What was their general reaction? Part encouragement and part disbelief.

“It sounded too good to be true,” Greene acknowledges. “We have to show them 70% loss ratios.”