Insuring success

Editor's note: Mary Ellen Gallagher is vice president, marketing, of ERIC Group, Inc., Englewood, Colorado.

When ERIC Group, Inc. set out to create an innovative environmental insurance product, it didn't begin with executives and other company insiders-the usual route taken in the insurance business. Instead, the small, Englewood, Colorado-based firm, which distributes insurance and scientific services to mitigate risks associated with environmental hazards, took its ideas for the yet-to-be-created insurance directly to the people who would use the product: bankers, property acquisition vice presidents and other executives charged with handling real estate transactions.

The firm did this through focus groups, a research tool often used to fine-tune products but rarely used in the insurance industry to create policies from the ground up. More than 20 focus group sessions were held in six Eastern and Midwestern cities during an 18-month period in 1990 and 1991.

The goal of the focus group process was to develop information on how handling environmental risk is decided within various companies and to develop a new policy, the ERIC Property Transfer Liability Insurance policy. The policy is designed to limit a property owner's and lender's liability if an environmental contamination is discovered on the property after it is purchased

Living, breathing mechanism

The focus group process has been called a "living, breathing mechanism" by Milton Brand, president of the Brand Consulting Group of Southfield, Michigan, which ERIC hired to do the focus group interviews. Brand likens the process to that of creating a sculpture. After each session, the sculptor is closer to perfecting the final product. For example, in the ERIC Group's research on its new insurance product, the policy concept was changed after each session to reflect the concerns, gut feelings, and requirements of the participants at the previous meeting. After the 25 focus groups were over, the final policy evolved from the original ideas as the group shaped the product.

The focus group process resulted in significant changes to the policy, such as who and what it would cover. To the surprise of ERIC executives, many of the key provisions that ERIC thought should be in this type of policy were completely changed or even eliminated as a result of the focus groups.

The intent of the first half of the 25 focus group sessions was to understand how potential purchasers of the policy think-how they weighed options and measured risk, how they saw things, and how they made decisions. The last half of the sessions honed the ideas generated during the earlier sessions into the final product.

Group participants

The participants in each focus group were chosen from businesses and industries that ERIC thought would influence or give final approval for major real estate transfers and sales: bankers, risk managers for large corporations, and vice presidents for real estate acquisition. But, like the conception of the final product, the participants were changed as the meetings progressed and discussions between respondents revealed who would most likely buy or desire the new policy.

The ERIC focus groups not only sought out the executive who would make the ultimate decision on a purchase, but also the people who would most likely influence the top decision maker. Before the groups started, ERIC had considered the risk manager-the person in a large company charged with minimizing property risk-to be a prime candidate for the new policy. But the focus groups revealed that while risk managers would most likely be an important part of the risk insurance buying process, in most cases they probably would not have the final say on the purchase. The more likely candidates were vice presidents of real estate acquisitions for major corporations and executives at large banks.

Policy changed

A look at the focus groups in various cities shows how the policy changed shape after each session to better meet the needs of the participants in each group. In the first sessions, held in Chicago in June, 1990, three groups participated: commercial property owners, real estate attorneys, and bankers.

The groups discussed various topics concerning environmental risk and real estate, such as the most significant problems involved with the purchase or sale of real estate, the risks that buyers and sellers of real estate face, and how environmental situations create problems and risks in today's real estate market. Environmental problems were a major concern of all three groups, but insurance was not perceived as a solution to the problems. A basic prejudice against insurance was voiced.

Initial reactions to proposed insurance coverage for environmental problems were negative because the participants were unclear on what would or wouldn't be covered by the insurance. In addition, the cost requirements were not clearly presented and understood.

It was also decided after the first sessions that real estate attorneys and the banker audience in these groups were not the ideal people to look to for product development information. To help correct these problems, the policy concept was changed according to the requirements of the focus group members.

The second set of focus groups was held in Pittsburgh in August, 1990. The real estate attorneys were replaced by a group of corporate risk managers. The concepts presented in these sessions were recast in a tighter framework to correct as much as possible the inadequacies voiced by the Chicago respondents.

Improved acceptance

Changes in the product concept resulted in a significant improvement in possible product acceptance, from low levels of interest in Chicago to moderate levels in Pittsburgh. But the real gains were made a month later at the third group of sessions in Philadelphia. After the concepts presented to the Pittsburgh groups were reformatted to address participant needs, the Philadelphia groups showed high "predisposition to become involved," scoring 9-10 on a 1 to 10 scale of interest.

For the Philadelphia sessions, the information on the policy was presented in a way that first introduced the concept of unforeseen environmental problems and then proposed possible insurance solutions, one of which was the new policy. Most participants agreed that there were potential environmental problems regarding real estate transactions and they would like to have an insurance policy to solve the problem.

The fourth set of focus groups, held in Miami/Fort Lauderdale in January, 1991, confirmed the favorable Philadelphia results: there were very few objections to the proposed policy and a high acceptance level. The Florida group meetings also identified the real estate related industry groups that would be most and least likely to buy the new policy. For example, title insurance brokers accepted the new policy concept but didn't perceive it to be their place to "sell" it. On the other hand, the Florida session results indicated that credit policy decision makers from major financial institutions, such as New York money center banks, were an ideal market segment that would be very interested in the product.

Final sessions

As a result of the focus groups, ERIC had developed a product that appeared to be acceptable to the major industry groups ERIC was targeting. Then, the company did three final sessions, in Minneapolis, Atlanta, and Chicago in April, 1991, to test the final product and its accompanying marketing and advertising campaigns.

The final sessions indicated that offering a wide range of terms and coverages significantly increased the acceptance level of the policy; pricing for the various options was considered commensurate with the value received for the product; and explanatory literature and initial advertising layouts were effective.

The ERIC Property Transfer Liability Insurance policy was formally launched on May 31, 1991. After only seven months on the market, the policy's success has proven the effectiveness of the focus group testing. As the research indicated, the large money center banking community seems to be the most eager to buy the new policy. ERIC has a commitment for policy purchase from one of the largest money center banks in the U.S. and is in active negotiations with several other bank, trust companies and developers of major shopping centers.

This eagerness of the banking community is driven by the need for large banks to protect their mortgages-and their mortgage holders-against major losses. If a bank's mortgage holder defaults on the mortgage because the environmental cleanup costs exceed the value of the property, the bank is left with a defaulted mortgage and a property that is difficult to sell.

One of the big surprises from the research was the scope of property transfer coverage the group participants preferred. ERIC had intended to protect property owners from environmental problems that violate federal Superfund laws. The group participants, however. strongly voiced their opinion in favor of a policy covering the state environmental laws as well. They indicated that state laws were as much or more of a legal obstacle as the federal laws were. As a result, ERIC researched more than 100 state laws and customized its policies for each state, something it probably would not have done without the focus group's input.

Another feature ERIC product planners and marketing people thought they would include in the product was bodily injury protection, which would insure against injury caused by an environmental problem on the owner's property. The focus group participants, however, said they didn't want bodily injury coverage, because it would increase the price of the premium. Rather, they wanted coverage that would solve the environmental and legal problems as quickly as possible so they could limit financial loss and continue with their business, which is why the groups also favored including the coverage of legal defense costs in the policy.