Partners Continue to Come and Go, But It’s a Great Time to Jump in the Game

By James M. Shaffer | December 6, 2004

Partners Continue to Come and Go, But It’s a Great Time to Jump in the Game

Program business over the past 10-15 years has been a rocky road for the insurance industry. Companies are in the game today, but gone tomorrow. Reinsurers are quota-sharing risk today and not tomorrow. Managing general agencies (MGAs) are taking risk today and not tomorrow.

Why such inconsistency? One problem was that in the soft market of the 1990s, program business was too often viewed as a quick fix to dwindling premiums in other business lines. Programs and even companies failed because they lacked the underwriting discipline, industry expertise and long-term commitment.

With many program failures still fresh in our mind, it’s worth asking the question, “Is program business a friend or foe to the insurance industry?”

A very feasible and acceptable answer would be that program business is both. But a better answer in today’s marketplace is that program business can certainly be a “friend” to the insurance industry.

If structured properly, programs can fill specialty gaps in the marketplace, not only because of coverages and pricing, but more importantly because of a high level of specialty service that generalists often cannot provide. If done correctly, programs can offer brokers, agents and insureds an extremely stable and professional niche for the placement of key risks.

How does one put together a successful program that will fill specialty gaps and provide a stable market for many years? What makes a program successful is the commitment the partners have to each other and to the industry being served. These partners should have an expert underwriting staff, a thorough understanding of the industry, and an exclusive relationship and general desire to assist their industry both through services they provide and other financial resources.

Keep in mind that most carriers and reinsurers are looking for book premiums in excess of $10 million for the first year of the program. If the program can exist for more than three years, then it has a very good chance of becoming a “player” that is respected in the insurance world and in its industry niche.

Below are five important characteristics of a successful program.

Partnership
A program should be a true partnership between the program manager or MGA, carrier, reinsurers and service providers, including third party administrators (TPAs) and loss control experts. All of these partners should be committed to an industry niche, long-term goals and profit in both the front and back ends. Too many programs fail when one partner pulls out, leaving the program without a market or the industry expertise it needs.

It is essential to secure a long-term commitment from each partner, a precaution that can be done contractually, but also by working with trustworthy partners. Enter into a program with eyes wide open and build in contingencies in case a partner exits.

If a carrier exits a program, often it has been negotiated in a contractual relationship that the MGA must receive ample notice to replace the program with another partner carrier. Since it can be difficult to replace a carrier, request a minimum of 120 days for replacement.

If the MGA exits the program, it is usually due to a lack of interest in the industry and an inability to make money and share in the risk. In such cases, carriers might take the program to other MGAs where they have pre-established relationships. If a reinsurer exits the partnership, in many cases the carrier and MGA will work together to replace this support in a timely manner. Keep in mind that losing a partner doesn’t mean the end of a program.

Goals
There should be an upfront understanding by all parties of the goals that need to be achieved. It’s impossible to throw together a program and go into the marketplace without long-term goals. These should include not just profit, yearly capacity and loss ratios goals, but also service goals that cover turnaround on submissions and the handling of referrals and other important workflow issues. Long-term goals should also include improving perceptions of the program industry, improving loss control and making a positive impact on the industry premiums.

Experience
The program manager, carrier and reinsurer should all have expertise and an understanding of the target marketplace. The importance of having expertise can be seen when watching some MGAs attempt to structure heterogeneous programs or extend into industry niches that are beyond their expertise. When they push the envelope too far, they very often fail. The MGA should focus on specified niche industries and all parties should have a thorough understanding of the industry. To do this, establish underwriting guidelines upfront and stick to them. Changes come only after discussion by all parties and a thorough understanding of a new industry.

Commitment
The program manager must be committed to the target market and industry, not to its bank account. That means the MGA setting up the program should be doing so because it sees a need in the marketplace and can be an expert in the industry. This type of commitment also means having the patience to endure the ups and downs of the economy and the insurance market, and resisting the temptation to lower rates and underwriting standards just to build premium. Stick to the integrity and underwriting standards established up front and wait for the market to return.

What ensures a long-term commitment from partners? Nothing is absolute, but it is possible to ensure that commitment by requiring risk be taken by all parties involved, and choosing partners that have an understanding of the industry, including the positives and negatives of doing business in that industry.

Long-term vision
All the partners in the program should share a long-term vision with a commitment of at least 10 years, the minimum run-off that should be considered. To run a successful program, the partners cannot be short sighted. If they are trying to make a quick buck, they shouldn’t do it with program business.

Conclusion
The five characteristics described are a formula for success for any program business. MGAs, carriers and reinsurers may continue to come and go in the marketplace, but if built on a solid foundation from the beginning, program business can withstand change and maintain a consistent “friendship” to all.

This is a great time to enter the market with a program, especially since many industries are looking for ways to cut costs related to risk management and insurance. In addition, as the market softens, industry expertise and services will become an even more important area of focus in securing risks. Program business is an excellent way to serve an industry.

James M. Shaffer is vice president of the Preferred Club Program at Venture Programs, a leader in the design, underwriting and distribution of specialty industry-focused insurance packages. Contact: (800) 282-6247, ext.237.

Topics Mergers & Acquisitions Carriers Excess Surplus Underwriting Reinsurance Insurance Wholesale Market

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