Programs Thriving in Today’s Market
There is a strain of thinking that says generalists can adapt and survive in most environments whereas specialists are more at the mercy of their environment.
That may be the case for some species but it’s increasingly not the case for insurance brokers.
If the success of the specialists who work in the program insurance business is any indication, the property/casualty insurance industry may be seeing a lot more specialists than generalists in the years ahead.
While the program market is a relatively small segment of the overall P/C market, program administrators and insurers writing in the program market say their business is growing at a faster pace than the overall P/C industry.
Program business premiums grew by 9 percent in 2011. Meanwhile the overall P/C industry grew only a third of that. P/C insurers reported a $13.8 billion, or 3.3 percent, increase in net written premiums to $437.6 billion for 2011 from $423.8 billion for 2010, according to ISO and the Property Casualty Insurers Association of America.
The Target Markets Program Administrators Association (TMPAA), in a recent study with Advisen, pegged the program insurance market at $24.7 billion in premiums in 2011; the same survey identified the market at just $22.6 billion in premium in 2010.
“Notwithstanding the economic environment and the soft market conditions, program business has performed reasonably well and broadly outperformed the overall property/casualty market,” says Jeremy R. Hitzig, CEO of Distinguished Programs Group, who also serves as president of TMPAA.
One reason for that growth is the niche market specialization that players in this field provide, the experts claim.
“I think it really comes down to specialization,” says Jino Masone, head of sales, marketing and distribution for Zurich Programs & Direct Markets, which specializes in growing existing program business and adding new programs. “Even though economic times have been tough, generally, we’ve been able to carve out or get involved in niches that need the services and the products that we offer.”
That specialization has enabled Zurich Programs & Direct Markets to grow.
“We’re going to do probably 12 or 13 new programs this year and that’s consistent with what we’ve done over the last four years,” Masone says.
Hitzig, too, says Distinguished Programs has grown its program book of business. “We have been very fortunate to have been able to build our program business steadily in recent years,” he says.
That growth came in the form of modest organic growth mixed with some new products and small acquisitions, including its Nov. 1 acquisition of National Specialty Underwriters’ (NSU) hospitality business through IDP Holdings, a joint venture with Ironshore, Hitzig said. The NSU acquisition increased Distinguished Programs’ total premiums under management by more than 30 percent.
Hitzig expects to pursue additional acquisitions in 2013 while also adding in organic growth and new product development.
“We try to build each of our programs to a minimum of $5 million to $10 million in premium, which we believe makes our loss and underwriting data more credible and therefore the program is more stable even in changing markets,” he said.
Consistent programs that are solid performers will always outperform the overall P/C insurance market, according to Archie McIntyre, senior vice president of strategic business development at Meadowbrook Insurance Group. Solid program performers “seem to be able to isolate or moderate themselves from the swings of the marketplace,” he says. “In my opinion it is absolutely an advantage to specialize.”
Specialist brokers and carriers say their expertise in a given segment helps their organizations stand out from competitors.
“You develop an expertise that’s better than your competitors’ and then that gives you a differentiation in the marketplace,” Zurich’s Masone says. “When you can speak the lingo of the market that you’re playing in, and you can do it convincingly, and you’re a known quantity, because people have seen you in that particular segment for so long, I think that goes a long way, versus somebody who’s a generalist who, one day might be doing car dealers, and the next day might be trying to do environmental concerns with drilling.”
Also, specialization allows for better risk selection and spread of risk.
“Specialization allows you to identify the better operators within any given segment and in most cases includes a geographic spread of risk,” says Dusty Rowland, president and CEO of Fulcrum Insurance Programs based in Bellevue, Wash.
Specializing in a segment can affect risk selection, Rowland says, as it brings better understanding of the nuances of an industry and sub-segments within an industry.
“These nuances can help you identify risk characteristics that traditional underwriters will miss,” he says, adding that with greater understanding of all the important risk characteristics comes better pricing and selection.
Rowland believes that products and services that are tailored to a customer’s needs create a stronger connection to buyers.
“The best program administrators understand the long-term benefits of better risk selection through specialization and can consistently deliver tailored coverage at a fair price for the risk,” Rowland says. “The best brokers and insurance buyers value this model.”
The Risk of Specializing
While specializing in a certain market or segment can be beneficial, it can also present additional risk as well, particularly in program business, some say.
“Factors outside your control can have a larger impact on your business,” Rowland says. For example, a program administrator or carrier specializing in contractors a few years ago was in dangerous territory. The “program could have been very profitable, but the economy could ruin the business regardless,” he says.
One of the risks of being a program administrator is the lack of diversification, particularly if the firm is small, says Hitzig.
“If you have one program and one insurance company relationship, you run the risk that something could go wrong. Those can be very volatile situations,” he says. That’s one reason Distinguished Programs prefers operating with multiple programs and multiple insurance company partners to allow for diversification.
At the same time, there are ways that specializing can be less risky.
“In terms of spread of risk, I think that having a decent size book of homogenous risks, putting aside property or cat risks which is a separate issue, is a more predictable and stable place, and preferable for underwriters,” he says. “I would rather have $20 million worth of nail salons than $20 million worth of mixed retail business.”
A program writer with $20 million worth of nail salons has more insight as to what drives losses and results, appreciates what constitutes a good risk versus a bad one, and understands how best to construct coverage to meet the needs of those risks, Hitzig says.
That’s one place where the generalist insurance model will fall short. “The generalist will find it more difficult to compete in trying to understand the dynamics of a particular marketplace if you are up against a program administrator whose entire business model is built around a particular industry in a particular territory,” according to Hitzig.
Being a specialist could lead to increased scrutiny when it comes to errors and omissions exposure. But Robert Sargent, president and CEO of Tennant Risk Services based in West Hartford, Conn., says there’s no consensus on that either. “Some people think yes and some people think no,” he says.
Glenn Clark, president of Rockwood Programs Inc. in Wilmington, Del., thinks yes. He believes the E&O risk is greater for specialists.
“Generalists rely on admitted forms and rates,” he says. “Specialists often utilize nonadmitted markets, manuscripted policies, and the expectation is that they are truly the experts.”
Sargent says the issue is much more about the underlying exposure of the specialty. For example, when a traditional retail agent makes a mistake placing auto coverage, the potential claim may end up at $100,000. However, when a marine specialist makes a mistake, the amount is significantly higher.
“I will never forget a situation (where) we wrote a marine specialist and they had placed coverage on a barge that was worth $3.5 million. Marine coverage is very complicated. They got into an argument about whether the navigation limits were properly adjusted, and the barge sank. That’s very different than $100,000, or even a $25,000 claim that you get on personal auto or something like that,” Sargent says.
Some specialists will have significantly more severity, he says.
Zurich’s Masone isn’t overly concerned about the risk.
“There’s always the possibility of litigation when you’re providing advice and people are relying on it, but I have to believe that if you’re specialized in a particular area, you know the pitfalls,” Masone says. “You know what you can address, what your capabilities are, and you should know what you can’t do or what’s beyond your skills. Hopefully, that would keep the liability down.”
One area that can cause problems for program administrators is open programs, ones that are dealing with many retail brokers. “The program administrator might not actually see the customer face-to-face, so he’s dealing with a retail agent. The possibility could exist that the retail agent might not understand the segment as well as the program administrator, and you could get into some issues there,” says Masone.
That’s an area where program administrators must be careful. “For instance,” he says, “we have a program that deals with roofers. That’s a very tough segment that you wouldn’t want somebody dealing with that wasn’t very strong in that segment.”
When it comes to risk in the program business market, Masone says the greatest risk is one that the entire industry faces.
“I think the greatest risk is when you have a carrier or a program administrator that’s chasing the premium, and they lose the underwriting discipline,” he says.
But program writers who are committed to an underwriting plan and understand the type of business they want and the price needed to support that business will stay on sound ground, he says.
Overall programs are not different or riskier than other insurance products, according to Clark. “Programs are not inherently riskier or safer than any other lines of insurance,” he says. “Consider homeowners and auto are both personal lines, yet they take completely separate expertise, coverage, policy language, demographics, risk factors, and risk management. Specializing enables the expert to develop the unique factors to the segment they specialize in. … A class of business, or a program, can outperform the market or underperform the market much like any other business.”
Despite the risks, these experts continue to believe that specializing is what works best in today’s insurance market.
“Being a specialized broker in a certain class of business is a differentiator with the competition, as you are able to ‘talk the talk’ and understand the business and the nuances that identify you, the broker, as the best in breed,” Meadowbrook’s McIntyre says.
McIntyre offers a few words of advice for anyone wishing to define themselves as a specialist: “Find a niche that you are passionate about — boating, fishing, farming, aviation, etc. — and immerse yourself into fully understanding every aspect of the industry. Push yourself to be the resident expert to set yourself apart from other more generalist brokers.” By doing so brokers will add significant value and service, he says.