Mission Impossible: How to Succeed in Program Business

Many people in our industry believe program business cannot be profitable. However, if done correctly, it can serve as a fantastic way for insurance companies to write business.

In the last few years, there have been many companies who failed in the program business arena. In fact, many have failed so badly they are no longer in existence. Blame has been placed on many things including dishonest managing general agents (MGA), fraudulent reinsurance buying, the concept of fronting and insurance companies not doing proper due-diligence. While these are a few of the contributing factors people are aware of, there are many more. But, instead of focusing on the negative, it’s maybe more appropriate to analyze how success in program business is possible.

Control is the key factor to being successful in program business. In fact, controlling and knowing your risks is the key factor to underwriting. In the past, many insurers fronted the insurance risk and passed all the insurance functions down to the MGA level with little or no knowledge of what they were insuring. As long as insurers were receiving fees and retaining very little of the risk, they didn’t care who they were doing business with, what the business was, or how to manage it. This attitude proved fatal.

The first and most important lesson in program business is to know whom you are doing business with. Your MGA will be acting as your eyes and ears in the market; they are one step closer to the insured. The MGA needs to be as concerned as the insurance company with the quality of the risk. An MGA that runs his or her operation as if it were an insurance company, one who strives to make an underwriting profit and not just produce volume, is an ideal partner. On the other side, an insurance company needs to be knowledgeable in program business, understand the market conditions, and be flexible in creating their products.

One of the best ways to know whom you are doing business with is to listen to the marketplace; the most valuable information you can obtain is from others with prior business relationships with the MGA. You shouldn’t ignore rumor, but you shouldn’t accept it as fact either; investigate the allegations. Check with the State Insurance Department to see how many consumer complaints were reported or if any serious allegations have been made. Integrity and high morals cannot always be analyzed or found in paper reports, but past experiences can paint a colorful picture.

Making sure the MGA has sufficient data to demonstrate their experience in this line of business is crucial to the program’s success. An MGA with a substantiated track record is the best way to understand the operation. Their historical experience can tell you how the MGA has performed compared to the industry and their peers, and how you may expect them to perform today. It can tell you whether an MGA is profit or volume driven, depending on their results during various cycles of the market. You should also inquire as to why their past carrier left this segment of the market or, more importantly, why the carrier is no longer doing business with them?

As the insurance company, you need to make sure you understand exactly what product the MGA specializes in. You should be sure to understand how this product fits with the rest of your company’s portfolio for both conflicts and overall corporate exposure. You should not rely solely on the knowledge of the MGA to guide you through this business. It is crucial to understand the risks you are insuring in order to properly develop a saleable product that will produce profits.

Make sure the product you are going to insure cannot be more readily served by the traditional markets. Two critical aspects of success in program business are homogeneous lines of business and the outsourcing of backroom functions. Because of outsourcing, program business can be incredibly efficient but only if a traditional insurer does not have an advantage in this segment of business. An underserved market due to poor loss experience in the past, a highly regulated geographic region, catastrophe exposed products or truly niche products are examples of where program writers could have an advantage over traditional insurance companies.

Once you have determined you would like to be a business partner with an MGA, you must now determine how you will manage the business without creating inefficiencies. Remember this business is on your paper and you are ultimately responsible for the insured. Therefore you must control what belongs to you. There are two keys here: data and standardization.

To the extent possible, minimize the times of data entry as this eliminates error and eliminates cost. Clarendon likes to use the phrase “Clear-n-done;” data should be entered once and all aspects of your data management should be satisfied.

Be sure to verify the abilities of an MGA’s systems before you enter into a relationship. Data is crucial to your ability to report financial statements and your ability to properly monitor and manage your portfolio. A sophisticated and successful MGA will have the ability to meet your data needs. The key here is to know your requirements and needs before you begin your relationship and determine if they can be met. MGAs will vary in size and sophistication, but both small and large operations can meet data requirements through various channels.

The other key factor to managing your risks is creating contractual standards. By standardizing your contracts, you eliminate gaps that may otherwise develop in individually negotiated contracts.

In the past, MGAs were given a lot of freedom in setting rates, meeting with insurance departments and negotiating and purchasing reinsurance; all functions the insurance company should have been controlling. Any insurance department will look to the insurance company, not the MGA, for obligations to the policyholder. Reinsurance is purchased to protect the assets of the insurance company, not the MGA. Therefore, it is you who must control the process. Treat your MGA as if they were a branch office with the local knowledge for the product and be sure all home office functions are retained.

With the proper controls, program business can prove to be a more efficient and profitable method for insurance companies to enter various lines or territorial regions and perhaps one day will be thought of as a successful model to follow.

Grace Orsolino is a program manager for Clarendon Insurance Group in New York, N.Y. She can be reached at: gorsolino@clarendon-ins.com or (212) 790-9757. Visit www.clarendon-ins.com for more information.