Programs, Beacons of Stability in Tumultuous Markets

Now that the hard market has firmly set, it’s no secret that more and more standard property and casualty insurance carriers are seeking to stem losses by restricting coverage and revamping underwriting habits. As in previous periods of reduced capacity, more and more agents and consumers are turning to surplus and specialty insurers to obtain policies.

Depending on how specialized the insurance needs of a commercial client are, however, programs in particular can prove invaluable, especially when coverage is scant in standard markets. Program policies provide suites of insurance products specifically geared toward particular industry segments. Rather than stand-alone general liability, property, or umbrella commercial coverages that make no distinctions between the different businesses of the policyholders who buy them, programs are customized to cover all aspects of a business’ operations. In other words, a program designed for an underground storage tank owner bears little resemblance to one designed for a dairy farmer. Nor should it, given the disparate risks between the two industries.

MGAs as program administrators
Many programs are developed by managing general agencies (MGAs), which then market them to interested insurance companies. Cary Cheldin, president of Woodland Hills, Calif.-based Crusader Insurance Company also runs several MGAs. He explained the role of MGAs in developing programs, as well as sustaining them.

“As an independent broker, you have two options,” Cheldin said. “You either look directly to an insurance company to deal with you, or you look to a company to appoint you as an agent. Or you go to a multitude of managing general agencies that offer insurance. They’re not insurance companies, but they’re a way for you to get insurance for your business owner.

“Many managing general agencies tend to specialize in certain programs,” he continued. “They are frequently the ones that invent the thing, and they find the market—they find the insurance company that has an appetite for it. If that insurance company loses its appetite, or has a management or ownership change that causes the cancellation of the entire program, the managing general agency will then look for a replacement company and keep that whole group of customers together.”

Michael Oliver, senior vice president of programs at Royal & SunAlliance USA, described his company’s relationship with MGAs in the administration of programs. “Most of (our programs) are MGA-driven programs, which the independent agent would have access to,” he said. “We have a couple that the company manages, but are still available to the independent agents.

“We’re looking for programs that are administered by MGAs, whether they deal with retail agents or directly with the public,” Oliver continued. “They would manage the underwriting and policy issuance, and the administration of the program. We could outboard the claims to them if they have that expertise and it makes sense. Otherwise we have that resource.”

Fireman’s Fund Interstate senior vice president of excess and surplus lines David Rucker explained how his company sets up programs: “Our programs are all wholesaler-driven. The current programs that we write—we do a sports program, we do an energy program, and we do a restaurant program. The key parts of our program business, which may be very different for other folks, is we’re looking for programs that take a homogenous customer group that all have the same style of identifiable exposures. We customize our products specifically for that customer set. That’s different than, let’s say, offering general liability on multiple customers.”

Anticipation or response?
In some instances, MGAs devise programs by anticipating the coverage needs of the industry they’re targeting. Programs have also been developed in response to agents and brokers relaying the needs of their clients to program administrators.

“We do it both ways,” Cheldin said. “More frequently the need comes to us through an agent or broker or MGA. They’ll call and say, ‘Hey, we’ve got a book of business or we have a program or we have an idea where we see a need for a company to write a pre-existing program.’ The minority of the time, we look at a marketplace from the sidelines and say, ‘Hey, maybe this would be a good idea.’ We usually get so busy handling the requests that we rarely get time to dream up our own ideas.”

Michael Hill, president of Denver-based Freberg Environmental Insurance (FEI), a managing underwriter providing programs for environmental industries, related similar experiences: “It’s a little bit of both … We noticed what was lacking in the marketplace and then sat down and developed our programs to address what we thought those issues were. But that was many, many years ago, when we first got started. That focused us on the small engineers and contractors because they were having a really hard time in the marketplace in the early 1990s, 1991.

“Now what we do is, we identify a niche that we think we can spin off the environmental piece, and we develop underwriting capability and policy form pricing.”

Varied coverages, varied premiums
Minimum premium requirements for program coverage depend on risk factors affecting the industries being covered. Because these factors vary widely from industry to industry, so do premiums.

Programs offered by Firemans’ Fund Interstate are geared toward energy, sports, and restaurants, as Rucker noted. “We’d like to see programs get to be $5 to $10 million at least,” he said. “We wouldn’t consider an admitted program for less than $5 million. We would consider a non-admitted regional program at a lower level, perhaps $2 to $3 million to start—that doesn’t have quite the complexity to file that an admitted program has. All the programs need to be at least $5 million or better.”

Royal & SunAllianceUSA offers programs designed for a wide array of industry segments, including coverages for farms, manufactured housing dealers, moving and storage companies, and social services. Oliver explained, “We’re looking for $5 to $6 million within 3 years … we’ve taken some regional programs that have been smaller but added some geographic expansion to them. We have 50-state capability, so they can get to that level. They’re mostly national. What we can take is a regional where somebody’s been kept at bay and expand them.”

Oliver continued, “We must have the data—the potential agent or program administrator would have to be able to provide us with data that validates the profitability of that program. The program has to be a specific industry—so it’s not a line of business approach, it’s a segment of business that is an industry, that contains homogenous risks. So we do, like, a truckers program … We have a moving and storage program, for instance, that does have an automobile exposure, but it’s focused entirely on moving and storage insurance.”

Mark McCrary, vice president of marketing at Professional Underwriters, a Trooper, Penn.-based program managing unit of Mutual Risk Management Ltd., noted that with two of his company’s largest programs—municipalities and schools—minimum premium requirements are much lower than those at Firemans’ Fund Interstate or Royal & SunAlliance. “Professional Underwriters has a variety of different programs—probably two of the more prominent ones at this point in time would be the Community Works insurance program, which is specifically designed for municipalities and public entities, along with the program that’s called Textbook, which is specifically designed for schools, both public and private from pre-K through college and university,” McCrary said. “The minimum premium requirement for both programs is $25,000. On our municipalities program, Community Works, the minimum population size is 5,000 in addition to the premium requirement.”

FEI’s Hill described the major programs available through his company, and the premiums they fetch: “The major programs at FEI are hazardous materials and trucking. It’s a tight market for that. We’ve got a really good program for that through the Gulf Insurance Company. Also, a big program for us is environmental engineers, environmental consultants, and environmental contractors. Something that’s really heating up right now and becoming bigger for us is site-specific pollution coverages for property transactions … It’s kind of like a lubricant for property transactions.

“Typically, our minimum premiums run around $25,000,” Hill continued. “However… we don’t have a minimum premium for trucking policies—the truck accounts are more expensive than that.”

Crusader’s Cheldin said most, but not all, of the programs his company provides are California-specific: “We’re a regional underwriter—most of our business is in California. The business that we’ve offered outside of California mainly has to do with property and casualty for restaurants, bars, taverns, and nightclubs.

“In California, that class or category probably constitutes about 10-15 percent of our total sales,” he said. “It’s a sizeable amount, certainly significant. But it’s not the majority of our business. In fact, that’s about the largest single program right now. We also write apartment buildings … I think apartment buildings are close to 15 percent, artisan contractors … around 10 percent of our total. I’d say there’s about six different groups that constitute 80 percent of our sales.” He added that a $1,000 minimum premium is usually required.

Advantages for agents
Advantages inherent in program insurance, regardless of how hard or soft markets are, seem straightforward enough: They are designed to target specific industries, addressing those industries’ specific needs more effectively than the more general policies available from standard carriers. But when markets harden and business owners face potential cancellation or non-renewal of their policies, programs provide an even greater advantage: stability of coverage.

Oliver of Royal & SunAlliance explained, “You’ve got somebody in a majority, if not all of our programs, that’s all they focus on. So the MGA or program administrator—that’s all they do. So you’re providing them with a comprehensive package, rather than coverage for one line of business at a time. But also, there are other services, or other knowledge that that agent has to make sure that the coverages are right for that industry.

“There would also be stability in that marketplace,” he continued. “They would be around and stable for a number of years, whereas a general insurance company would expand and contract into that industry depending on the market cycle.”

McCrary of Professional Underwriters pointed out, “Why would an agent work with someone who had a program, to present a program to a client, as opposed to going out and trying to place the individual coverage? I think that question is best answered by the fact that typically, with the programs such as Community Works or Textbook, you have a program manager or a program administrator—in this case it’s Professional Underwriters, but there are many of them out there—that oversee the program and then put together something specifically designed for that type of risk. It has special coverage enhancements that fit a school or municipality, whereas if you’ve got an off-the-shelf product from carrier XYZ, it may or may not—probably will not—fit as many needs as that program-specific coverage.

“We’ve also got underwriters doing those programs, underwriting those programs, who have vast knowledge, in most cases, of that class of business or segment of business. So they’re able to perhaps see risk exposures that other underwriters may not be aware of, and they’re also able in many cases to have better rates for that class of business because they know what they will write and what they won’t write.”

FEI’s Hill explained that because several more general carriers toying with the idea of offering environmental or other specialty coverages are now withdrawing, program insurance is in a good position to continue providing such policies. “We can fill some really nice gaps for agents looking for a place to be competitive,” he said. “If they can develop a little bit of expertise in pollution lines that we can help provide to them, then they can do a little bit better job than their competitors, who might not even mention pollution coverage in a presentation. When it comes to engineers, consultants, and contractors, some agents specialize in architects and engineers. We can be a really great market for that. We’re responsive, and we know the industry really well since we’ve done it for about 11 years now. Some agents are trying to focus their agency and figure out their niches all the time … We’ve seen our production go up quite a bit, because of the market. Companies that were kind of dabbling in environmental … have stopped doing it.”

Crusader’s Cheldin emphasized the ability of programs to provide stable coverage, even if such coverage costs a little more: “I’d like to think that the underwriters of programs, having more experience and expertise, can thereby offer more competitive prices and more custom-tailored coverage packages. But I say that with hesitation because sometimes the experience and knowledge of a program causes a program manager to charge rates that are actually higher than an inexperienced underwriter would. So I can’t say absolutely that a program manager is always going to offer a more appealing product to the consumer. But they certainly tend to offer a more stable market, and by that I mean that they have a commitment to the class, to their program, and they tend to stick by that group of customers year in and year out, despite losses of profits and hardships, while the other standard-line carriers tend to respond to adversity by retracting from the class entirely.

“For example, right now in California we’re seeing many different insurance companies withdrawing from habitational classes,” Cheldin continued. “In other words, many of our apartment building-type risks in California are being canceled or non-renewed because their traditional or standard-line carriers have found that class to be unprofitable, or less desirable than maybe some other classes. So they respond by issuing non-renewal notices, which I find humorous because I would never do that to a customer. To me, stability is important.”