Building Program Muscle

Smaller, Regional and Start-Up Programs Sweat It Out

Just like Arnold Schwarzenegger, today’s strongest and most successful insurance programs started out as scrawny and klutzy kids. Hard work along with nurturing from wise and patient carriers helped them build muscle and get where they are now. Despite that track record, carrier support for fledgling insurance programs for niche markets can be difficult to come by in today’s market.

“Every one of us in our membership committee was a small program at one time,” said Glenn Clark, founder of Target Markets Program Administrators Association, and president of Wilmington, Del.-based Rockwood Programs.

Clark says today’s agents and brokers struggle to grow or start new programs. “If I was just starting in this industry today, no one would talk to me,” he told Insurance Journal.

According to Clark and others in the program marketplace, a number of large, national insurance carriers writing program business today will not consider writing smaller programs, or those defined as less than $10 million in premium. This lack of interest prevails whether they are start-ups, smaller or regional programs in need of new carrier partners.

Carrier perspective
From a carrier perspective, this reluctance has some basis in economics.

“It costs the same amount to start a small program as it does to start a large program … whether you are talking about $5 million versus $15 million; you have to do the same thing,” according to Rick Weidman, chair of the Target Markets Carrier Committee, and an executive at Clarendon Insurance Group.

Predictability is also extremely important in program business.

“The two principal issues that challenge all of us with respect to small programs is the opportunity cost, and that the scale of being smaller means that sometimes you have less of an ability to predict what you get in the future,” said Roger Brunner, executive vice president of Zurich North America’s program business.

Another reason a lot of companies don’t write smaller programs is ratings pressure, points out Fred Fontein, senior vice president of Lexington Insurance Company.

“As the market becomes hard, the program business is looked at more critically by rating agencies or company management because they cannot change as quickly as individual risk business or brokerage business,” Fontein said.

Also, when the market becomes hard, some carriers disappear. “So those remaining markets specializing in programs usually get deluged with submissions, and in response to that they usually raise their requirements,” Fontein maintains. As a result there will be a number of programs that fall outside of those requirements and ultimately have no place to go to.

ASI, Zurich, AIG
All is not lost for program entrepreneurs, however. Clarendon’s Weidman notes that no company wants too many large programs. A carrier might also consider writing a smaller program “hoping it will grow into a larger program.”

There are some well-known, national carriers that will consider small programs.

American Safety Insurance, based in Atlanta, Ga., is one national carrier that specifically targets niche markets that are underserved, including business written through its program division.

“We are looking for areas of the market that are underserved and one of the areas of the program marketplace that is underserved is smaller programs,” said Brad Isaacson, director of ASI’s program unit. While larger program carriers may not want any business under $10 million, ASI sees this as an opportunity.

“We’ll step in and look at $2 million, $3 million, or $4 million programs,” Isaacson said. “We actually see those as areas of opportunity where some would look away.” ASI writes programs on average between $5 million to $20 million in size, primarily on a non-admitted basis, but also has an available admitted company.

ASI’s program division seeks experts in various classes of business–from pest control to bar and tavern programs–and program administrators willing to share in the underwriting profits of the program. “We want them to share in the risk,” he said.

Zurich North America is another carrier whose appetite includes large programs along with some smaller ones.

“One of the reasons that we are willing to work with a smaller program, say a $5 million program, is if it’s in a very defined specialty niche with a significant, meaningful market share and a long track record of profitable execution,” said Zurich’s Brunner.

Zurich might also work with a small program in an emerging market where there is an opportunity for meaningful, profitable growth.

“We are really looking at those programs that have found a way to meet a market need with underwriting discipline and have created a significant and somewhat unique expertise at delivering an insurance product to a customer base on a sustainable basis,” he said.

AIG Program’s in-house program administrator, AI Risk–a division of Risk Specialists Companies Inc., a member company of American International Group–also provides a venue for start-up and small programs under $10 million in premium. “We kind of incubate a program or develop a smaller program through AI Risk,” explains AIG-Lexington’s Fontein.

AI Risk will first try to identify how the program business segment might be underserved. “We have to understand how we capture the business, what’s the marketing strategy, what are the relationships, who controls the accounts, is there an association, has there been a recent survey of insureds,” he said. “Is it a group that doesn’t have to have insurance but now they are required to by a contract? … There’s a great opportunity to put together an insurance program.”

According to Fontein, clear goals and objectives must be set prior to entering any program partnership. “Even if it’s a start-up, you’d like to get it up to $1 million in a year, or $3 million in two years or $5 million in three years … you’d like to have some benchmark,” he said.

Ideally, he said, the small program should grow to at least $5 million when the program is mature, reasonably after three years. “What you don’t want to do is to be putting out hundreds of policies at $1 million limits and you only have $300,000 in premium after 18 months or so. The risk you are taking is not balanced in that situation.”

Regional programs
Sometimes solid programs are considered small simply because they are not national but are instead limited in their geography.

Robin C. Brennan, vice president with the Managing Agency Group in Hartford, Conn., a subsidiary of Hilb Rogal & Hobbs, has shown programs can be successful even when regional in their reach. She manages the PUMP Insurance Protection Program, which generates $15 million a year in premium from 10 northern states.

“It’s fairly easy to have a regional program when the region dictates the market,” Brennan maintains, referring to the colder states.

She actually thinks there are advantages to being regional. “If you’re regional, you’re right in the heart of it,” she said.

Agents with their sights set on a regional or state program might look to one of their friendly regional carriers.

There is the case of a program manager whose carrier was backing out of his umbrella program and that of another agent with a book of franchise hospitality risks for which he needed a carrier. Both of these agents were able to team up with a regional carrier not known for writing program business.

Merchants Insurance Group, based in Buffalo, N.Y., writes in New England, Mid-Atlantic and Midwest states, primarily targeting small commercial lines. It writes a lot of artisan contractors and family restaurants by offering a coverage package geared toward these segments, but the company does not relinquish underwriting or administrative responsibility on these.

However, in the two cases of the umbrella and the hospitality programs, Merchants agreed to work with agents acting as program managers, according to Fred A. Hildebrand, senior vice president.

The umbrella program brings in about $20 million through the Green Agency in East Aurora, N.Y. The hospitality program is just getting off the ground in New York, New Jersey and Pennsylvania.

According to Hildebrand, while program business is not its forte, Merchants is willing to listen.

“If an agency or program manager came to us because he had reached a limit with a carrier or a carrier is withdrawing, we would look at it carefully if it offers the kind of business we would normally write,” Hildebrand said.