More Punch for Programs

Today’s managing general agencies and carrier partners in the specialty program marketplace are enjoying profitable times while looking over their shoulders at new carriers and agents eager to enter the ring, according to industry insiders.

The specialty market written through program administrators is already big. It is worth about $20 billion to $40 billion of annual gross written premium, according to “The Specialty Insurance Programs Issuing Carrier Survey,” published by Guy Carpenter in September 2006.

It’s also perceived as profitable. Many carriers (65 percent) surveyed by Guy Carpenter said they view program market results over the past three years as more profitable than the standard market.

Indications are that the good times will continue. The same Guy Carpenter survey revealed that the majority (65 percent) of program carriers expected the market to grow throughout 2006. More than half (55 percent) of survey respondents indicated that they expected the market results for the past three years to continue throughout 2007.

Competition heats up
There are more people fighting to get into the program business ring, but not all of them are experienced program players.

Greg Thompson, president of Atlanta-based Thompson Insurance Enterprises Inc. “Thomco” and incoming president of the Target Markets Program Administrators Association, senses heightened competition from startup program administrators.

“One thing we are seeing is a softening,” Thompson said at the recent Target Markets annual convention in Tempe, Ariz. “More and more carriers are interested in the program business. There are more new programs being started and, as a result, there is more competition — but especially more competition for carriers to provide coverages, competitive coverages and programs to program administrators.”

Just two years ago, a number of managing general agencies went out of business because they were not able to find carriers to support their programs, said Richard Weidman Jr., secretary and director of CastlePoint Management in New York. “What’s happening now is that we’re seeing many, many new general agents come into the market; new startups,” he said. “We’re also seeing the appetite among carriers for program business being even stronger.”

David Jordan, senior vice president of Lexington Insurance Co., a member of AIG, agreed that the biggest trend in the program market today is the increased interest in the market. “We are seeing an increase in the number of insurers and reinsurers who are interested in this business; some for the first time,” he said. “Some who have been involved in the past and who are now looking to get back into it and then a core group, like ourselves, who have been in it for many years and expect to stay in it for a long time.”

Jordan noted that while primary carriers may be venturing into programs to grow and diversify their writings, another factor driving the expansion stems from the fact that program administrators today are better run, better managed and have better controls over their business than they did in past years. “So there’s a recognition by the industry that underwriting business through program administrators can, in fact, be a profitable enterprise,” he said.

“What happened in the last hard market is that a lot of the less reputable program administrators fell by the wayside,” Thompson added. “The ones that remain are more professional … I think carriers are recognizing this.”

More capacity, more problems
While prospects for future growth in the program market remain bright, growing pains do exist.

Carriers responding to Guy Carpenter’s survey said the biggest challenges in 2006 are new business production, maintaining current rate levels, obtaining professional submission and program information, and maintaining and increasing premium volume. (See “Biggest Challenges Facing Program Writers” on page N14.)

Thomco’s Thompson believes that what’s driving the increased capacity in recent years, with the exception of catastrophe business, is good business. “The program business has been extremely profitable, and so carriers are looking to capitalize on that profitability and therefore [are] putting capital into the business,” he said.

Darren Lewin of Abacus Insurance Brokers Inc. in Los Angeles, is not convinced the overall market is growing, but agrees there’s some new blood in the game.

“The program business as a whole doesn’t seem to be growing too much, but it seems that more carriers are trying to get a piece of the program market,” Lewin said. “And they seem to be lowering their appetite for premium volume, multi-state distribution and various other constraints that they want. They seem to be making those barriers to entry a lot easier for the program managers.”

According to Thompson, the biggest challenge for the entire industry will be how it deals with the soft market conditions. “There is more and more competition,” he said, “so how do we continue to write business but not burn the insurance company with a bad loss ratio?” Thompson said “sometimes there is not a whole lot you [can] do,” except to “watch your volume go down in any given program if the competition is too aggressive.”

Thomco’s approach is to bring in value-added services and risk management to combat pricing wars. On commodity-like business, or small account business with many transactions, Thomco uses online quoting, rating and binding to speed up the process service component — and hopefully override another company offering a cheaper price, he said.

Yet the most important thing for any program administrator, regardless of the cycle in the marketplace, Thompson said, is the commitment to make money for the insurance carrier. “Because if you make money for the insurance carrier, ultimately you will make a lot of money because they will take care of you,” he said.

Click for larger image

Click for larger image

Defining the program
While interest in programs is booming, not everybody has the same understanding of what a program is.

A program basically consists of two components, according to Dr. Detlef Steiner, chairman of Delos Insurance based in New York.

The first component is that the program must be a homogeneous portfolio of risks. “So the definition of a program does not fit large industrial, large commercial risk-by-risk underwriting,” Steiner said. “It’s more a homogeneous affinity type group of product. The rating is template driven [with] very tight underwriting guidelines.”

“Basically, what we define as a program is a collection of similar risks,” CastlePoint’s Weidman said. “Effectively, they are risks that have certain characteristics that basically fall across all of the risks in that particular group,” he said. “It can be anything. There are a collection of role risks, and it could be a collection of certain premium size items. It can be a collection of risks that have similar risk characteristics. … It depends on how you define that particular program and what characteristics you wish to use.”

“The second component is outsourcing,” Steiner added. “Almost all functions are outsourced up to the front, to the MGA, maybe even to the retail agency,” he explained.

Why is that so?

“People believe that we can save a lot of money and expenses. … So that gives you a competitive edge on the expenses,” Steiner said.

Almost every industry today has outsourcing models, he notes. “In cars, you buy a Chrysler … nothing has been manufactured by Chrysler. They just put it together; assemble it. I believe that will happen more and more in our industry, so the competition is fierce. I see a future for MGA business in connection with the carriers like Delos who are just complementing the MGA operations.”

Starting the program
Starting a new program is no easy task, insiders say. It can take a few months to several years to get a program developed.

“One of our newest programs is one called Fun Pro for people who do one-day events like moon walks, inflatable slides, that kind of thing, and it was a really incredible journey,” Thompson said. He said Thomco worked on the program for three years before a carrier finally signed off on it. “A lot of companies did not want to write this business.”

Thompson said the business tended to have bad loss experience. “The way we got a company to do it, ultimately, is we were able to find claims data on the Internet, injury data for this industry. We created an actuarial model using Milliman, the national actuarial firm, using some assumptions. And we finally got the carrier to sign off.”

Thompson added that the most important part of any new program is “information, information and more information.”

The amount of information needed to start a new program is “unbelievable,” he said. “I mean the amount of information you need in terms of how knowledgeable you are about the industry you are going to insure, and how knowledgeable you are about the economic models on which those businesses operate, knowing how to underwrite them, and why you think certain underwriting guidelines would be successful [at] giving the carrier a profitable business.”

Having that knowledge “requires tremendous research from a wide range of sources,” Thompson added. “What I would say to any program administrator doing a startup is do your homework, and do a lot of it.”

The cost to start a new program also can be an issue.

“What people that are getting into the program business have to remember is that the smaller the program, the greater the costs in terms of the startup,” CastlePoint’s Weidman said. “It costs the same to start a small program as it does to start a large program. And carriers have to absorb those costs starting out,” he said.

The high cost to start a new program is one reason carriers may be hesitant to start smaller programs, or those traditionally with less than $5 million in premium.

“So typically, you’re going to want to focus on programs that have larger volumes,” Weidman said. “That way you can obviously absorb those costs.”

Thompson said that it is definitely easier this year compared to last year to start a smaller program, with today’s soft market climate. Nevertheless, starting a program still can be difficult. “Carriers like to see a minimum of $5 million in premium for a new program, and a lot of startup administrators with startup programs … are looking at less than that.”

Abacus’ Lewin, however, said the industry is looking at smaller programs more and more today than it has in the past. “They are looking at risks or programs that they may not have looked at a couple of years ago for various reasons, and they seem to have more of an appetite and more of an open mind and willingness to try different things. [They seem willing] to spend in areas where they may not have the expertise, but [will] rely on the expertise of the agent or program manager,” he said.

AIG’s Jordan agreed that first and foremost his company looks for expertise.

“We are looking for discipline and controls and we are looking for a track record,” he said. “But having said that we also have the ability to help brokers who have a great idea for a program but don’t necessarily have the infrastructure to be a program administrator,” he added. Most importantly, have a sound business plan, Jordan advised. “Carriers who do program business are inundated with proposals and submissions,” he said. “The ones that make sense rise to the top of the pile.”