It Pays To Specialize

Article

How Program Managers Beat the Commodity Trend and Soft Market

Despite challenging soft market conditions, today’s program administrators should be able to seize the day’s market opportunities thanks to their specialty knowledge and expertise, says William Kronenberg III, CEO of Exton, Pa.-based Professional Underwriters Corp. and incoming president of the Target Market Program Administrators Association (TMPAA).

Carriers are eager to enter the profitable program market as program managers have become more sophisticated, knowledgeable and real underwriting partners, he adds. Carriers view the current marketplace and “realize that if the vast majority of their book is in pure commodity business, that commodity business will certainly be subject to major swings due to the market conditions.” To help prevent market swings now and in the future, Kronenberg says some carriers are shifting more of their books to specialty programs.

As TMPAA gets ready for its 8th Annual TMPAA Summit in Tempe, Ariz., Oct. 13-15, Kronenberg took time to share his thoughts with Insurance Journal‘s Andrea Ortega-Wells on the program market and how program managers have evolved to become true industry specialists.

Is it more difficult to grow program business given the soft market?
William Kronenberg III: Not necessarily. The overall pricing changes … perhaps, either by the pricing or by the underwriter, in conjunction with the carrier to follow a rate downwards. That said … some program administrators, usually hand-in-hand with the specialty nature of the program they have put together, have created special forms for their markets… [T]hey understand that market and it’s not often pure commodity business, which goes simply for price. The ultimate customer and the retail broker that’s usually between the program administrator and the ultimate carrier are aware that there is a specialty nature to this and they will lose that if they simply move the business for a price.

That’s another reason why we believe program administrators are again uniquely positioned to help weather the storm and retain more business, and thus grow the products and services for their carriers.

Are carriers more interested now in helping a program manager start a new program?
Kronenberg: They very well may. They will look at the marketplace and realize that if the vast majority of their book is in pure commodity business, that commodity business will certainly be subject to major swings due to the market conditions. To help prevent that now and to prevent it even more in the future, you might find carriers shifting more of their books to specialty programs to specifically avoid the upcoming changes in the marketplace.

With more carriers wanting to expand their program books, what does that do for program managers?
Kronenberg: It creates opportunities. It creates many opportunities for program managers to work closely with their carriers, to prove their expertise and their specialization in a marketplace and to work hand-in-hand with carriers to attack new opportunities.

We see that happening more and more. It’s still quite frequent that a program administrator has the idea, has the contacts and shops that program to one or more carriers to find the right fit.

But today, it’s happening … more frequently … carriers in good conversations with the already existing program administrators are looking at brand new market segments, different SIC codes and determining if between the two of them, they can actually create a new program and venture into the marketplace with that.

What does it takes to have a successful program today?
Kronenberg: First and foremost, I think it’s the knowledge that the program administrator will have of that specific class or marketplace. Anybody can think off the top of their head and say, ‘Oh, class XYZ we understand might have this risk or that risk.’

The program administrator will know the in-depth about XYZ. They will know what makes that industry tick. They will know where that industry is growing or failing. They will know who the leaders are in that industry. What are its geographic concentrations or barriers? They will have had experience with the class of business, so they will know who the major retail producers of that business are. They will know what have been the claims experienced of that class in the past.

And they will be able to bring all of that to a strong underwriting discipline, to bear on that market. Hand-in-hand with a carrier who provides ultimately the paper and the capital to bear the risk, that’s underwritten in a very disciplined way by the program administrator.

Carriers are also seeing program administrators become increasingly savvy about the actuarial issues and demands of analyzing a program. No longer is it just simply the carrier pushing down actuarial data to the program administrator. It’s the program administrator and the carrier working together on developing or understanding what are the actuarial trends involved with their program or with new ones to come.

Are you seeing carriers more interested in lower volume programs?
Kronenberg: … I think there is a growing acceptance of smaller programs by certain carriers. The larger carriers, there is no question that they tend to write larger programs because there are inherent start-up expenses on both sides in a program that might be there regardless of size or less sensitive to size. The rule of thumb always is that, you want to have a program large enough to deal with those start-up costs in the first year or two. However, there are newer carriers and units of other carriers that have looked at this and said, ‘We are willing to spread those start up costs over more years and take on smaller programs as long as the program administrators are still able to evidence his or her unique capabilities in the area.’ … They are not willing to walk away from programs just because they don’t hit a $10 million or $20 million barrier. Some carriers are willing to look at programs in a $5 million mark.

What makes a good program? Is it an under-served market or a mis-served market or just a specialty market?
Kronenberg: I mean, if it’s under-served and it’s a specialty, the better. That’s like a double hit. It’s certainly a market that must be under served by specialtists. So, it could be being served … perhaps buying insurance today, unless it’s a brand new coverage. If they are under served by a specialist in that marketplace, I think that that’s where the opportunity first comes. When the customer and the retail broker know that you as a program administrator live their business as much as they do. When you understand again who are the leaders in that business? Who are the losers? What’s the merger and acquisition opportunity or activity level, in that business? What are the real challenges? Are there legal problems in that industry?

So, it’s incumbent upon a good program administrator to not just be an expert in insurance but he, her and their underwriters, must clearly know the industry they serve just as well. … They really have to be insurance experts but also extraordinarily knowledgeable of the industries they serve.

What’s in store for the market in the near future? Is there room for growth?
Kronenberg: I think there is always growth in the program administrator marketplace. I think the program administrators have become increasingly sophisticated over the last decade — much better knowledge of the actuarial issues, much better knowledge of the legal issues around form and rate filing that the carriers have to deal with. I think that broadening sophistication has led them to be able to establish to carriers, and a growing number of carriers, that they can very well serve the insurance carrier’s needs and be a strong source of distribution and underwriting.

With that growing sophistication and growing size of the program administrators I think there is room for growth. I don’t think there’s any question that there is room for growth. There are too many industry segments just being treated as a commodity and don’t have that right level of expertise and industry knowledge and specialization being applied to them, that they can benefit from.

So, the carriers benefit but the clients also benefit because they get a product specifically modeled for their needs. They don’t just get an off-the-shelf product that fits them. They get one that’s specifically modeled for their needs. It also works on the claims side.

Whether it’s the program administrator handling the claims where then his operations or her operations has that specialization or, they may not be providing it themselves but they work very closely with the carrier. To be sure that the carrier provides their clients with customized claim handling around the forms and the needs of their clients.

Both sides win when a program administrator does their job in specialization and because of that double win, I think you are going to see continued growth in the program administrator world.

What role does the Target Market Program Administrators Association play in helping its members in the current market?
Kronenberg: What the association brings to its members, first and foremost, is a marketplace for networking with carriers.

At this annual meeting we will be approaching, if not exceeding, 50 carrier markets that have specifically proven they wish to be in program business. … [P]rogram administrators have the opportunity to sit down with, to network with, to understand what they [carriers] are looking for, and to find opportunities of mutual benefit. So that networking and social community is first and foremost, what TMPAA has always brought together — a working group created, between program administrators and the carriers wishing to do business in our field.

Secondly, we look for every opportunity to help our agents be educated in these issues. … [T]here are panel discussions on merger and acquisition. There are panel discussions on actuarial issues of clients. We hope to educate our program administrators in the key issues of the day.

Things to Ask About a Program (Before Placing a Customer)
By Christopher Boggs, Associate Editor, MyNewMarkets.com

Services offered (loss control, property valuation help, claims management help, etc.)
Retention rates
Expertise (subjective question) and how long has the program run
Commissions (for some reason, agents want to get paid to place business)
Is there an appointment process for the agent?
Associational and industry group endorsements (National Restaurant Association for a restaurant program)
Carriers participating in the program
Is staff program-specific or do they work on other accounts?
Do agents share in contingency?
Is there a limit on the number of agents that can access this program in a particular territory? Is “territory” defined as city, state or region?
Has the program been profitable for the carrier(s)?
Any carrier(s) looking to exit this particular market?
How long has/have the current carrier(s) been on this program?
What added coverage or other “extras” does this program give the client?