Insurance Programs Must Work for All Involved

To some, a great solution; to others, a rate war triggering menace. What could that be? Well, insurance programs that have their good and bad points.

There Are Several Forms of Programs

1. A master policy covering individual members of a group. Often these come to market as a by-product of an insured being a member of a specific organization, franchise or association.
2. A program offering specific coverage for a specific class of business that are offered by an insurance company to the group as a whole but individually underwritten and distributed. No association or organized group membership needed.
3. A Risk Purchasing Group (RPG). These offer specific liability coverages for a homogeneous group of risks requiring some special or unique coverage. The advantage of an RPG is really in distribution. The carrier needs only to file the risk in one state and then under the federal law governing RPGs. The policies can be distributed nationwide with no individual state filing or approval of rates/form.
4. Risk Retention Group (RRG). This form of program is far more sophisticated than the others as in effect the members of the group set up their own mutual insurance carrier. Each member, in order to join the group, must pay a premium and contribute an amount to the carrier’s surplus, which becomes “at risk” and is non-refundable. RRGs usually are designed for the large risk that can afford to join and more importantly can conduct its business so that its losses are kept to a minimum and the group makes a profit, which ultimately results in large premium savings.

Why Do Programs Exist?

There are a number of reasons why insurance programs exist, including:

• Premium savings because of number of risks and ease of distribution.
• Provide coverages not normally available under standard policies.
• Exclusivity of coverage.
• Franchises or similar entities want uniformity of coverage.

I have also seen some programs that in my opinion were only designed so the agent could make a quick buck. This type of program either has unsustainable premium levels or stripped coverages which the insureds don’t understand. Not a good practice.

How Does a Program Come About?

A program should be designed for a specific need of a class of insureds. This could arise because of many reasons such as:

• Franchises requiring a set of specific coverages for their franchises.
• Each member of a group may only command a small premium and cannot get individual coverage. (I have seen successful programs where the individual premium is $12 per year!)
• An emerging exposure needs a tailor-made policy for individual insureds. A program is needed because individually carriers cannot justify providing the coverage. If there are many risks, this attitude changes.
• Distribution, in order to penetrate a given class, a simple distribution channel is needed. RPGs are examples of this.

Programs are offered by many different sources but insureds and agents should be careful in their evaluation of whether a program is “right” or not for their needs. Consideration should be given to the carrier’s solvency and ability to service and pay claims. The underwriting needs to be reasonable and fair and examination of the coverage forms offered should reveal no service shortcomings.

I believe that programs should only exist if they develop value for all, i.e., insured, agent and carrier. If a program only benefits one to the detriment of others, it should be avoided. I have created several successful programs in the past and have several in place now but find that insurers are not stepping up to the plate when a good idea for a program comes along. Most who say they write programs really mean that they will take a roll-over of an existing one with a minimum of $5 million in annual volume.

Where has the entrepreneurial spirit gone? Some of the most successful programs have sprung from a simple idea that was new and never insured before. Today very few carriers will play in that sandbox.

Programs will continue to have their place in the insurance marketplace, especially in this age of electronic trading. However, insureds, agents and carriers all need to be aware that if a program does not produce value for all, it’s not a successful program and may do more harm than good.

Topics Carriers