Survey: Program Market to Remain Vibrant in 2008

May 21, 2008

The program market continues to grow and will continue to grow in 2008, as insurance companies focus on core concerns of new business production, premium writing and rate profitability, according to a new industry survey by Guy Carpenter &Co. However, several new trends emerged in 2008 as the market’s appetite for mergers and acquisitions (M&A) increased, along with a growing interest in the use of outside capital to fuel new endeavors.

“The program market remains vibrant and has become an increasingly attractive target for new capital,” said Carl Bach, head of Guy Carpenter’s Program Manager Solutions Specialty Practice. “Across programs of all sizes, organizational structures, technology platforms and servicing capabilities, we continue to see a strong interest from carriers in doing business with program administrators and managing general agencies.”

Guy Carpenter’s fourth annual survey of domestic insurance companies writing specialty program business through program administrators examines insurance carriers’ evolving appetites for program business through program administrators (PAs) and managing general agents (MGAs) and touches on key trends, including market size and dynamics and operating platforms.

Interest by carriers to do more business with PAs and MGAs extends across a number of areas, including providing insurance for programs, partnering in expanding operations to grow revenues and even potentially purchasing a PA/MGA operation via merger or acquisition, said Bach. “Given these largely positive trends, all indicators point to an exciting and active year in the program marketplace,” he said.

The survey found that 56 percent of survey respondents expect the market to grow in 2008, while 32 percent expect it to remain flat. Only 12 percent expect the market to contract.

Respondents perceive the PA/MGA market to be large, with 92 percent estimating the total PA/MGA market to be at least $20 billion in gross written premium (GWP). Some 33 percent specified a range of $20 billion to $30 billion, with 38 percent estimating the market at between $30 billion and $40 billion. More than 20 percent believe that the PA/MGA market generates GWP in excess of $40 billion.

Profitability perceptions remained fairly consistent with the Guy Carpenter’s 2007 survey. Some 92 percent of respondents estimate a combined ratio for the market of 90 percent to 100 percent, with 68 percent putting the market at 90 percent to 95 percent.

Respondents identified their primary challenges as new business production (77 percent), premium growth (66 percent) and maintaining rate levels (58 percent). The survey also identifies the compatibility of systems as an increasing challenge, given carriers’ increasing flexibility in the use of front-end rate, quote, bind, and issue systems.

Other Findings

Survey results indicate interest in programs of almost all sizes. Eight percent of the respondents are targeting programs with GWP below $5 million, while 12 percent are seeking programs of greater than $20 million in GWP. The remaining 80 percent seek program sizes between the two extremes.

Across commercial lines, 2008 was largely consistent with 2007. PAs and MGAs remain focused on growing the same lines of business, particularly inland marine, property and auto liability.

The survey indicates a growing interest in the homeowners segment (up to 31 percent from 21 percent in 2007), while interest in auto dropped from 30 percent in 2007 to 15 percent. Personal umbrella is another growing area.

Carriers continue to be flexible with regard to system use and claim handling. Over 80 percent of respondents expect the PA/MGA to underwrite, rate, quote and bind the business, as well as issue and service policies. Other services, such as loss control and premium audit services, remain important to some carriers. Respondents continue to have robust procedures in place to monitor results and control the processes involved in working with PAs and MGAs.

A large majority — 72 percent — of respondents indicate an interest in M&A, with 54 percent focusing on acquiring other PAs/MGAs, and 39 percent interested in carriers. 23 percent would like to acquire wholesalers.

Source: Guy Carpenter & Co.

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