Compatibility Key To Program MarriageSuccess

Reinsurance brokers can play essential matchmaker rolein program community

Program business can be a source of revenue and profits foragents, insurers and reinsurers. But a profitable relationship willnever develop if the partners are not initially compatible.

Thats why professional reinsurance intermediaries who work withprogram managers do more than simply search for insurers andreinsurers in a marketplace that has thinned out in recent years.Like matchmakers, reinsurance brokers essentially work to joinprogram managers with the right insurer and reinsurancepartners, so that marriages can survive over the long term, inspite of challenges.

Program business, by definition, can describe varying aspects ofthe insurance industry. The term as used here denotes that businesswhich is produced and underwritten by a program manager on behalfof an insurance company. This business is usually homogeneous innature and has a proven track record that differentiates one MGAfrom another. The MGA in question would also have policy issuancecapabilities, and in some instances claims handling authority aswell.

Historically, many insurers viewed this business favorablybecause programs are developed by program managers with strongunderwriting expertise in a particular class of business. In manycases, program managers can underwrite the business more costeffectively and efficiently than the carrier itself.

When an insurer or reinsurer commits to a program, the insureror reinsurer is generally doing so based on the underwriting acumenof a particular program manager. Although program managers maysuggest rates and draft underwriting guidelines, the finaldecisions are generally made by the insurer.

In the past, most program managers did not bear any of thefinancial risk for their program business. Today, however, more andmore program managers bear financial risk either through asliding-scale commission or through a rent-a-captive facility ortheir own captive insurance company.

(Typically, in a sliding-scale commission arrangement, theprogram manager is rewarded or penalized for its underwritingresults through a formula that varies the commission rate inverselywith the loss ratio, subject to a minimum and maximum. The scalesare not always one-to-one. For example, as the loss ratio decreasesby 1 percentage point, the ceding commission might increase only0.5 percentage points.)

Placing program business in today's marketplace can be a realchallenge. While insurance pricing, terms and conditions havechanged dramatically over the past few years, changes in theprogram business environment have been even more pronounced, andhave evolved more quickly, than pricing and conditions in thetraditional areas of underwriting and business production.

All of these changes plus reinsurance problems, reserveincreases and the losses resulting from the Sept. 11, 2001 attackscaused many insurers to reallocate financial assets back to theircore businesses, thus abandoning the program business marketplace.Other insurers cut back on the number of programs they would write,while some were downgraded by the rating agencies and thereforerendered ineffective.

The result is a contracted marketplace for program business.Those markets that remain are quite sophisticated in theimplementation of a program, which is a far more complex processtoday than it was five years ago.

Turnaround time on program business has slowed considerably,with more and more empirical data being required before acommitment can be made. Actuarial reviews have become an importantpart of the analysis for all programs and the cost can besubstantial.

Insurers generally require a track record of at least five yearsof historical underwriting and need to know estimated loss costs aswell as projected underwriting profits. Without this statisticalanalysis, many viable opportunities go to the bottom of the pile ofsubmissions and never get considered.

Those programs that do pass initial muster by an insurer thenendure a lengthy review of all aspects of the opportunity,including a due-diligence review of the underwriting files,financials, systems, primary rate structures, management,underwriting and investment strategies. In this environment,start-ups are nearly non-viable due to the time and expense of theprocess. When a rent-a-captive or captive is involved, afeasibility study, with actuarial and financial projections, ismandatory.

The Role Of Reinsurance

Reinsurance plays an important role in the placement of programbusiness, and more importantly, in the longevity of a program. Inmany instances, it can be the determining factor in the ultimatesuccess of the program opportunity.

Many program carriers do not have corporate treaties in place,so program-specific reinsurance is essential on the front-end ofthe process. Once the program is bound, the reinsurance underwriterbecomes another set of eyes and ears, and brings added value to theprocess based on its own underwriting expertise for the class ofbusiness underwritten. The combination of the carrier, reinsurerand MGA working toward a common goal represents the best formulafor the long-term success of any program opportunity.

Further complicating program business, reinsurance prices beganrising in mid-2001 with the arrival of the hard market. Securityissues surrounding reinsurance companies became more and moreimportant, and reinsurers began requiring insurers to retain moreof the risk.

Prior to 2001, insurers generally bought pro-rata reinsurance ontheir program business risks and some covered 100 percent of therisk with reinsurance. Today, its nearly impossible to find areinsurer willing to assume 100 percent pro-rata reinsurance.Generally, reinsurers now favor excess-of-loss reinsurance, ratherthan the pro-rata approach.

Making A Match

Programs need to be structured in such a way as to workfinancially for the program manager as well as the insurer and thereinsurer.

The reinsurance broker is an asset to the program manager infinding the right partners for the program and structuring a dealthat works for all parties involved. This is because brokers haveextensive market relationships and can identify a number ofpotential insurers and reinsurers for a given class of business.Once the insurer has been identified, the broker then places theprogram-specific reinsurance.

The intermediarys matchmaker role is crucial. If the insurer andthe program manager are not compatible, the program will more thanlikely need to be re-marketed sooner than expected, and this is thelast thing a program manager wants to see happen. A professionalreinsurance broker can greatly reduce the risk of this type ofupheaval.

In sum, a reinsurance broker places the insurance andreinsurance, and can be essential to the long-term success of aprogram. Further, working with a professional reinsurance brokershould provide the program manager with more input and more controlover the program in the long term.

Kevin R. Kennedy is a senior vice president of Gill and RoeserInc,. a reinsurance intermediary and financial advisorheadquartered in New York. He can be reached at [email protected]. Mr.Kennedy was assisted by members of the Program Business Group ofGill and Roeser in completing this article.

Reproduced from National Underwriter Edition, May 14, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.