Some Programs Managers Still Out Of Luck

Experts say start-ups, workers' comp, small programs havetrouble finding a home

While a survey published in May suggested that programadministrators are having little trouble finding insurers to signonto their programs, that's not universally true, experts say.

“An underlying assumption…is that prior to any issuing carrierconsidering a new program opportunity, [the carrier] expects thatthere is historical data available that would support the program'sultimate expected loss ratio, rate levels and profitability,” saidCarl Bach, who heads Guy Carpenter's Program Manager SolutionsSpecialty practice. He noted that Guy Carpenter's recent survey ofcarrier appetites did not directly address the issue.

“If you don't have data and expertise, the [other] surveyresults are moot,” he said. In fact, “a start-up program is next toimpossible to place,” he added, unless the program administratorhas done market research, can draw upon Insurance Services Officeor National Council on Compensation Insurance data, and can showquantitatively why the program will be profitable.

Carrier executives interviewed by National Underwriter said theywould entertain start-up programs under certain circumstances.

“It depends who the people are,” said William Berkley, CEO ofW.R. Berkley Corp. in Greenwich, Conn. “If they're bringingparticular expertise from past lives that's perfectly applicable towhat they're doing, sure I would.” If, instead, someone says, “'I'mbrilliant, [but] I've never done anything like it before,' then no,we wouldn't have any interest,” he added.

Robert Groff, vice president of the programs division of ACEWestchester Specialty in Philadelphia, agreed. “With any of those,they've got to have a good, sound business plan [and] marketingplan,” he said, adding that ACE would need to be convinced that theclass is underserved.

According to the Guy Carpenter report, carrier appetites vary byline of business, with 95 percent of respondents saying they wouldwrite general liability, while only 38 percent will write workers'compensation.

Doug Bennett, senior vice president of Benfield ProgramSolutions in Westport, Conn., observed that “there tends to be alot of companies interested in the same types of programs,” such asspecialty general liability, specialty property and non-medicalprofessional. There's still a shortage of capacity for workers'comp programs, those that have heavy commercial auto exposures, andumbrella and excess programs, he said.

He added that insurers typically look for largeprograms–starting at $10 million, or even at $20-to-25 million fornational programs. Programs smaller than $10 million represent “anarea of opportunity for carriers,” he said.

Both Mr. Bennett and Mr. Bach said there are new marketsparticipating in the program arena. Mr. Bach said that at the timeof the survey there were four–three of which had developed out ofknown reinsurance markets, and one a traditional insurer that hasexpanded into the program market. (Keeping identities of allcarriers confidential was a condition of the survey.) Mr. Bennettsaid that some London markets now have onshore capacity, andBermuda companies, including Axis and Aspen, have entered.

At least one Bermudian–Arch Capital–scaled back relationshipswith some managing general underwriters last year. In February,during an earnings conference call, Arch CEO Constantine Iordanousaid that of 14 MGU relationships existing at the beginning of2004, only eight were in place by year's end. “We like what wehave, but we don't want to have a significant part of the businessof this company subject to contractual agreements–where they [MGUs]can walk out at any time subject to no notice,” Mr. Iordanousaid.

While most market experts said that competition has increased inthe program business segment, Mr. Berkley sees different trends.“At the moment, more people are leaving the business than goinginto it, because it's a hard business to control,” he said. “Buttraditional markets are competing against the specialty niches morenow,” he added, noting that this is happening in all specialtyareas, not just programs.

“Other specialty insurers aren't being aggressive competitors.It's standard markets that are being stupid [and] coming intothings they don't know anything about.”

The Guy Carpenter carrier survey, in addition to looking intoappetites by line, includes information about service expectationsand control processes. The survey reported that over 75 percent ofcarriers expect or allow program managers to perform theunderwriting function (81 percent) and issue policies (76.2percent).

“We found that the traditional insurers that have specialtyprogram units tend to give up less underwriting authority than thetrue specialty carriers,” Mr. Bach said.

With respect to claims handling, the survey found that 75percent of responding carriers won't allow the use of a third-partyadministrator owned by an MGA. Benfield's Mr. Bennett explained:“There's been some bad experience historically where programmanagers handle claims and also set reserves. There's a potentialinherent conflict.”

Mr. Bach added that if there is a financial issue at the MGA,the carrier “not only gets hit with the financial impact of theflow of premium but also has issues with the financial strength ofthe claims TPA.”

Carrier executives interviewed by NU described expectationsabout program manager services that were in line with surveyresults but stressed control processes they have in place toscrutinize performance.

At Clarendon, Chief Program Officer Juergen Lang said there'sbeen more monitoring of general agents during the past three years.“In each area–underwriting, claims, financial, data processing,regulatory compliance and actuarial–we do at least one audit peryear,” he said, noting that larger programs may have quarterlyaudits. On the other hand, for those MGAs with whom Clarendon hashad long-term relationships, fewer audits are needed. “It dependson how familiar we are with the operation and what previous auditsproduced,” he said.

Mr. Berkley said his company oversees accounting and claims, andthat all payments go through its system. In addition to audits,company representatives “just visit” program managers. “We get toknow them and they get to know us. We don't just do audits sittingin our office, having them send us data. We have people go out totheir locations and sit and talk,” he said.

Are carriers doing enough monitoring? “That's a fundamentalquestion,” said George Lagos, CEO of Syndicated Services Company inManchester, N.H. While it's impossible to answer for the industry,he said “an energetic audit process is critical.”

“I don't mean…a police-type function,” he added, describing anineffective process where a carrier “sends out an auditor, whojustifies his existence by finding a bunch of things wrong” andreleases a report 120 days later. “There's no implementation orfollow-up”–and the same issues are bound to arise on the nextaudit, he said. “The point…is to improve operational capability, sothe quality of services improves.”

While Mr. Berkley and Mr. Lang also described profit-sharingcommission arrangements used to align carrier and MGA interests,the Guy Carpenter survey revealed that nearly half (48 percent) ofrespondents are still paying flat commissions.

Flag: The Survey Says

Head: Growth Projected

Guy Carpenter's May 2005 “Issuing Carrier Survey” exploringcarrier appetites in program business found the following keyresults:

70-80:

The total number of new programs that responding carriersproject they will write as a group in 2005.

$20-$40 Billion:

Gross written premiums in the specialty program marketplaceestimated by nearly three-quarters (72 percent) of surveyrespondents

81 Percent:

Percentage of respondents indicating they expect or allowprogram administrators to perform the underwriting function.

11:

Eleven out of 23 respondents–nearly one-half–still pay flatcommissions.

70 Percent:

Percentage of respondents indicating that AAMGA and NAPSLOmeetings nurture program business relationships.