With chatter about the next market turn heating up, experiencedniche-market participants don’t anticipate a replay of thegut-wrenching turmoil that left some program administrators out inthe cold during the last soft-to-hard transition.

But that doesn’t mean there won’t be program books in need ofrepair or even that some carrier retrenchment from theprogram-business segment isn’t happening already, they say.

Just how rough was the last turn?

NU’s June 12, 2002 edition, displaying an image of aprogram administrator wearing a sandwich board that said “MarketsWanted For Program Business,” told the story of several bankruptedprogram carriers—and others that abruptly exited thebusiness—leaving managing general agents (MGAs) to undertakedesperate searches for new markets.

The absence of the “fronting model” popular back in the last1990s is one big distinguishing factor between now and then, marketparticipants say.

Wayne Carter, EVP, Crump Professional Programs, recalls that“back then, in many situations, the risk bearer was the reinsurer.Occasionally, you would have the MGA take a piece of the action.But often, the insurance company didn’t take any risk, which is whythey were called fronting arrangements.”

When reinsurers stopped payingclaims, it was “a house of cards,” recalls Andrew Burger, VP, Gill& Roeser.

Carter adds that managing general underwriters—a term hereserves for MGAs with specialized underwriting expertise—were theexception, not the rule in the late 90s. Instead, there was aproliferation of MGAs that “were an outgrowth of agents andbrokers,” controlling a “tremendous amount of capacity. Those twothings don’t necessarily mix well from an underwritingprofitability standpoint.”

Burger says “the marketplace was not terribly sophisticated” inthe l990s, referring specifically to the lack of actuarial modelsand mapping programs to support underwriting decisions.

“Underwriting managers did not have the equipment, the IT, theunderwriting talent for the most part,” he says, adding thatpartnerships between reinsurance intermediaries, carriers and MGAssprung from “old school ties”—situations where they may have workedtogether at a company together or a brokerage firm.

“There was more of a push for top-line growth,” Burger recalls.“Cash-flow underwriting was more or less an accepted practice” at atime when interest rates and investment returns were higher.

Contrasting the current environment, SteveDresner, head of the specialty insurance business unit ofEndurance, says “companies are just a lot smarterand the technology is a lot more advanced.”

“All of our key competitors are taking a lot more risk upfront and managing the programs better than a reinsurance companycould,” he adds.

While Endurance has both insurance and reinsurance operations,“in the program space we primarily play on the insurance side,” hesays. “That’s where you’re closer to the market. It’s where you candrive underwriting control and profitability.”

“Today, there’s not as much reinsurance,” says Bob Kimmel,EVP/program specialty practice leader, Guy Carpenter, who authorsthe firm’s annual survey of the program-business carriers. “Most ofthe business is held net by the insurers. You used to see a lot ofprogram-specific reinsurance—quota shares on individual programs.It doesn’t happen as much anymore,” he says.

Because carriers are keeping the business net, Kimmel believesthey do more due diligence before signing on to programs. Theprograms are more closely monitored when they’re on the books, headds, citing a trend in survey results. Six years ago, half themarket was doing only one underwriting audit per year. Now themajority are doing at least two, he says.

NO FRONTING, NO PROBLEM?

“You can still find a way to build a bad book of programbusiness,” says George Lagos, principal, GL Insurance Partners. “Ifyou look at the quality of books across various companies, they’renot identical,” he says, noting that while some carriers haveseasoned program books and longstanding relationships withadministrators, others are breaking into the segment. “Inevitablywhen you’re in that position, you’re not able to attract the big,stable programs. You end up working with those on the other end ofthe continuum,” he says.

Still, Lagos believes the industry will see fewer “spectacularcrashes and burns” during the next turn. The absence of frontingwon’t solve all problems, “but it certainly solves some biggerones,” he says. “That can be a very quick way to get intotrouble—when there’s no alignment of interests and people are doingthings that are strictly driven on volume.”

“The big mistakes that have been made are well known,” heconcludes.

But Bob Abramson, managing director, Bliss & Glennon,disagrees. “The market won’t change until the Legions of the worldgo broke,” he says, referring to one of most renowned insolvenciesof the last turn. “I have been in this business for 34 years and Ihave never seen the market turn without some carriers goingdown.”

(For a financial analyst’s perspective on the proximity of themarket turn and the strength of program business carriers, seerelated article, “NoRed Alerts In Program Business Segment.”)

Crump’s Carter, referring primarily toprofessional liability niches in which he has experience, notes thesignificant amounts of capital—and competition—in both the currentmarket and the late 1990s.

Contrasting the two periods, however, he says there are morepeople with expertise in the business today. “They have a trackrecord. They can tell a good story and they can raise capital,” hesays. “The capital is much less naïve than it was in 1999.”

Still, competition prevails because carriers have madecommitments to investors. “They are actually forced—probablyagainst their better judgment—to drive premium and prices andbusiness into their operations to satisfy those commitments.”

“The dynamic seems to be different now as to what drives thecompetitive positioning,” Carter concludes. “But the end result isexactly the same—too many dollars chasing too few accounts.”

That means carrier exits “will have to happen” when lossesemerge on underpriced business. “Eventually they’re eithergoing to pull the plug or shut their doors because they’re upsidedown with respect to results,” he says. “We’re seeing too muchirrational behavior from certain markets. And it’s classic. Italways comes full circle.”

EXIT RAMPS CLEAR, BUT…

Burger sees exits coming sooner than others. “I’m not going toname names, but it’s happened to me already this year,” hesays, going on to describe carrier moves toretrench rather than wholesale exits.

Only RenaissanceRe has completely exited, announcing the sale of itsprogram business operations to QBE in November 2010. (RenRe CEO Neill Currie explained the move toNU in March. See related article, “RenRe’sCEO Explains U.S. Ins Ops Sale.”)

But Burger says insurers are moving off unprofitable programsmore quickly than in the past. Before, they might have given aprogram manager a year to fix things. Then it was two quarters.Now, they’re withdrawing in 90 days.

“They’re raising the bar regarding information and returnrequirements, and that’s starting to be more ubiquitous,” hereports. “Companies are starting to say, ‘No, we don’t envisionwe’ll get our market share,” or “we can’t get our ROE,” or “youdon’t have critical mass.”

The business, he says, “isn’t being controlled by underwritersanymore. The business is being controlled by financial peoplemaking financial decisions, not underwriting decisions.”

That can be a bad thing for some programadministrators that have had some misfortune in their underwritingresults, he says. “You could follow all the protocols, all theprocedures, rate it appropriate, have the right risk selection andyou get a bad claim.”

Kimmel says carriers are “hungry for the business” despite theirrecognition that underwriting profits are disappearing. Two yearsago, only 8 percent of program carriers pegged the program marketcombined ratio above 100. This year 30 percent put it there, hesays.

In addition, he notes that three years ago, 60 percent ofcarriers said they wanted MGAs to use their systems. Today that’sdown to 6 percent.

“They’re doing things looser. They’re letting the MGAs usetheir own systems. They’re writing the business at higher lossratios, and they’re letting the MGAs handle more of the servicing,”Kimmel says.

That last item actually helps carriers work on the expense sideof the combined ratio. Carriers expect program administrators totake on more responsibilities than in the past—for policy issuance,loss control, premium audit, claims, for example—but for the samecommissions, he says.

Both Kimmel and Lagos said startup programs remain difficult inthis market, since carriers need to look at historical experienceas they perform their due-diligence work. But Lagos adds that he’sseen movement among carriers to entertain what he referred to as“quasi-startups”—startup situations “where there’s some reason tobelieve there’s some volume that would be there at the outset.” Anexample might be picking up an experienced underwriter who canbring a specified amount of business.

Like Burger, Lagos also sees some retrenchment—“a little bitfrom the standpoint of insisting on getting prices up and paringtheir books.”

“Most carriers have had sort of a hunker-down mentality,” hesays. They are trying to “preserve and protect” their betterprograms while “weeding out the ones that can’t hold up in a softmarket.”

“When you get down to the bottom of portfolio, those [programs]that haven’t been able to generate volume or where [carriers] can’tget the pricing they need to generate a profit are the ones mostlikely to be looking for new homes,” he says.

Carter says that while none of Crump’s professional programcarriers has exhibited a desire to withdraw, “we have worked veryhard with several to come up with approaches [to] help drive someless desirable business into competing markets.” He notes thatprogram managers with a lot of experience in a class can analyzedata to identify subclasses “trending in the wrong direction.”

“In a competitive market, price is the bestway to drive business into another market,” he says, revealing thecarriers’ likely follow-up actions.

With respect to lines and classes of business, Burger notes thatprograms are tough to place in regulated lines like workers’compensation—lines where carriers believe they can’t get the ratesthey need.

Also on Burger’s list of tougher program placements aredistressed commercial auto, non-emergency medical transportationand non-supported umbrellas.

Kimmel notes that while carrier interest in lines like auto andhomeowners has been declining in recent years, carrier appetiteshave expanded for medical-malpractice and professional liability(E&O) programs.

According to Guy Carpenter’s survey results, only 7 percent ofprogram carriers said they were interested in personal auto in2010—a sharp decline from 40 percent five years ago. In contrast,Kimmel reports that 85 percent said they are looking formiscellaneous E&O programs in 2010, up from only 40 percentthree years ago.

Giving a carrier perspective, Dresner says Endurance wants to bemore visible in the market, but is very selective. “It’s notsurprising that we have a very small number of programs,” he says,referring to Endurance’s current program book.

“We’ve looked at quite a few opportunities over the past year.Half of them have not gone very far either because there’s lack ofactuarial pricing support or they’re in a class we’re just notreally excited about,” he says, identifying personal lines andworkers’ comp as two of those classes.

Endurance’s first program, written in 2006, was actually aCalifornia workers’ comp program. “We were concerned with themedical trend that we were seeing in the marketplace on compbusiness,” he says, explaining that the insurer has since exitedthe relationship.

The bottom line is the economics of the program and potentialprofit, he says. “We want long-term partnerships. If it’s notprofitable for either the carrier or the MGA, it’s not going to belong term.”

“One reason that the relationships get challenged is when thebooks are not profitable,” Dresner says.

Related articles:

• MGAs Uncork Multiple New Program Niches

• No Red Alerts In Program Business Segment

• RenRe’s CEO Explains U.S. Ins Ops Sale

• Events: Program Administrators To Gather At TMPAA Midyear