With chatter about the next market turn heating up, it's a goodtime to explore the potential impact on program business—to see ifthere could be a replay of the gut-wrenching turmoil that left someprogram administrators (PA) out in the cold during the lastsoft-to-hard transition.

Just how rough was the last such turn? NU's June 12,2002 edition, displaying an image of a PA wearing a sandwich boardthat said “Markets Wanted For Program Business,” told the story ofbankrupted program carriers—and some that abruptly exited thebusiness—leaving PAs desperately searching for new markets.

Thanks to changes in the way program business is conductedtoday, experienced niche-market participants don't anticipatewidespread damage like that seen a decade ago.

But the turn will still prove traumatic for some, observerspredict.

NO FRONTING, NO PROBLEM

One reason why history is unlikely to repeat itself is theabsence of the “fronting model” popular back in the last 1990s.That is one big distinguishing factor between now and then, marketparticipants say.

Wayne Carter, EVP at 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 paying claims, it was “a house ofcards,” recalls Andrew Burger, VP of Gill & Roeser. “Themarketplace was not terribly sophisticated,” he adds, referring toa lack of actuarial analytics and technology to supportunderwriting decisions—and describing an environment where programpartnerships between reinsurance intermediaries, carriers and MGAssprung from “old school ties” rather than specializedexpertise.

That contrasts sharply with the current environment, where“companies are just a lot smarter and the technology moreadvanced,” says Steve Dresner, head of the specialty insurancebusiness unit of Endurance. “All of our key competitors are takinga lot more risk up front and managing the programs better than areinsurance company could.”

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 [and] you can driveunderwriting control and profitability.”

“Today, there's not as much reinsurance,” says Bob Kimmel,EVP/program specialty practice leader at Guy Carpenter, who authorsthe firm's annual survey of program-business carriers. Becausecarriers are keeping the business net, he believes they do more duediligence before signing on to programs and more closely monitorthose on the books. Six years ago, half the market was doing onlyone underwriting audit each year. Now the majority do at least two,he says.

THE MORE THINGS CHANGE…

While the carnage likely will be more contained this timearound, casualties will occur.

“You can still find a way to build a bad book of programbusiness,” says George Lagos, principal of GL Insurance Partners.“If you look at the quality of books of various companies, they'renot identical,” he adds, noting that while some carriers haveseasoned books and longstanding relationships with PAs, others arebreaking into the segment. “Inevitably when you're in thatposition, you don't attract the big, stable programs. You end upworking with those on the other end of the [spectrum],” hesays.

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 aredoing things that are strictly driven on volume.”

But Bob Abramson, managing director of Bliss & Glennon,disagrees. “The market won't change until the Legions of the worldgo broke,” he says, referring to a renowned past insolvency. “I'vebeen in this business 34 years and have never seen the market turnwithout carriers going down.”

Another notorious feature of the past cycles—“naïve capital”—isabsent in this one, says Crump's Carter. But there is still toomuch capital and aggressive competition. Even though there are morepeople with expertise in the business today, insurers are “actuallyforced, probably against their better judgment, to drive premium[volume] into their operations to satisfy commitments [toinvestors].”

The competitive dynamic is different, but “the end result isexactly the same [as during the last turn]—too many dollars chasingtoo few accounts,” says Carter.

That means carrier exits “will have to happen” when lossesemerge on underpriced business. “Eventually they're either going topull the plug or shut their doors because they're upside down withrespect to results,” he says. “We're seeing too much irrationalbehavior from certain markets. And it's classic. It always comesfull circle.”

RETRENCHMENT VS. RETREAT

Are some carriers already starting to exit?

“I do see it. It's happened to me already this year,” says Gill& Roeser's Burger, who described carrier moves as“retrenchments” rather than wholesale exits.

Only RenaissanceRe has completely exited, announcing the sale of itsprogram business operations to QBE in November 2010.

But Burger says insurers are moving off unprofitable programsquickly. Before, they might have given a program manager a year tofix things. Then it was two quarters. Now, they're withdrawing in90 days.

“They're raising the bar regarding information and returnrequirements, and that's starting to be more ubiquitous,” hesays.

In contrast, Kimmel of Guy Carpenter says carriers are “hungryfor the business” even though they recognize that underwritingprofits are disappearing. Two years ago, only 8 percent of programcarriers pegged the program market combined ratio above 100. Thisyear 30 percent put it there, he says.

Kimmel also reports, however, that as loss ratios climb,carriers are working the expense side of the combined ratio. Theyexpect PAs to take on more responsibilities than in the past—forpolicy issuance, loss control, premium audit, claims—and to do sofor the same commissions, he says.