Dedicated insurance programs are an excellent way for independent agents and agencies to set themselves apart from their competitors and help grow a specialized, renewable and, potentially, profitable book of business.
In addition to conventional commissions on premiums, with some carriers there may be opportunities to take an equity position in the program.
In the first article of this series, we provided a summary review of how to prepare the program submission. We covered the expected timeline—the basic format and necessary content for the submission, as well as how to package the submission for its review by prospective partners.
With the submission now in hand, it is time to identify, approach and work with your program’s prospective carrier partner, the first phase of which is discovery and due diligence.
Finding the right fit
As an agency develops a book of specialized business, it may already be thinking about program status and may have already made a preliminary exploration for possible insurance carrier partners.
There are several paths to finding a program carrier—the current list of carriers with which your agency already does business, or reviewing the websites of carriers to get an idea of their appetite for programs.
Be careful approaching your existing markets, as you may tip them off that you are thinking of moving your business. Also be careful dealing with your current markets’ competitors, as this may prove politically complicated.
Industry resources such as insurance publications and directories can provide guidance. Websites and publications of such organizations as the American Association of Managing General Agents (AAMGA), National Association of Professional Surplus Lines Offices (NAPSLO), Target Markets Program Administrators Association (TMPAA) and other national underwriting associations can be a good source of leads. Finally, rely on mutual contacts in the insurance industry, including reinsurance brokers and business consultants who specialize in bringing parties together.
How to select and manage working with a broker/intermediary and do you use one or more?
Make sure you clear any conflicts before going too far. It is recommended that you formally assign or designate to each broker the specific carrier markets you would authorize them to approach on your behalf.
While conducting this search, look for carriers with a compatible business model; expertise in your program’s specific line of coverage; favorable support including applicable reinsurance, infrastructure and operational flexibility; appropriate product filings and pricing parameters; and, perhaps most importantly, a shared vision for business success.
What is the risk/reward for you working with the prospective carrier? Do you know each prospective carrier’s projected combined ratio, coupled with the expense factors of your business?
Discovery and due diligence
Once a formal request to review a program submission is made by an agent to an underwriter, an initial conference call will often take place to review the program. Be candid. What are your program’s strengths and weaknesses? What are you doing to solve/address challenges?
Don’t hide anything that will ultimately be found out with due diligence. Tell the whole story, not just the up-side. Give yourself a “reality check”—is what you write what you do and is it accurate?
If both you and your prospective carrier agree to continue discussions in more detail, often both parties will enter into a confidentiality agreement. On the agency side, your program submission may offer valuable insight and data on a market segment not previously considered by the carrier. The confidentiality agreement protects the agency while it too is exposed to certain information that the carrier understandably wants to protect.
The SWOT assessment
The carrier will first begin a formal assessment of the program’s strengths, weaknesses, opportunities and threats (SWOT).
From the carrier’s perspective, potential strengths of the submitted program might include the program’s record of steady growth in number of insureds and premiums; favorable claims history backed by excellent risk prevention; or its sophistication (a specialized class of insureds or some area of the economy in high demand).
Is there demonstrable expertise present? What are the barriers to entry that prevent others from replicating your program?
On the other hand, a search for weaknesses might reveal that the group of insureds is too few or too new for the carrier to be comfortable with the premium, loss and claims trends—or that the program insures a volatile or vulnerable segment of the economy.
The opportunities inherent in a submitted program can include the way it complements the carrier’s existing business; access to a new and desirable group of affiliates; its geographic distribution; or cross-selling potential with already established carrier programs.
There are several possible threats or “stoppers” to a carrier taking on an otherwise sound program. These generally fall into four categories:
•There is an internal conflict to an existing book of business; or the program could even conflict with another book of business which the carrier’s agency partner has with another carrier. In this case, the carrier doesn’t want to risk jeopardizing another existing agency program or relationship.
•The regulatory environment and geographic distribution. For example, the difficulty in writing medical malpractice can vary quite a bit from state-to-state.
•A class of business that might give a carrier’s reinsurers cause for concern. The underwriter is already writing large exposures in that area, or a class of business the carrier is not authorized to write with its reinsurers, is a potential issue.
•The acquisition or implementation costs don’t justify the potential volume of premiums.
In many cases, if the program submission is not accepted by a given carrier, it doesn’t necessarily mean that it is an unsound program. Rather, the agency needs to find the “right fit” for its given program.
A look at the numbers—the actuarial assessment
Once a program passes SWOT, the carrier will run a detailed actuarial analysis. This is really the first hard look “at the numbers,” and will include, but is not limited to, such areas as:
•Program parameters like average account size; lines of business (LOB), classifications and rating class codes; eligibility guidelines; list of forms, endorsements and applications; primary limits by LOB; and rates.
•Program experience in relation to total written premiums (annualized basis and inception-to-date); premium history and policy count by year; hit ratio and renewal retention ratios; rate and pricing change history; loss ratios (pure and ultimate); and premium projections.
•Claims handling history, including loss runs by LOB (typically, five years currently-valued hard copy); claims information (paid losses, number of claims, reserves, etc.); and a summary of large losses.
The carrier’s actuarial analysis might be strengthened if the program submission included its own independent actuarial analysis, best done by an actuarial firm specializing in the insurance industry.
Carriers really want to know that their program administrators have a realistic assessment of their experience and, in result, are proactively underwriting to reach their targeted goals.
Home and away
If the program looks good, the carrier will next schedule a “home and away,” perhaps even before the actuarial assessment is complete. The first part, a visit by the agency to the carrier, will be a chance for management and staff on both sides to meet face to face. In particular, the agency can get an overview of operations at the carrier and meet some of the people it may be working with in the future.
After this, the carrier will schedule an on-site visit to the agency and pull prospective account files to take a good look at the breadth and depth of agency underwriting.
There are a handful of documents that your agency will need to have readily available for the carriers to review and reference. These include, but are not limited to: all applicable state insurance licenses, audited annual income and balance sheet statements, staff resumes, and any pertinent vendor contracts (such as processing systems, association endorsements, and loss control service providers). Making these documents conveniently available and accessible via a digital data-room may prove to be an informed way to address routine requests for documentation.
The program has been formally submitted to a carrier. The parties have talked on the phone. The carrier has conducted its SWOT assessment and is well underway with a detailed actuarial assessment. Additionally, the agency and underwriter have met face to face on both home courts.
What’s next? In the third article in this series on program submission, evaluation and implementation process, we will discuss the more detailed financial and insurance reviews that come next. They include department reviews within the carrier, financial modeling, discussion about compensation and a risk management review.
Phillip J. Gajewski is AVP of Business Development for Southfield, Michigan-based Meadowbrook Insurance Group, Inc., and can be reached at firstname.lastname@example.org or (248) 204-8276. For more information, please visit www.meadowbrook.com.