Educational Article Series: Program Business—From Submission to Finish Line

Part 5: A Review

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 underwriters, there may be opportunities to take an equity position in the program.

In this article, we will provide an overview of program development steps.

The program submission

The 30-day to 6-month timeframe it takes to develop a submission will reflect the complexity of the program and its inherent underwriting issues, the existing quality of the agency’s information management systems, and agency resources that can be devoted to the project. An independent actuarial analysis and review by an accounting firm with insurance industry expertise may be helpful.

With information gathering and analysis complete, the core components of the program submission are then assembled for presentation to a prospective carrier. The elements of this presentation include an executive summary, distribution, underwriting, claims experience, program experience, actuarial information, agency profile, and competitive market intelligence. This last item, competitive market intelligence, is one of the most telling parts of the submission. Here, the agency makes its case for the program in terms of the current and potential market for the coverage line, backed by applicable market research. This section must also include an honest analysis of competitive products and competing agencies.

The right fit

It is now time to identify, approach and work with the program’s prospective underwriter, the first phase of which is discovery and due diligence.

In conducting the search for an underwriting partner, look for carriers with a compatible business model; expertise in your program’s specific line of coverage; favorable support, infrastructure and operational flexibility; appropriate product placement and pricing parameters; and, perhaps most importantly, a shared vision for business success. 

Today, submissions are made electronically, through secure web-based data channels. Upon submission, the parties will enter into a confidentiality agreement and, possibly, an additional non-compete agreement. This formal request usually leads to a conference call and, if there is enough interest on both sides, the submission is brought to life. 

The SWOT assessment. 

The carrier will then begin a formal assessment of the program’s strengths, weaknesses, opportunities and threats, also known as a SWOT assessment.

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, i.e. a specialized class of insureds in advanced technology or some area of the economy in high demand.

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 range of programs; access to a new and desirable group of affiliates, i.e. professional organizations with which the agency has relationships; 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.  Examples include a conflict with a carrier’s existing business, regulatory or geographic distribution issues or reinsurance objections. 

Thus, a sound program unaccepted by one carrier may find its proper match with another one.

The actuarial assessment 

Once a program passes the SWOT assessment, the carrier will perform a detailed actuarial analysis.  This analysis will be organized under the broad areas of program parameters, including items such as average account size and rates; program experience, including total written premiums, hit ratio and renewal retention ratios; premium history, loss ratios and future projections; and claims-handling history, including loss runs by lines of business (LOB).

Home and away

If things look promising, the underwriter will next schedule a “home and away,” often before completing the actuarial assessment.  The first part (home), 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 they may be working with in the future. 

If all goes well on this visit, the carrier will schedule an on-site visit to the agency (away).  The carrier will likely pull prospective program files and take a good look at the breadth and depth of agency underwriting.

Finalizing due diligence

By this time, both parties will have a good idea if there are solid grounds for formalizing the program and introducing it to the market place. 

If so, the agency and the carrier should execute a non-binding program proposal in writing.  In a way, this is now the agency’s turn at due diligence.  The agency should make sure that the carrier is completely identifying all elements needed to bring the program to market and that it has the capability to successfully bring them off.   

This is an important stage of program development, as it begins the transition from how the agency has been doing things on its own to how the new partnership will handle specific program areas.

Financial modeling

This analysis will include the projected expense structure, the premium projections by lines of business and states, as well as the projected loss ratio.  While the carrier will examine the historical loss pick, it is equally, if not more, important to derive a projected loss pick. 

This look forward, the projected loss pick, will take into account such factors as overall insurance industry market conditions, competition within the program category, more recent loss trends and specific activities and risks of the industry or service group being insured, and the overall economic potential of the industry or service being insured.

The agency and carrier will now have a clear expectation for the program’s combined ratio.  This calculation serves as both a benchmark for the program, should it go forward, and the starting point for negotiating compensation and other final matters.

Negotiating compensation

The agency’s program submission will normally include a detailed compensation request, which helps the carrier understand program expectations from the agency’s view.

Compensation plans for most programs will have a base commission comparable to conventional premium-based retail commissions.  Subject to negotiation, the program administrator can further be compensated for insurance services that it provides related to policy issuance, premium audits, claims coordination and loss control services. Most carriers will retain responsibility for re-insurance.  Last, the agency may negotiate incentive compensation, typically based on premium growth, meeting combined ratio (ROI) objectives and growth in the quality of the insurance book. 

An important goal in negotiating compensation is to establish a reasonable loss fund, while making sure that each party, agency and carrier, perceives that they are entering into a win-win relationship. 

The final negotiations should also make clear issues of trademarks, branding and related intellectual property, as well as define the conditions under which the agreement may be terminated.

Implementation

This is a complex process, best done through a rigorous, check-listed methodology. Important elements include necessary authorizations (agency contracts), which will include the basic agreement between agency and carrier and any necessary profit-sharing, re-insurance and claims contracts; an official agency appointment by the carrier; and underwriting guidelines and authority.

Next come formal operational aspects of the program, including forms and pricing; state filings, which should follow a carefully determined strategic pattern; how claims will be handled; and the loss control and risk management functions. During this phase of the submission process, the agency and carrier will also outline the program’s billing responsibilities, authorities, fees and reporting systems.

Support

Support aspects of implementation are the program’s technological and functional infrastructure and marketing. The former will include the rate, quote and issue (bind) system; programs that track performance parameters like premium growth, claims and claims paid; and regular reporting that will be used to direct the overall management of the program. 

Most carriers will have an experienced corporate communications team that will be a valuable resource for the agency.  Marketing materials may include brochures, flyers, a program-specific web site, e-mail blasts and social media strategy. The carrier can also help with presentations to prospective client groups and attendance at trade conventions.

Finally, it is important to carefully present the change in carrier to a program’s existing clients, including items like any changes in A.M. Best rating, payment procedures or claims procedures. This is usually done at policy renewal.

It’s a complex process developing the program, establishing contracts and underwriting guidelines, gaining needed regulatory approvals, setting up all necessary infrastructure and establishing processing and reporting systems. 

The care taken during implementation, buoyed by a growing rapport between agency and carrier, will be rewarded in the marketplace with a program that serves all parties, including insureds, in the ways intended.

Archie McIntyre is senior vice president of business development for Southfield, Michigan-based Meadowbrook Insurance Group, Inc. and can be reached at archie.mcintyre@meadowbrook.com or (248) 204-8518. Timothy J. Harkins is vice president of business development for Meadowbrook and can be reached at tharkins@meadowbrook.com or (248) 204-8170. Phillip J. Gajewski is assistant vice president of business development for Meadowbrook and can be reached at pgajewski@meadowbrook.com or (248) 204-8276.

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