While the number of program carriers expanded to at least four dozen in 2008, executives of program divisions say there's no shortage of program prospects coming their way to match the list of insurance suppliers.

“We're not going to suffer a lack of opportunity,” said Scott Reynolds, president of United National Group in Charlotte, N.C., one of 48 carriers listed among current carrier members of the Wilmington, Del.-based Target Markets Program Administrators Association.

“I have already seen a lot of submissions. We've already gone far enough through the process on several to say no, and we're looking at several of the others,” noted Mr. Reynolds, who spoke to National Underwriter just six weeks after joining United National from AmWINS Group.

“We will have opportunity,” added the program specialist, who served most recently as president of the specialty underwriting division of AmWINS before taking the position at United National in July, and as chief actuary at AmWINS for four years before that. “We'll need to see a lot of opportunities, since the success ratio of new program submissions is typically low.”

The reasons carriers give for declining specific opportunities provide insights into broader questions of risk appetite and program requirements, while revealing their capabilities to support particular types of business.

“I don't really even use the word 'decline' anymore,” said Rocco Malandrino, senior program underwriter of Markel Shand in Deerfield, Ill., after he and Henry Lopez, vice president of the program division, presented a number of examples describing how they worked with program managers to find necessary data to get comfortable with programs, or to redefine program boundaries to bring opportunities up to the insurer's required profit levels.

Mr. Malandrino said the only programs that have failed to make the cut at the eight-month-old division targeting professional liability were not “glued together enough.”

He explained, for example, that in some situations, program managers involved did not have the complete endorsement of a professional association or group. Upon realizing that the desired penetration wasn't there, program managers decided not to move forward, prompting Shand to offer different solutions–insuring individual risks on a brokerage basis or providing a master certificate, Mr. Malandrino said.

At American Safety Insurance in Atlanta, Ga., Brad Isaacson, vice president of program business, said his division looks at over 100 deals per year, but typically signs on to just four or five.

Mr. Isaacson–who provided a road map for the decision-making process that was similar for all three insurers–said the first step is to determine whether the program fits the insurer's model.

“Is it the line of business we want to do? Do they [the program managers] want to take risk? Is it in an area we see as being underserved, or is it a vanilla class of business that 50 carriers are in?” he said.

Once a program gets through that first stage–getting the carrier comfortable with the managing general agent and the class of business–the next question to tackle is whether there's enough data for the carrier's actuary to price the deal.

The final question, Mr. Isaacson said, is whether the program is profitable.

o Stage 1: Does It Fit The Model?

Mr. Isaacson estimated that 60-to-70 percent of program opportunities evaluated by American Safety fall out at Stage One.

“They may want to include workers' compensation, or they may say they want to take risk,” but what they're really talking about is a sliding-scale commission arrangement, he said, identifying two program characteristics that fall outside his company's model.

At American Safety, “the cornerstone of our model, what really differentiates us is that we have a risk-participation model,” Mr. Isaacson noted. “The MGAs we partner with have confidence in their ability to make an underwriting profit over the long term and have a desire to take a true risk position on the back end. They act as a reinsurer to the program and share in its profits.”

Mr. Isaacson said the insurer looks to team up with program administrators that have expertise in a specialty niche class of business. “We strongly prefer our programs to be written on nonadmitted paper,” he added. The company has admitted capabilities in 47 states; however, the flexibility of coverage and rate makes nonadmitted the preferred solution, he said.

American Safety–which has been involved in programs for 10 years and currently writes 15 for roughly $80-to-$85 million in premium volume–has traditionally entertained general liability and professional liability lines, he said.

The company recently moved into property as well, he said, noting that this allows his division to look at package deals–with property and general liability or inland marine components.

Expanding on the virtues of a risk-participation model, Mr. Isaacson said it aligns all parties toward the same goal–profitability. With an alternative non-risk participation model, “there's a built-in dynamic between the MGA and the insurer” that rewards the MGA for growing the program, he explained. “They're rewarded on commission dollars.”

“While we certainly encourage growth, when it's time to sign that quote, we want them thinking, how profitable is this program going to be for me–as an MGA, and for my insurance company and reinsurance partners,” he added.

Mr. Isaacson said American Safety has a segregated-cell captive facility that is used for a number of program deals, but the company is open to the use of any reinsurance vehicle. “We've got MGAs that have their own insurance companies, others that have their own captives, and others have their own segregated cell,” he noted.

The amount of risk an MGA takes varies, [but] at the end of the day, what we're looking for as a company is enough risk participation to be meaningful for the MGA,” he said. He explained that the actual amount depends on the appetite of the MGA and its ability financially to take risk.

An MGA that has a limited amount of capital, for example, can't take 100 percent quota share of the first $250,000, he said. On the other hand, an MGA with a strong balance sheet may not be meaningfully impacted by a 5 percent quota share, he added, noting that percentages on current deals range from 5-to-10 percent up to 70-to-80 percent.

At United National, Mr. Reynolds said the company, over the last six years, transformed from one that “basically fronted and relied heavily on the expertise of reinsurers, to a carrier that traditionally backs programs [and] supports program managers.”

“That's the path forward,” he added–noting, however, that other aspects of the carrier's program appetite are not traditional.

“We're not looking for standard classes. We're looking for unique classes of business with class experts–people who have backgrounds in something that you're not going to find in a typical underwriter,” Mr. Reynolds said, highlighting the largest of the company's 15 programs–for horse mortality–as the epitome of what the company seeks to do.

Other current United National programs include health clubs, pawn shops, archery facilities and manufacturers, according to company's Web site.

“There are a lot of vanilla programs that come across your desk. I'm not interested in those because they're also coming across another couple of dozen carrier's desks, and I don't want to be the low bidder,” Mr. Reynolds said.

Mr. Isaacson said current programs at American Safety include property and liability coverages for pest control operators and inspectors–the company's longest-standing program–and four contracting programs. The latter are consistent with core strengths of American Safety, which started out as a specialist in contracting and environmental coverage.

“We also do some very niche specialty programs, he said, offering a small program for [parent-teacher associations and organizations] as an example, and a West Coast real estate E&O program.

At the Shand division of Markel, 30 years of expertise in the professional liability arena puts the program spotlight on that specialty as well.

But with 130 lines of business written across all of Markel's operating units, and a new strategy in place to offer customers the entire breadth of Markel products, “we could find a home for virtually any product that a program manager brings us,” according to Mr. Lopez. (For more on Markel's new strategy, known as Atlas, see NU, Sept. 22, page 20.)

Indeed, Mr. Lopez noted that while none of Markel's units writes workers' compensation, “even there, if we find the right business that is profitable, if we could find a partner carrier, we're really not in the mode to decline things.”

While programs have been written in other units of Markel for years, Shand only started developing its program business initiative in January. “We didn't have the necessary tools and technology to monitor, control and audit delegation of authority and policy issuance to a program manager,” according to Mr. Lopez.

That situation changed with the development of in-house information technology systems that can be easily transferred to a program manager. “We no longer need to physically go to that location to do quarterly audits. We can do it remotely now,” he said.

In addition, transferring technology and tools to program managers makes them “just an extension of our office in Deerfield, Ill.,” he said, as they're using the same system, clearance and underwriting profiles. “If we change our underwriting guidelines, our underwriters in Deerfield get the changes, and immediately, at the same time, our program managers get them also.”

In the first eight months, Mr. Lopez reported that several programs are up and running, including a $3 million massage therapy program and a standard physicians program made up of doctors who are women. Another $6-to-$7 million allied health program and an East Coast standard lawyers' program are also among those in the works, he said.

Unlike the other programs, the women physicians program was a small, conceptual start-up rather than an existing program.

The program manager “brought it to us with an actuarial analysis to show that certain physicians with certain qualifications and traits exhibit better profitability,” Mr. Lopez said–noting, for example that lower workloads translate into more patient communication and fewer claims.

o Stage 2: Do We Have The Data?

Like Markel, Mr. Isaacson said American Safety has done start-ups, and it has also done deals falling below a typical minimum premium threshold of $5 million. “It all depends on how comfortable we are with the MGAs, their experience, and how much data they can provide,” he noted.

While the ideal situation is a rollover program with a lot of data to support pricing, “you find opportunities where an MGA brings on talent from another company but can't use that data,” he said, explaining that in such situations, the carrier has used data from the Insurance Services Office, or its own data for a similar type of business together with a conservative pricing approach.

Mr. Lopez described a similar situation where a program manager was moving a program but couldn't get the data from the incumbent carrier. Without historical data, the universe of markets willing to entertain the risk shrank from 30 to three, he said.

The solution Shand came up with was to send out a team of its underwriters, claims people and actuaries, “investing five or six people's time for several days” to physically audit the book. The team was also able to go back in time to look at closed accounts to develop aggregated loss data.

The problem isn't always data, however, Mr. Maladrino noted, as sometimes a program source “is looking for some flexibility, creativity and quite honestly some work” because a program “is in trouble.” In such cases, “we can bring our resources to bear,” he said, pointing to claims experts with three decades invested in professional liability, who can spot claims-handling issues.

Giving the example of the allied health program written in February, Mr. Lopez said one reason it moved was because the third-party administrator previously handling the claims didn't understand the professional liability component of the program.

“They understood the general liability, but for professional, they were putting up reserves [and] settling claims when they shouldn't,” he explained. “They didn't understand the coverage or what was excluded.” Shand can handle the claims in-house, without outsourcing to a TPA, he added.

Mr. Maladrino said claims audits can flag issues that make certain groups undesirable candidates for programs, giving the example of a group of chiropractors with a high frequency of claims.

“We'll go the extra mile to see if there's a trend we can correct”–perhaps recommending re-education on how to do a certain manipulation of the back or neck, or simply advising them to stop engaging in a particular procedure producing claims, he said, noting that loss control and risk management expertise are valuable services carriers provide to groups and associations.

o Stage 3: Is It Profitable?

“If we were to decline a program, it would probably be because the program manager suggested unprofitable rates, but almost nobody does that,” according to Mr. Maladrino. He noted that while Shand likes to take 100 percent of the risk, it typically puts contingency agreements in place to incentivize proper underwriting.

“They know that they have to pick the good risks. It would make no sense to go out there with a product that was underpriced. It would only hurt them later,” turning a long-term program into a short-term one, he said.

Mr. Lopez said the expertise and knowledge of a program manager can turn an unprofitable program around. Again alluding to the allied health program, he said the program manager identified the fact that schools covered under the program made up only 5 percent of the premium but were contributing 40 percent of the claims.

The solution was to work with the association to carve out two separate portfolios, according to Mr. Lopez. “It was a nice solution, and it was the program manager who identified it” by applying its in-depth knowledge of the class and putting in the work to analyze the claims, he said.

“Those are the characteristics we look for in a program manager–not just someone who's going through the quoting process,” he said. “We want them to really underwrite it, analyze results,” asking how they compare to Shand's results overall or vary by state. “We look for partners that want to increase our underwriting profit together.”

Art captions:

Jeweler image

KEEN EYE REQUIRED. Program carriers see more flawed programs than gems among the many business opportunities presented to them.

Horse mortality image

“Unique” and “tough” are the key attributes of a horse mortality program that epitomizes United National's appetite.

Pest control image

American Safety prefers to team up with program managers with expertise in niche classes, like pest control operations, who are also willing to take true risk positions in their programs.

Women physicians image

Executives at Markel Shand are willing to entertain conceptual start-ups, like a new women's physician program, and to work with program managers moving without access to historical data.

Special Reports /

Specialty Carriers Seek Gems Among Program Business Riches

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