MGAs Warned: Dont Lose Your Market!

On May 1, PMA Capital Corp. announced that it would exit the excess and surplus lines business written through its Caliber One operationa withdrawal that represented roughly $120 million worth of E&S business.

At the end of March, Legion Insurance was put into rehabilitation by the Pennsylvania insurance department, representing about $1.2 billion of business

In mid-April, a fronting unit of ACE USA based in Philadelphia, about $500 million, was shut down. (He distinguished this alternative risk unit from an ongoing specialty programs unit.)

American Equity Insurance in Scottsdale, doing roughly $250 million in business, was shut down.

While the first two of these market changes were publicly announced (see the NU Online News Service, May 3 and March 29), the last two were not.

Travelers Property Casualty in Hartford inherited American Equity, a part of The Northland Companies, when Citigroup acquired Northlands parent, Associates First Capital, in September 2000. American Equity "was not a good strategic fit with Travelers core business operations," sources close to Travelers said.

At ACE USA, the company said: "ACE USA is a writer of program business in several specialty marketsACE's program strategy is to emphasize arrangements that provide strategic underwriting and distribution enhancements, and to de-emphasize arrangements that do not meet these objectives."

Adding to the list of E&S market defections, Mr. Broomall noted that Kempes, SAFECO and Scottsdale Insurance made partial exits by terminating a number of general agents in 2001, and that a number of reinsurers bailed out.

John Curry, vice president of marketing and agency relations for Penn-America Insurance Group in Hatboro, Pa., said that "new capacity will only enter the E&S business when the capital markets perceive superior trends are really there." While "nothing should ever surprise any of us," this hard market is "totally unique" in that regard, he said. "E&S companies must simply make their margins or be closed."

In particular, he noted that many primary E&S companies are now part of a larger group. "If your parent is part of the problem" and has not met its profit margins, "you have a problem, because youre not going to be able to participate" in the hard market, he said.

"I have never seen so much significant talent in our business sitting outside of it waiting to get back in," he added, listing former executives of Kempes, American Equity and Caliber One, among others.

"MGAs who do not have a competitive advantage, who are selling a commodity: Dont lose your market," Mr. Broomall warned. Reporting that he had just returned from the AAMGA Annual Meeting in Las Vegas, he reported that he spent his time there meeting with "desperate MGAs," who suffered the trials of the prior six weeks and were shopping program business as a result.

"If an MGA is seeking a market for a non-standard auto, nursing home, long-haul truck or PEO program, either its going to have a hell of time replacing it or it wont find one," he said, also highlighting contractors and habitational programs as difficult. Others cited public entity programs as a distressed class.

For those who dont find replacements, he suggested two options–transactional wholesale and alternative risk-transfer mechanisms, such as MGA captives. In some cases, he said, insureds displaced by market changes are themselves seeking to put risks in rent-a-captives, he said. "Whether its a chain of nursing homes or a cardio-thoracic surgery group, they have to have a policy," he said, suggesting that some will pay $1.2 million for a $1 million limit.

He disclosed his self-interest in presenting these alternatives, noting that in addition to First American Insurance Company, a specialty insurer writing through MGAs, Arch Capital has two offshore rent-a-captive facilities, and that a transactional brokerage unit was put under the Arch umbrella last year.

"There are some wholesalers who are also MGAs," he told NU, noting that an MGA with a program but no market could place the individual risks through separate wholesale transactions.

Whether motivated by self-promotion or not, no one interviewed by NU disputed the grim picture Mr. Broomall painted of the program business market.

"The programs market is in a pretty significant state of disarray," said John Mahoney, president of Kempes in Scottsdale. "Most carriers, from an underwriting perspective, have underperformed in the program segment," he said, noting that his company had to make a number of appetite changes as a result.

"In many cases, the business followed the general soft market pricing cycle of the rest of the industry," he said, but "programs get hit harder" for underwriting and pricing mistakes because of the ability of program managers to "deliver large volumes in a relatively short period of time."

While the combined ratios may not have been "materially different" than the industry's, "you can lose a lot of money very quickly because of the speed at which the volume can hit you," he said.

"Its absolutely tougher out there for MGAs to place their programs in the marketplace," said Marc Cohen, president of Program Brokerage Corp., a New York City-based subsidiary of HUB International. Mr. Cohen, who attended the PIWA meeting, told NU that "the reinsurance and insurance markets are looking to MGAs to bring more to the table than just premium volume."

"The companies can get their premium volume on individual accounts now. They don't have to allocate their capital to the program arena," he said, noting that companies are asking for complete submissions, including actuarial data that answer the question: "Why do you feel we have an opportunity to make money on this?"

Ed Levine, a wholesaler and general agent for American Marketing Center in New York City, who attended the AAMGA meeting, said that not everyone attending was in "desperate" straits. Instead, he said that while "program administrators and MGAs" were sporting "long faces," general agents are faring well, distinguishing between people who handle homogeneous books of business and those who simply have pens for E&S companies (general agents).

He is one of several people interviewed by National Underwriter who felt the need to give precise definitions. Both Mr. Curry and Mr. Broomall gave the NAIC definition of MGA (which says that an MGA must place reinsurance or handle claims), as they described the downfall of "new-age fronting companies," like Legion. While Mr. Curry highlighted a general lack of oversight by the fronts and Mr. Broomall blamed reinsurers for problems, both noted the stigma thats been attached to the term "MGA" as a result of Legion, Unicover and other failures.

Going forward, "the true MGA really has to shine and have a pristine book of business," Mr. Levine said.

Describing himself as a GA, Mr. Levine said his firm was affected by the American Equity shutdown, but reported that he was able to find a replacement, attributing his success to several factors. "Ive spent enough money on infrastructure," he said, also citing underwriting oversight provided by a 25-year veteran on staff and his firms regional expertise.

Mr. Broomall, who said his company only does business with "underwriting managers," continued to use the term MGA as a "catchphrase" anyway. "Im a true proponent of MGA business," he said. "There are some very competent people out there who have specialized expertise and underwriting. Theyve identified law changes in given states that provide opportunities [or] theyve identified a subclass within a larger class that has redundant rates."

During an interview, Mr. Broomall identified "drill-and-fill dental professional liability" as one such subclass. If dentists dont do orthodontics or oral surgery"they just repair filings and put on crowns"they don't have many claims, but the premiums being charged are higher than they should be, he said.

Mr. Cohen, whose firm has successfully retained markets for all but one of its 32 programs, said the reinsurance and primary insurance marketplace is looking for the program manager to bring additional value.

Describing the value his firm brings to the largest program, residential real estate, he said, "we have developed an expertise in understanding the different court systems in the New York area, and in [handling] lead-paint and slip-and-fall exposures." He also said, "we're underwriting terrorism and mold exposures."

He said his firm underwrites the business by inspecting for water damage that might give rise to mold claims and identifying buildings located near potential terror targets. He added his firm demonstrates a "vested interest" in the results of this and other programs by assuming risk through a sister company, Old Lyme Insurance Company.

He also noted that his firm worked on building an infrastructure during the soft 1990s, which included the creation of an in-house third-party administrator. On a restaurant program, he said, the firm has built an advanced IT system that can "dice up exposure and loss data" to support educated underwriting decisions.

"We can go back to 1985 for every restaurant written by our office and isolate restaurants that do less than $0.5 million in sales, are located in Manhattan ZIP codes and serve ethnic food, and tell you what our loss experience is," he said.

"Data is your lifeblood," Mr. Broomall said. Even MGAs who dont control the case reserving on the losses, should get them from the TPAs or insurers that do, he said, advising MGAs on how to pre-plan for future waves of market defections. "If you don't get the data on a monthly basis so that you can build your own accident-year loss triangles, you're at a severe disadvantage."

"When I hear the excuse, I can't get my results or experience from Reliance or Frontier, I empathize. However, your proposal has to compete with the MGA that has kept data" through up-to-date systems, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 17, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.