Stalwarts Stick With Program Business

At Clarendon National Insurance Company, headquartered in New York City, Vice President Rick Weidman said his companys appetite for program business is "still strong."

"We're very much in the market with minimum premiums around $10 million," he said, noting that while Clarendon isnt interested in medical malpractice and other long-tail liability lines, "we will do any other class provided there's a potential for underwriting profit."

He also said that Clarendon may be taking more risk on its programs. While the company used to cede 90 percent to reinsurers, "getting reinsurance isn't as easy as it was before," he said. Plus, with the hardening market, "there is more underwriting profit potential available to us," he noted.

Mr. Weidman said classes are considered to have a short enough tail for Clarendons appetite if a significant portion of the claims have developed within five years. That means Clarendon will entertain many of the package, general liability, commercial auto and workers compensation programs in the market, he said.

Describing a program the company turned down, however, he said it was one "where the MGA wasn't performing all the functions we would want to perform. They handled some of the underwriting functions, but not all of them. We want a turnkey operation," he added, noting that the outsourced model has always been Clarendons model.

"We like to set them up as a branch office," he said, noting that the company expects MGAs to perform the policy issuance, underwriting and pricing functions.

With 10 years of experience in the business, Clarendon is now one of the largest writers of program business, with a $2 billion book. It employs only about 120 employees, Mr. Weidman said. "Our idea is let's outsource the process to the people who are closest to the customer."

He noted, however, that after four years of growing at roughly a 25 percent rate each year (from $1 billion to $2 billion), "growth this year will be flat as we displace some business that has not been profitable." While the company will add new programs at the same time, the non-renewals will be made up by price increases on existing business, he said.

Clarendon partners with 50 general agents on 140 different programs. The added programs will come in what one could almost characterize as "a sellers market, if you consider us the seller," Mr. Weidman said, agreeing that theres been an uptick in proposals from agents who have lost their markets as a result of downgrades, insolvencies and withdrawals from the market.

GE ERC:

Bill Donnell, leader of the P&C Select division of GE ERC Commercial Insurance, said that his company had more than $1 billion of business submitted to it in first-quarter 2001. Without reporting how much it decided to participate on, he said only that GE ERC has "a fairly substantial volume of the program business market."

Like Clarendon, GE ERC uses an outsourced model.

"We like the model. We think it can be a successful one, but there [are] some real imperatives that you must have tohave this model," Mr. Donnell said. In particular, he said that insurers who want to have the benefits of the modelnot having to have tremendous head count in order to get premium flowwont be successful if they dont set up "the proper controllerships" that set forth expected results and program manager functions.

Mr. Donnell said the company expects managing general underwriters to handle policy issuance and administration, billing and collection functions. In some cases, claims handling is also outsourced "to a very select group of third-party administrators," he said, noting that TPA relationships are controlled as tightly as MGU relationships.

Writing the business through two "A-double-plus" facilities–Westport Insurance Company and First Specialty–he said the most notable change in GE ERCs appetite this year is that the insurer has come up with "a more defined strategy" about what it wants to write.

That strategy produces efficiencies, "as opposed to saying, just send it in to me and I'll tell you whether I want it," he said, noting that GE ERCs "strike zone"–defined in terms of customer groups, types of products and partners–is 25-to-35 percent of the MGU marketplace.

"Were not interested in products or customer groups that lend themselves to commoditization, where barriers to entry are very low," he said, giving the transportation segment as an example. "That business, which is enduring very difficult times right now, is easy to enter" and not in line with the companys long-term strategy, he said. "Another piece of the 70-75 percent we're not interested in is general business," he added.

GE also initiated a requirement that MGUs must be risk-bearing in 2001. Rejecting the hypothesis that the strategy was adopted because business became unprofitable, he said, "we adopted it because it was the right thing to do–because to have a long-term view of this marketplace, whether its a hard or soft market, you've got to align interests."

Mr. Donnell said ERCs "controlled growth" comes from two areas–a select number of new programs and core growth on existing ones. Describing the latter, he said, "we generally partner with someone who is number one, two or three in a particular customer or product group." As a result, he said, business from weaker competitors–"someone who had a number five or six market share position [and] lost a market"–has gone to GE ERCs MGUs because of their dominant positions.

He also said that GE ERC terminated some programs in the last year. "When we came to this strategy of niche business, there were some that didn't fit," he said, noting that some long-haul transportation programs were jettisoned.

Royal & SunAlliance:

At Royal & SunAlliance, according to Michael Oliver, senior vice president of Royal & SunAlliance Programs in Farmington, Conn., the majority of 2001 programs that didnt make it into 2002 were company-driven programs where Royal was the underwriter.

Noting that the company had a mixture of both MGA-driven programs and company-driven programs when it integrated the former Orion Specialty operation with Royal programs last year, he said, "we decided to go the MGA route." (RSA USA acquired Orion Capital Corporation in 1999.)

"Between the two organizations, we've been in the program business for decades," he said, noting that Royal & SunAlliance Programs has 22 programs with about $250 million in premium.

Having to staff up to write company-driven programs, "from our perspective, was not a way to go to be agile in the market," he said. "With MGAs, the expense and burden is on them to produce results and to [have] the resourcesto do that. We pay them for that," he said, adding that if things don't work out, "we can end the relationship" without going through an "expensive or arduous ordeal."

The program manager has to be able to do the policy processing, he said. "We have a system that we can outboard to them to do that," he said. Adding that some MGAs have their own systems that the insurer integrates back into its systems, he said, the preferred method would be for program managers to use Royals system going forward.

In some cases, MGAs also handle claims, he said, where they demonstrate that they have some knowledge that sets their claim services apart from what the company could deliver. In those situations, Royal would stack its own resources on top of the MGAs, to provide enhanced salvage and subrogation operations, for example, he said.

Mr. Oliver also said that Royal requires programs to have a potential $5-$6 million of premiums within three years, noting that some regional programs arent there initially, but can come up to that size because the company can offer them a wider distribution area.

He added, however, "we are entirely profit driven. So the top line isn't as important to us as the bottom line," noting that his company most often takes "rollover opportunities," and that it targets programs offering 10-15 percent returns.

"Most of the things that we go after are just a little bit outside of the comfort level of the standard market, so price fluctuation is not as large as you would see in some of the other commodity classes," like habitational, trucking or other line-of-business-type programs.

Mr. Oliver said the company adds a maximum of three or four new programs per year. (More information about Royals criteria for new programs is contained on its Web site at www.rsaprograms.com.)

Kempes:

Kempes, in Scottsdale, Ariz., which was formed in 1998 as the specialty program writing subsidiary of Kemper, continues to be "a programs-only market," according to John Mahoney, Kempes president. "We are committed to that."

But with its own share of the industrys underperforming programs, the company has restricted its appetite to focus more on specialty casualty-driven programs, he said during a recent interview.

The change also comes as a result of "the realities of the marketplace post Sept. 11, he said. "We look much more critically today at catastrophe exposures and aggregation of values than we ever have in the past. That gives us a reduced appetite for anything that would include coastal property, earthquake exposures, or even significant concentrations of large property values," he said, noting that while the company will write some property, casualty will predominate.

Kempes appetite now is also tilted toward frequency-driven programs, he said, also noting that Kempes tend to be more in the small-to-medium p-c accounts with average premiums ranging from $5,000 to $100,000.

Kempes has been a property-casualty and professional liability company from day one, he said, noting that Kempes does not write workers comp programs. "We view workers comp as a different sort of niche with a different level of expertise that we don't have," he said.

Having cancelled a number of programs, Mr. Mahoney projects that Kempes will be at roughly $400 million in gross writings this year, with the expected volume declining more in 2003 as a result of programs Kempes has exited. He said Kempes has 12 customer groups that fit its appetite, while eight have been terminated. (A description of the 12 programs is given on the companys Web site at www.kempes.com, along with program requirements.)

"We don't generally market that we have a specific set of classes we like or dislike," Mr. Mahoney stressed. "We prefer to evaluate the particular program manager based on their book of business and level of expertise." He also said that Kempes expects program managers to have the ability to rate, quote and issue their policies as well as effectively market the program in whatever territory the company thinks makes sense.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 15, 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.