Program Business Gets Leaner

But the good news is that the current crop of program participants, while not as numerous as in the past, are seasoned insurance professionals determined to learn from–and not repeat–the market's past mistakes.

David May, executive vice president of Arch Insurance Group in Stamford, Conn., pointed out that there have lately been relatively few entrants into the program business market, and that's not necessarily a bad thing. "Arch looks for established programs, we are not enthusiastic about start-ups," said Mr. May.

He emphasized the consensus opinion among those interviewed that "flight to quality" is as applicable today in the program sector as it is in the reinsurance sector.

"In terms of availability of insurers doing program business, I don't think that market will expand," noted Mr. May. "Carriers not already in the program sector are more concerned with looking after their current business than expanding into new areas."

Andrew Burger, vice president of Gill and Roeser, a reinsurance intermediary and program business consultant in Simsbury, Conn., agreed with Mr. May's comment about start-up programs.

"No insurer in program business is looking for new operations. They all want established portfolios," Mr. Burger said. "There are more retractions [of programs] compared to last year, and the market may even be a tad worse, depending on the class of business."

Size also matters these days in program business. Kevin Kennedy, senior vice president of Gill and Roeser, noted that most carriers are looking for "larger programs of $10 million in premium volume and up."

Mr. Burger described the program market as "pretty quiet" right now, and not only because so many insurance people are on vacation. "Decisions are on hold, awaiting mid-year analyses of program results," he indicated.

"The program market will remain 'hard' until 2006," Mr. Burger predicted. He supported his view by noting that the insurance industry's capital drain, reinsurance costs and the problems in the equity markets would all contribute to the continued hardness.

"A lot of weaker carriers left the business," said Glenn Clark, president of Rockwood Programs Inc., based in Wilmington, Del. According to Mr. Clark, these included American Equity, Legion and Kemper."

There has also been a lot of dislocation of programs to other carriers," Mr. Clark added. "A carrier either makes new commitments and develops more intense relationships [with program administrators] or it is out. Some have thrived in this environment and become survivors, seeing a lot more submissions."

At The St. Paul Companies, Jon Farber, vice president of specialty programs, described the program business segment as "rebounding," although he indicated that the "traditional MGA" market is in somewhat worse shape.

Mr. Farber defined a "traditional" managing general agency as an entity that controls underwriting, claims, billing, reinsurance and other administrative functions. St. Paul, on the other hand, uses "program managers" that handle marketing, sales and certain service functions, but leave a significant amount of the underwriting, claims and other key functions to the insurer, he said.

Mr. May said that Arch, one of the few new entrants into program business, is entering this marketplace because the issues that doomed the less successful players–lack of careful selection and oversight of MGAs and programs–will not be a problem at Arch.

"In a general agent, we look for specialization in a particular area and a reputation and track record," Mr. May noted. "We do extensive due diligence, looking at the agency's financials, systems and capabilities, and perform background checks on the principals. The claims operation is looked at in detail–we demand a disciplined approach to claims."

As for the program itself, Mr. May wants a "going-concern" program with at least $15 million in premium volume.

"Arch has certain appetites for and against," Mr. May said. "We don't want workers' compensation, long-haul trucking, livery or catastrophe-exposed property." He added that Arch currently has programs for emergency services providers, volunteer fire departments and ambulances, security guards, pest control experts, logging equipment companies, and California artisan contractors.

St. Paul, according to Mr. Farber, looks for programs that are national in scope, have $5 million or more in premium, three-to-five years of history behind them, and at least 15 percent of the market share in the niche being serviced.

"The program should also have a good geographic spread, limited competition, and insure owner/proprietors as opposed to large national chains," Mr. Farber continued. He indicated that the chains tend to want self-insurance and other risk treatment alternatives that may not be conducive to a program business approach. "We also want the program manager to be a specialist in the industry or coverage involved," he added.

Current St. Paul programs insure entertainment risks, equipment rental companies, rural electric utilities, landscape architects, liquefied petroleum gas distributors, amusement and race parks, and movie theaters.

Gill and Roeser's Mr. Kennedy stressed that the program must have a sound actuarial basis. "My advice to MGAs is to perform an actuarial analysis of the program. If the program is to be moved to a new carrier, this analysis is critical if the proposal is to receive the attention it deserves."

Mr. Burger of Gill and Roeser encourages MGAs that are shopping a program to provide potential insurers with accurate and objective information, to "show the blemishes" of the program and explain why it is viable.

"A quality, professional proposal is critical," Mr. Kennedy added.

"Profitability, underwriting acumen, responsible pricing, quality reinsurance and a strong distribution network" are what carriers are looking for in an MGA, according to Mr. Burger. "Integrity and reputation are also important," he added.

Gill and Roesers current projects include those for distressed professional liability lines, sanitation haulers, convention cancellation, habitational properties, entertainment and commercial auto. "Clarendon, AIG, ACE, Arch and GE" are some of the major players in the program business market," Mr. Burger noted.

"A program should have something that makes it unique or different, such as geography or the regulatory environment in which it operates," Rockwood's Mr. Clark added. "Also important is stability. Has the program had multiple homes or been with the same carrier for many years? Also, the history of the folks administering the program must be considered."

Rob Byler, chief executive officer of Alea Alternative Risk in Rocky Hill, Conn., sees many more "positives" in the program market than existed at this time last year. "We are seeing better information from program managers, and tighter guidelines. They are really analyzing their books of business and taking out the poor performers," Mr. Byler said.

"There is more interest on the part of program managers to work with carriers and maintain tighter actuarial controls on their business," Mr. Byler added. "They [program managers] are very open to the audit function. It is a more collaborative effort now."

Mr. Byler also noted that, in general, rate increases are still the order of the day in the program market, although there has been some "flattening" of rates recently. "Some books are still in need of a rate increase, and where this is the case, the program managers are getting it. They are being aggressive and making sure they are not leaving money on the table."

Alea, which offers value-added services to program administrators and reinsurance intermediaries, has worked with programs for habitational properties, artisan contractors, truck transportation, lumber and other types of risks.

Some of the newer program insurers, in addition to Arch, include XL, Mitsui Sumitomo and Houston Casualty (through acquisition), Mr. Clark of Rockwood pointed out. He also said that Rockwood's current programs include employment practices, management liability, podiatrists' malpractice, small property/casualty agents' errors and omissions, and life insurance agents' E&O.

Craig Kelbel, executive vice president of HCC Insurance Holdings Inc., which recently acquired Rockwood Programs, noted that policyholders displaced by the recent contraction in the program business market are, for the most part, not going without coverage. "They just went into different baskets; either the programs went to other insurance companies or they found individual coverage for their business. They are not going bare."

"The next 12 to 24 months in the program business market look very positive," Aleas Mr. Byler said. Underwriting managers who want to partner with carriers will do well as long as they are well run, they focus on profitable areas, and they work with the carriers on the audit side, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 8, 2003. Copyright 2003 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.