Program managers find themselves back in the drivers seat

WHAT a difference a couple of years make. In 2003, as premiums rose in the hard market, program administrators had it made–if they had access to insurers. The problem was that many didn't. Carriers fled the program business market or, in several well-publicized cases, were forced into bankruptcy by bad underwriting results. Given the dearth of markets, program managers were left scrambling to find homes even for programs that were proven profit-makers. Startup programs, meanwhile, were all but outlawed by most insurance companies.

Today insurers have turned the spigot back on. Carriers are wooing program administrators as they haven't since the late 1990s. Insurers are willing to broaden coverage, and a program administrator with a proven track record and a new idea for a program can find a receptive audience for it.

But while the challenge of finding a market has largely evaporated, others have taken its place. Program administrators face increasing costs for such expenses as marketing and IT support. In some lines, premiums are under growing pressure. Even the Spitzer investigation could become a concern.

To get a sense for how the program-business market is changing, we contacted several program administrators, who discussed the opportunities and challenges now facing them. Following are their comments.

Geoffrey McKernan
NSM Inc.

The softening market is giving program administrators more options for writing business, according to Geoffrey McKernan, president and CEO of NSM Inc. in Conshohocken, Pa., but it is also creating challenges in regard to carrier selection, IT management and maintaining profitability.

NSM has more than 10 programs that serve homebuilders, various commercial auto risks, boat dealers and temporary staffing firms, among other insureds. At the moment, he has no problem finding takers for such business, McKernan said. “Two years ago, you couldn't get an insurance underwriter to return your phone call,” he said. “Now they're coming out of the woodwork.”

Greater carrier interest is being manifested in a number of ways, McKernan said. Today, insurers are willing to write business on either an admitted or nonadmitted basis, he said, whereas in the hard market they tended to accept only nonadmitted programs, which are less expensive for insurers, since they don't have to file forms and rates in multiple states. They'll also entertain proposals for new programs, McKernan said, adding that NSM hopes to launch two by midsummer.

Many carriers got out of program business during the hard market, but now new ones are coming in, McKernan said, including offshore markets and even regional carriers looking for opportunities in their territories. The insurers, however, are not necessarily writing anything and everything, he said. Rather, they are specializing and looking for program administrators with expertise in the sort of business they desire.

“The key with programs is that you still have to show quality underwriting,” McKernan said. “You won't get anywhere unless you have data and good underwriting profitability.”

While all the new options are great for a program administrator to have, McKernan said, they also create challenges. The first is checking out the carriers themselves, he said. “With some of these carriers, we're concerned they may be buying business,” McKernan said. Therefore NSM takes care to partner with insurers that understand programs, are financially solid and are in program business for the long term.

“We get to know upper management before we deal with a company on any new business,” he added. “That's very important, because line underwriters change. You need to know the upper management of a company and understand their philosophy, because its not always communicated down the ranks.”

Dealing with technology is another major issue, McKernan said. Many program-business insurers have their own proprietary computer systems–there's no such thing as SEMCI in the program-business market–and integrating with the multiple systems can be a challenge for program administrators, McKernan said. Taking on a new market also often means taking on a new computer system, he said. If the insurer does not have its own claims department, the program administrator may have to connect to its outside TPA, too. That can increase expenses at a time when premiums are stagnant or even falling, he said.

“We have two full-time IT people,” McKernan said. “All they do is manage our systems.”

Marketing expenses also increase in a soft market, McKernan said. In the past year, he said, NSM's marketing budget has gone up almost 60%. He said NSM is using full-time telemarketers to contact retail agents and brokers, and in some niches, including homebuilders, is using direct mail to increase brand awareness among potential insureds as well.

With costs for marketing, IT and other expenses increasing, McKernan said, underwriting discipline becomes all the more imperative in a softening market.

“The challenge is keeping pricing at a profitable level,” he said. “As a program administrator, you have to manage that. You want to grow the book but at the same time you have to keep it profitable.”

Arthur Seifert, CPCU, CIC, RPLU
The Lighthouse Companies

One of the consequences of the changing insurance marketplace could be increasing consolidation among program administrators, according to Art Seifert, president and CEO of The Lighthouse Cos., in Annadale, Va.

Seifert, who also is chairman of the Target Markets Program Administrators Association, said some long-time program administrators who don't want to go through another soft market are thinking about selling their businesses. Seifert said he probably would make his first strategic acquisition this year and may try to do one or two annually over the next couple of years. The plan would be to find administrators with programs in the same classes as those he already has and to then roll their programs into his. Lighthouse currently has five programs: for staffing firms, entertainment risks, assisted-living facilities, nonprofit organizations and professional liability risks (mainly lawyers and insurance agents).

Seifert, who was contacted shortly after returning from the mid-year meeting of the Target Markets Program Administrators Association, said it was evident at the meeting that carriers are looking for business more aggressively than they have in the last three to four years. He said insurers that once insisted on $15 million books now will look at $5 million programs and even new ventures, “if it's a startup with a really good story and you have data.”

As markets continue to soften, program administrators will face challenges as they try to maintain revenue and profitability, Seifert said. The changing market already has affected his annual planning, he said. “In the past couple of years, we've been figuring in a 10% to 15% increase in rates, and now we're estimating a 10% to 15% decrease.”

To maintain revenue, program administrators must write more new business, Seifert said. One way they will do that, he said, is by casting a wider net. Lighthouse, for example, is creating a second, higher tier of pricing that it will offer to clients not as qualified as those accepted during the hard market. “I think a lot of people will open up their eligibility requirements a bit to write some accounts they might not have written in the past,” he said.

There also will be renewed emphasis on marketing, he said, adding that Lighthouse has increased its own budget for such activities. As advances in technology provide program administrators with increasingly better data, they can target their efforts, Seifert said. For instance, he said Lighthouse has been able to produce data demonstrating that its program for assisted-living facilities probably has a competitive advantage in eight or nine states. In those states, Seifert said he plans to advertise in newsletters of associations representing assisted-living facilities and to attend insurance agents associations' conventions.

While increasing their expenditures for marketing, program administrators will have to look at cutting expenses in other areas, Seifert said. “We're trying to find ways to use technology to reduce our cost and to make it easier for people to access our services using the Internet.”

With the backing of insurers, program administrators now can offer expanded coverage in some instances, Seifert said. For instance, he said he can provide punitive-damages coverage to large assisted living facilities with good loss experience. While the program has not been changed to automatically include the coverage, he said he can provide it when, for example, a retail agent with a $200,000 account says, “The order's yours, but you've got to be able to include punitive damages.”

Seifert said a new task for program administrators this year is trying to figure out how the insurance investigations led by New York Attorney General Eliot Spitzer will affect their business. On one hand, as national brokers like Willis and Aon, in an effort to avoid the appearance of conflict of interest, divest themselves of their wholesale and program-business subsidiaries, the brokers may place more such business through independent program administrators, Seifert said. On the other hand, some states are imposing new producer disclosure requirements from which program managers have not been exempted, he said, which will increase their regulatory-compliance costs.

Chris Randall
National Specialty Underwriters

Proof that start-up programs are now possible can be found at National Specialty Underwriters in Bellevue, Wash., where President Chris Randall reports that NSU recently launched a new program for medical imaging facilities. The program insures the facilities and operators of medical-imaging equipment but not doctors.

One reason NSU was able to find an insurer for the new venture was because it has a proven track record in program business, Randall said. At this point of the market cycle, he said, someone new to the program-business market would have a much more difficult time getting an audience with a carrier. Another key to landing a company for the program was acquiring underwriting expertise, Randall said. “The people we hired to work in that area have previous backgrounds in medical professional liability.”

NSU has four programs in addition to the new program for medical imaging facilities. All four are in the hospitality industry. Two provide primary coverage, and two offer umbrella and excess insurance.

The program business market went through kind of a “cleansing process” during the hard market, Randall said. “Now, I won't say it's soft, but it certainly stopped hardening.” While a more relaxed market makes it easier to work with carriers, he said, it brings on more competition from the non-program marketplace. “Frequently, the competition is not as knowledgeable, so that makes for a difficult competitive environment,” he said.

One of the biggest challenges facing program administrators, Randall said, is simply dealing with filing issues, which are a major concern to prospective carriers. “When you go into a room to start talking about a new program, the first thing on the table isn't, 'Is it going to be competitive' or 'Does it make good business sense?'” he said. “It's, 'What do we have to do in terms of filing?'”

For admitted programs like the four NSU operates for the hospitality industry, it can take insurers six months to get new rate filings (up or down) approved in all states. Changes to policy forms also must be filed for approval, he said, although the rate filings are the bigger problem. The cost associated with the filings is one reason insurers often insist on a $10 million minimum for national programs written on admitted paper, Randall said.

Filings are less of an issue for carriers when administrators use nonadmitted paper, as NSU does for its medical facilities program, Randall said, but that places a larger burden on program administrators to handle filings themselves. To do so, he said, they either must work through surplus-lines brokers or be licensed as surplus-lines brokers themselves in the states in which the program is offered.

Despite the softening market, Randall expects a good year at NSU. “The playing field is the playing field,” he said. “As long as we are out marketing and selecting risks reasonably well and connecting with our distribution system (retail agents and brokers), we'll see good growth.”

Wayne Carter
Target Insurance Services

After giving him some initial concern, the program-business market appears to be holding up reasonably well, said Wayne Carter, president and CEO of Target Insurance Services in Avon, Conn.

“It's been an interesting year,” said Carter. He called the first couple of months “a little scary,” as prices softened noticeably in the professional liability market and competitors became more aggressive. But the softening has since abated, he said. “We had two relatively good months (in March and April), and our pricing has held reasonably well,” he said.

Target Insurance Services has eight major programs that predominantly serve the non-medical professional liability insurance market. Accepted classes include lawyers, accountants, home inspectors and temporary staffing firms.

One reason for the relative stability, Carter said, is a lack of reinsurance support. “One of the interesting differences in this softening market is that the reinsurance community is still not particularly healthy,” Carter said. “Some of them (reinsurers) still have balance sheet issues and have to get their act together in terms of profitability.”

Carter said the program-business model has “shifted” from what it was in the late 1990s, when “there was a predominance of smaller carriers or fronted carriers that relied heavily on reinsurance, and that's kind of what drove a lot of the soft pricing. Well, you don't see that now, because the reinsurers don't have an appetite or the ability to depress the marketplace.”

Carter said Target Insurance Services has changed its thinking about carrier relationships in light of this development. “Generally, we have moved away from fronting arrangements to more stable carriers like the Hartford, Fireman's Fund and CNA,” he said, because such carriers can handle large net lines, have more control over their pricing and aren't greatly dependent on the reinsurance market.

Like other program administrators, Carter said he has found insurers more receptive to the idea of starting new programs. He said Target Insurance Programs recently started from scratch an admitted program for accountants in the western part of the country, and a nonadmitted program for home inspectors. Neither would have been possible to launch a year ago, he said.

Carter said insurers also are offering a few more coverage enhancements these days. For instance, Carter said he's seen more willingness to offer “career coverage” for attorneys. It essentially covers attorneys (and their employers), after they have joined a new law firm or gone into practice for themselves, from claims arising from their work at a previous law firm. Carter said he's also seen a few insurers reducing deductibles a bit.

John Solari, CPCU, ARM
Professional Underwriters

John Solari said he has seen a shift in emphasis among program insurers. Over the past 12 to 18 months, they have finished culling poor performers from their portfolios and are again stressing production, he said. “I think most feel they have their houses in order, and they are looking outward now for good program opportunities.”

Solari is president and chief underwriting officer for Professional Underwriters in Trooper, Pa. It has two nationwide programs for public entities. One serves public and private elementary and secondary schools, as well as community colleges. The other is designed for municipalities and a variety of other local governmental units. In New York, Professional Underwriters also is a program manager for two safety groups that provide workers compensation insurance for risks in its two programs.

In today's market, Solari said, it's probably possible to negotiate higher commissions for a program, depending on its performance. Also, insurers are not as insistent that program administrators take on underwriting risk via a loss corridor or other means, he said. “Before, it was required. Today, it may be something they would want to see a program administrator move toward but not necessarily start with.”

Some large multi-lines carriers are now increasing their commitment to program business, Solari said. He noted that Zurich, one of Professional Underwriters' main markets, recently consolidated its various program operations into a separate division, which he said he believes will significantly enhance Professional Underwriters' partnership with the carrier. “A division that focuses its full attention on programs is much better at evaluating, serving and managing them,” he said.

Solari said Professional Underwriters' strategy is to remain exclusively in the public entity arena. But while it doesn't expect to start programs in other niches, it is taking advantage of market conditions to enhance its current programs. For instance, it recently introduced environmental impairment liability coverage for both its public entity programs, and expanded its fixed-asset inventory service offered through its loss-control department. Within the past couple of months, it also found a carrier that will enable it to offer student accident coverage as part of its program for schools.

Solari said maintaining pricing levels is one of Professional Underwriters' greatest challenges this year. “We go to great pains to analyze our book of business…using actuarial support to ensure we have proper rate levels and to ensure that we don't deviate” from them, he said, “But without a doubt, the softening market is definitely taking its toll across the board in every segment.”

Solari said Professional Underwriters devotes considerable resources to getting out its message to agents and brokers. Today “we're probably marketing harder than ever,” he added. “Our marketing is designed to encourage agents and brokers to submit business they may not have otherwise, based on our knowledge and commitment to the public entity sector.”

“I think in today's marketplace, your marketing communications and message must be more succinct and clear than at anytime in recent history,” Solari said, “because as the market softens, there is a reduced need on the part of retail agents and brokers to remarket their business.”

“The idea is to catch the interest of retail agents and brokers not only for accounts that are going to market,” he added, “but for accounts that may not be going to market, to give us an opportunity to work on those accounts as well.”

Solari said another key to success in today's market is to pick the right accounts and price them properly. In a hard market, a program manager may be able to get by with less than the best risk selection because premiums are higher, he said, but “as pricing is reduced, it really magnifies the importance of selection.”

Tom Downs
National Insurance Professionals Corp.

The softening market has brought about a noticeable change in program-business insurers, according to Tom Downs, executive vice president at National Insurance Professionals Corp., in Poulsbo, Wash. Downs, who has been involved with programs since the 1970s, said that for the past two to three years, the market has been as tight as he's ever seen it. “Essentially, you couldn't get anybody to talk to you unless you had an existing $15 million program that had been profitable over 10 years,” he said. “Now, that's changing. People are willing to consider smaller programs. They're even willing to consider startups, if the situation strikes them as being right.” For the right deal, he added, it's now possible to find insurers for programs smaller than $5 million.

NIPC operates seven programs. The oldest and largest is for social service agencies, and it has regional programs for dentists and public entities. The program administrator also has programs for such unusual risks as the bicycle industry (manufacturers, dealers, tour operators, etc.), tattoo artists and body piercers.

Given the more relaxed market conditions, NIPC is looking to create more programs, Downs said. “We are actively pursuing a couple of new opportunities that I think would have been just dead in the water a year ago.”

The softening market is starting to put pressure on rates, Downs said. Insurers are not insisting on price increases, as they were a year or two ago, he said, and some competitors are dropping prices in an effort to get business, although so far the rate cutting has been “nothing radical or stupid.”

The keys to getting a new program launched haven't changed, Downs said. Administrators must be able to demonstrate to insurers that a program will produce an underwriting profit, he said, and there has to be some kind of “marketing hook.” Insurers still like to see program administrators take on underwriting risk, he added, but having skin in the game “is not an absolute requirement the way it would have been two years ago.”

Downs said the last two years have been as profitable for NIPC as any in its history. Despite the softening market, Downs said he still expects 2005 will be another year of growth at NIPC–just not the kind of growth it achieved in 2003 and 2004.

Ben Francavilla
Americana Underwriters

The market has softened to the point where carriers are soliciting program administrators for business, according to Ben Francavilla, senior managing director of Americana Underwriters, an American Wholesale Insurance Group company in Camp Hill, Pa. Francavilla said at recent industry meetings, carriers have asked him if he might have new ideas for programs on which they could collaborate. But such interest, he added, is being shown only to program administrators with whom a given carrier already has a relationship.

“The reason is that the due diligence process has gotten extremely difficult over the past few years.” Francavilla said. “It's time-consuming and expensive for both parties.” Thus, it's more efficient for insurers to work with someone whom they've already evaluated, he said. “If you have a carrier who likes your results from an underwriting standpoint, who likes your results from an audit standpoint, they're going to want to do more business with you.”

Americana Program Underwriters currently has about 15 programs generating about $90 million in premiums. Many of the programs serve the environmental market, while others focus on such niches as broadcasters, public entities, warehousemen and welding-supply distributors.

While insurers will entertain new programs, Francavilla said, program administrators should be careful not to bring them proposals that “have been run through the mill. Carriers don't want to see program ideas that have been unsuccessfully marketed several times in the past five or six years,” he said. Rather, they want to see fresh programs that are backed up with thorough, convincing data concerning anticipated profitability.

Of course, a softening market creates challenges as well as opportunities. The same forces that are whetting insurers' appetites for business are putting pressure on prices, Francavilla said. “I think some of our programs are seeing some flattening of rates, but we're also still also capable of getting rates on programs where coverages are still difficult,” he said. Property-oriented programs are feeling the competition the most, he added.

Overall, Francavilla said he expects a good year. “We're optimistic that we will be able to not only grow our existing program base but hopefully start one or two new programs in 2005.”

Joseph Dolce, CPCU
Venture Programs

Despite softening conditions, Joseph Dolce sees a flight to quality in today's program business market. “I think there are more players out there now, but they're going after fewer program managers,” said Dolce, who is executive vice president of Venture Programs in West Chester, Pa.

In the past five or six years, a number of program-business insurers posted dismal results or even went bankrupt. While those carriers obviously bear responsibility for their fate, they were not helped by program administrators that sent them unprofitable business, Dolce said. The hard market may be over, but insurers remain circumspect, “because they've been burned,” he said. “They're very, very gun shy about program managers.”

For established program administrators with good reputations, however, Dolce agreed that life is good and markets are plentiful. “I just came back from two weeks of meetings (conventions held by the Target Markets Program Administrators and the American Association of Managing General Agents) and must have spoken with-at a minimum-20 carriers or reinsurers,” he said.

Venture Programs serves five industry groups: clubs (including golf and country clubs), hospitality (full-service restaurants and hotels), technology (Internet service providers, application service providers and equip- ment manufacturers), life sciences (biotech and research firms) and banking. Dolce said Venture has a solid group of insurers for these programs but is always looking for new ones. He said it is important to have multiple carriers for programs, both to offer a choice to retail agents and their clients and to protect a program in case one carrier withdraws from it. Additional carriers also can offer enhancements to programs, he said. For instance, he said Venture is negotiating with a carrier that would provide optional coverage to country clubs, giving their members worldwide coverage for lost or stolen golf clubs.

If the right situation comes along, Venture may also expand into additional niches, Dolce said. Like other program administrators contacted for this report, he said carriers are more willing to consider startups these days, although the window is far from wide open.

“It's a definite 'maybe' now,” he said, but one must “clearly demonstrate your advantage in that particular niche” to get an insurer or reinsurer onboard.

Dolce said Venture's niches have become more competitive in the past six months, but premiums lately have been flattening. Venture can't–and shouldn't–change its underwriting standards, he said, and therefore is looking to compete by finding ways to enhance coverage; increase responsiveness; and improve loss control, claims management and other services–”all those intangibles that are the reasons brokers come to us in the first place.”