Insurers Show More Flexibility On MGA Programs As Appetites Expand

As insurer and reinsurer appetites expand in the program business market, even startup stories are getting attention, according to market experts, who note that these were among the most difficult programs to find homes for in years past. “This has been the first year where we're actually trying to figure out ways to tell carriers no,” said Scott Reynolds, president of the specialty underwriting division of AmWINS Group in Charlotte, N.C.

Mr. Reynolds said that AmWINS has been able to launch every program it wanted to start this year. In addition, “on some existing programs, we have carriers knocking on the door trying to figure out how to get them away from our incumbent carriers,” he noted.

Carl Bach, leader of the Program Manager Solutions Specialty practice of Guy Carpenter in New York, said there's “a telling story” revealed when he compares today's level of activity to the level just six-to-nine months ago.

Back then, “you'd work so hard and you'd find one market that might have interest if you were successful.”

Now “we have multiple programs with multiple carriers interested in doing them for the first time in a long time,” he said.

“More people are listening to startup stories,” he said, noting that at a meeting he attended during the American Association of Managing General Agents annual conference last month in the Bahamas, carrier representatives said they would consider a program with premiums as small $2-to-$5 million if they felt it could get to $10 million in a couple of years.

While there's less competition in this size range, he said carriers with underwriting experience are looking to capitalize on that expertise by helping startups they think can eventually grow to significant volumes.

“In today's market, we're seeing startup programs and standard lines programs, such as workers' comp and auto liability,” being entertained by multiple carriers, according to Mr. Reynolds.

“Three years ago, you couldn't get any of that done,” he said. “You probably would have needed a $15 million book in a rollover situation with extensive statistics to justify the profitability.”

He reported that AmWINS successfully launched two programs this year with very little program-specific data, instead leveraging data from the Insurance Services Offices.

In addition to the two recent programs–one for beer wholesalers, and a separate financial product designed to protect lenders when borrowers default on their loans–AmWINS has 30 programs with nearly $250 million.

Included are programs based on classes of business–such as pizza delivery operations and welding supply distributors–for which multiple insurance products are offered to class members, and underwriting facilities designed around a product, instead of a class.

Explaining the latter, he said, for example, that AmWINS has a facility writing property coverage for many business classes in multiple jurisdictions.

“We're growing in both ways. I think it just coincides with a fairly soft market we're heading into,” he said, explaining that with capacity no longer constrained and rates dropping, carriers are seeking new ways to grow.

Mr. Bach said carriers continue to be flexible in allowing the MGAs to use their own systems and third-party administrators.

On the other hand, he noted that he has also seen carriers try to get MGAs to set money aside to cover the possibility that a selected TPA goes out of business or fails to handle claims satisfactorily, resulting in termination.

Reporting that he'd seen carriers impose this requirement three times over the last five months, he said “there are things you need to take into consideration to offset the impact of being flexible.”

He said he hasn't witnessed any changes in the incidence of carriers requiring risk-taking through sliding scale commissions or captive development.

“You still have your spotty markets that say you need to take risk,” he said, noting that others don't want to get involved in that at all, instead paying flat commissions, while others want a sliding scale.

He did say, however, that he's seeing some elevation in commission levels–increasing from past levels of 19-to-21 percent, to 22- or 23 percent more recently. “We even did one at 24.5 [percent] paid to the MGA,” he added.

Mr. Bach said he has seen instances where programs went to the carriers that had “gone out and spent time with that MGA–gotten to know them as opposed to just looking at the black-and-white submission.”

When a carrier demonstrates it is “giving as much importance to that MGA relationship as to just the business itself, the MGAs like that. They feel comfortable,” he added.

Anne Marie Roberts, president and chief executive officer of Dallas-based BMS Intermediaries, said MGAs are also looking for carriers that have some willingness to expand underwriting boxes.

“At times, an MGA will want flexibility to maybe go into another region, or with rate or product,” she said. “So, most MGAs look for carriers that are willing to work with them–to partner.”

Consistency, she added, is a critical consideration, contending that the “worst thing that can happen” is to get to 2008 and the carrier decides to pull out of the program class.

Unable to renew anything past a certain date, the MGAs would then have to seek out a replacement carrier, but in the meantime face the risk that their retailers will go somewhere else. “That's a bad situation for any MGA. They want long-term partners,” she said.

Mr. Bach noted that MGAs still ask for exclusivity. While carriers remain reluctant to write full-fledged exclusivity into contracts, if an MGA performs and a relationship develops profitably in a given territory, no one else is appointed, he said.

Mr. Reynolds said the firm has a security committee authorizing whether carriers meet financial security standards, adding that while high financial ratings give AmWINS more comfort, carriers are also chosen based on their track record with the firm.

“If we have carriers that have demonstrated a willingness to have long-term relationships–to ride the market cycles with us–we're going to go to those carriers,” he said.

In addition, some carriers are selected based on their people, he said, noting that some of the newest program carriers have individuals working in their organizations that his firm knows well from their backgrounds at other insurers.

Finally, he said, “if it's a very difficult placement–something most people would say no to–then as long as they meet our financial rating, we're just looking for a carrier that's going to do it.”

From a carrier's perspective, Lois Massa, vice president of the programs unit of Swiss Re, told NU she has seen more competitors enter the program business arena in recent years.

“It's a hot area,” she said during a March interview at the midyear conference of the National Association of Professional Surplus Lines Offices Ltd. in Palms Springs, Calif.

Giving one measure, Ms. Massa–who has managed a program segment at Swiss Re (then GE Insurance) since 1998–said her company was one of five founding carriers of the Delaware-based Target Markets Program Administrators Association, which last year had 38 carrier members.

In spite of an increasing number of players and heightened competition, she said there is no undue pressure on her company. “There's enough program business out there for the major players,” she added.

Mr. Bach said that in contrast to last year, when new companies were being set up to focus on programs, recent entrants are more likely to be traditional insurers that have used the MGA distribution platform before.

“We get a number of calls from treaty clients who want to investigate the MGA marketplace,” he said, noting that they want to grow middle-market business and believe much of that market is controlled by MGAs and written as programs.

Among the newest entrants is Delos Insurance Company, set up last year by longtime program specialist Detlef Steiner (formerly of Clarendon) to focus solely on programs. He sought capital from private equity investors to launch the venture and now expects to outgrow that capital by next year.

Growth is also on the horizon at Swiss Re, according to Ms. Massa, who said her unit no longer takes a reactive approach to the business.

“In the past, if a market was going away, like Reliance or Legion, the business was on the street [and] came to us and all other program markets,” she said.

Recognizing, among other issues, that such crisis situations leave little time for due diligence, her unit no longer waits for programs to show up at the door but instead works to proactively forge relationships with experienced program managers.

“Then we can go to their offices and ask: 'What do you have that you would want to do with us?'” she noted.

Two new programs that Swiss Re wrote this year are programs “we went out and found,” she reported.

Despite warm welcomes from carriers, some programs still have trouble getting off the ground. Mr. Reynolds gave the example of a general liability facility for contractors that AmWINS has been trying to start.

There's still a reluctance to underwrite residential contractors, in particular, he said. “We'll get it done, but that's been troubling,” he noted.

Ms. Roberts said nationwide transportation programs versus regional or single state programs are struggling to find a carrier partner for this year, adding that programs involving hazardous materials and any programs with severity losses would also be a challenge.

But challenges that have more to do with MGA character than classes of business have diminished, she said. “It's a more sophisticated world than it was 15 years ago when you did a deal on a napkin or with a handshake.”

“Underwriters are a lot more educated than they used to be. There's a lot of actuarial data available,” she added, noting that with actuaries on staff, BMS can assist MGAs and carriers with technical aspects of program analysis.

Mr. Reynolds, who heads up the underwriting and actuarial functions for AmWINS, also said his firm applies strong analytical discipline to programs–building price monitors and models to make sure they produce expected profits, and using vendor catastrophe models to analyze property risk.

In addition to the MGAs practicing more discipline, Ms. Roberts said that “people who got burned by bad programs–reinsurance intermediaries included–are fussier about who they do business with.”

BMS does license- and background checks on MGAs, she noted.

“Most of the business we see is from reputable people and it's doable,” she added.

Art caption:

Carriers are starting to bend over backwards when it comes to size requirements, historical data and territorial boundaries on program business, experts say.

“We've had multiple programs where we have multiple carriers interested in doing them for the first time in a long time.”

Carl Bach, Leader,

Program Manager Solutions Specialty Practice

Guy Carpenter

“It's a more sophisticated world than it was 15 years ago, when you did a deal on a napkin or with a handshake.”

Anne Marie Roberts, President,

BMS Intermediaries