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VENDORS

Program administrators face a broad range of challenges these days—including operational, strategic and market. Vendors can help address many of these hurdles.

Operational challenges

According to Kevin Donoghue, CFA, CPA, CIC, the biggest operational challenge is rate. “Rate flows through the entire organization,” he says. “The lower the rate, the lower the commissions. Policy count isn’t lower, though, so it’s tough.”

Lower rates call for greater discipline. “Program administrators that will make it over the long haul are those that maintained underwriting discipline during tough rate times,” he says. “Those that burn their markets aren’t going to be around.”

Richard Look, president of West Chester, Pennsylvania-based Vertibrands, a full-service marketing communications firm serving program administrators, has seen the same issues. “Program administrators have been buried by the soft market,” he says. “I don’t think others in the industry have a full appreciation of just how much MGAs have cut back. The market couldn’t turn too quickly for most of them.”

Organic program development is another challenge, according to Donoghue, managing director of New York City-based Mystic Capital Advisors Group, a strategic business consulting firm active in insurance mergers and acquisitions. “Many groups have developed and nurtured a program, but they haven’t developed any more,” he says. “Others have built on their success. Rockwood Programs is a great example. They started with one professional liability program and added more. They developed around their core competencies.”

Program administrators also face the risk of losing a carrier. “If they maintain discipline and develop programs, including their primary one, this shouldn’t be a dramatic risk,” Donoghue explains. “Another market will be waiting. Still, it’s good to have discussions and know what your options are. You can’t wait until the last minute.”

Strategic and financial challenges

From a strategic standpoint, the graying of the insurance industry is a big factor, Donoghue says. “Many program administrators are small business owners, and they’re getting close to retirement,” he explains. This feeds other strategic issues.

First is lack of clear succession. “Many of these organizations are pretty lean,” he says. “There’s not the strong financial bench strength they need—individuals who could afford to buy out the principal.”

Couple that with a potential capital gains rate change. “The rate is slated to go up, at the latest, in 2011,” Donoghue notes. “This could drive program administrators to seek a sale without having solid in-house succession arranged.”

On the flipside, consolidation continues. The larger MGAs, MGUs and wholesalers need to buy program administrators to continue to grow, Donoghue says. “It’s a nice feeling for program administrators to know there’s a pretty solid marketplace for their operation.”

Sheer financial challenges also exist, including staff efficiency. “Are people efficiently underwriting, placing and renewing policies?” Donoghue asks, “or are they spending too much time with manual processes? If program administrators run efficient operations, they’ll be around for the long haul, more often than not.”

Organizational excess is another financial concern. “Those firms that went out and got high-end offices, lavish furniture and other things that are inappropriate for long-term stability will suffer during tough times,” he notes. “More often than not, your customers and brokers don’t come visit you. A lot of people get ahead of themselves with their cost structure.”

Don’t go it alone

Program administrators can find allies when facing these issues. “For instance, actuarial firms can help develop programs and pitch books,” Donoghue says. “Financial vendors can help with the purchase or sale of a business. General consulting organizations can help drive efficiency gains,” through focus on workflows and technology.

One of the greatest needs Look sees among program administrators is in the area of technology. “There seems to be a struggle to get all of the various pieces to work in cooperation with one another,” he notes. The prospect for a solution is good, though. “Just four years ago, there were just a couple of technology players serving the MGA space,” he recalls. “Today, there are several.” And some are starting to put the pieces together.

What Look finds interesting is the source of solutions. “You have program administrators that have built the better mousetrap and they’re sharing that with other like companies,” he says. One such group, he says, is Wilmington, Delaware-based Counterpoint Software, a technology solution provider that grew out of an MGA several years ago. Look’s own firm, which was spun off from Venture Insurance Programs, in West Chester, Pennsylvania, is another example.

Focal Point, which was part of Woodbridge, New Jersey-based NIP Group, is yet another. It offers e-mail marketing for program administrators. “The company consistently delivers results,” Look says. “It’s a situation where the company built a mousetrap and then ultimately said, ‘We could probably turn this into a profit center by having it as an independent operation.’” And they did.

Value in association

According to Look, program administrators can learn which vendors offer what solutions by tapping their Target Markets Program Administrators Association membership—and taking part in meetings. “Program administrators can talk with other businesses that have been there,” he says. “They’re all experiencing the same issues. At the workshops, most of the presenters are association members.”

Meetings offer more than just peer-to-peer counsel and education. “Many of the vendors that take part have a very clear and narrow focus—they’re solving problems for program administrators,” he explains. Some, of course, have broader reach but, in many cases, have units with a proven specialty helping TMPAA members. “I think the members benefit greatly from that focus and expertise,” he adds.

Members run the risk of missing out, though, Look warns. “So often, the focus of MGAs is on making sure they conduct carrier discussions,” he says. “That’s important, of course. But the association meetings offer a great opportunity to talk with partners who can provide relevant products and services” that can lead to efficiency gains or address other operational, strategic or financial challenges.

At the TMPAA Summit in October, workshops start even before the welcome reception. “I strongly encourage attendees to take in these and other sessions,” Look says. “They provide a great opportunity for learning and for personal, back-and-forth discussions.” Look has presented at similar TMPAA sessions, and is impressed with the amount and quality of interaction they offer.

Explore the options

In talking with vendors, program administrators may find solutions are within their reach. “People we’ve spoken with sometimes think we’re too big for them,” Look says. “The same, I believe, is true for other vendors.” That’s generally not the case, he adds.

In his travels, Donoghue has seen some program administrators tap vendor partners more than others. “Some companies run really efficient operations and, for that reason, may feel no need to bring in a consultant or vendor,” he says. That may be true in some cases, but not all. “For the most part, I don’t think most program administrators make use of vendor services to the extent they should,” he adds. “They look at the short-term cost rather than the return on an investment.”

Now might be an especially good time to consider partnering with solution providers if new work needs to be done. “Program administrators might be hurting right now, but by outsourcing to a vendor partner, the expense becomes scalable,” Look explains. “If work is done internally and cuts need to be made, the only choice is to lay people off. Then they lose that expertise entirely.”

Whether the challenges are operational, strategic or market-based, Look and Donoghue believe program administrators would do well to explore the benefits outside resources could deliver.