William D. Brecht (seated), executive vice president of E.W. Blanch Insurance Services,
is joined at the company's headquarters by Scott T. Brock, president and chief operating officer.
For the producer, agent or MGA who has all or most of the tools it takes to administer a program, the reinsurance market provides a very large market for business that can be underwritten on a reverse flow basis. Hundreds of millions of premium dollars currently flow to this market. We'll take a look at the reasons why and the criteria that need to be followed to take advantage of this market source.
Why should an agent/MGA use the reverse flow (reinsurance) market?
Control and Destiny of the Program--Usually an agent or MGA can get exclusivity for a program in exchange for reasonable volume commitment in a single state or regional area. Often, there are commitments to multiple-year support.
Flexibility--The underwriting and pricing flexibility is greater due to the nature of the specific book of business. An agent or MGA may more easily develop specific policy forms or endorsements. Generally, the issuing carrier will have the freedom to be flexible since it will not have other business within the specific program area.
Accessibility--The program agent/MGA can control who has access to the program and therefore control the growth and profitability by virtue of their selection criteria.
Longevity--Since the issuing carrier usually takes a very small segment of the exposure, it is motivated mostly by issuing fees (often called fronting fees) which it can look to as mostly bottom line revenue. The reinsurance market picks up the major portion of the exposure, and normally there will be one lead reinsurer and several other following reinsurers. If one or more reinsurers wish to back away upon renewal of the program, it is generally quite easy to replace them. If the lead reinsurer wishes to back out, quite often one of the other reinsurers will take the lead position. The entire reinsurance market is available for the program.
What are the requirements of the agent/MGA?
Stability and reliability--You must have a current, well-defined book of business in place or business that is controlled which can be placed into the program. It is best that three years plus of experience can be adequately demonstrated.
Commitment to underwriting and pricing--A separate underwriting division/group needs to be in place to see that the underwriting criteria and pricing guidelines are followed. Sales oriented people don't make good underwriters, and the reinsurance market is looking to the agent/MGA for operating within the designed framework of the program.
Product development, marketing and sales--It will be imperative that the agent/MGA has fully developed the product/program, completed a thorough review of the current market, and has in place an effective sales force that will support continuity and strong growth.
Administration--There must be a good financial statement that will give a proper comfort level to the reinsurers and the issuing carrier. Along with the financial position, the agent/MGA must be able to handle the accounting, policy issuance and statistical reporting to the issuing carrier and, often, claims, either in-house or through a TPA. It takes a fairly sophisticated system to handle a program "Turnkey." We can assist with some of the administrative expense such as policy issuance, statistical reporting and claims through outsourcing, but all of these outsourced services have a cost and that cost needs to be looked at carefully. In some cases, outsourcing makes complete sense and in others it is unworkable within the overall cost structure. The administrative, underwriting/pricing and stability is the basis for the "reverse flow" system to work.
When do you know whether you have a program that will appeal to the reverse flow market?
Premium Volume--The program should have a first-year minimum volume of $5 million of annual written premium growing to more than $10 million over a three-year period. It is doubtful that the agent/MGA could afford to handle the administration and systems requirements on less.
Niche Product--Specialization--The product should be unique with a high growth potential. Generally it is the underwriting criteria, coverage and pricing along with the sales and marketing that make the product special in nature. Sometimes the inclusion of an additional coverage of low exposure makes it unique. The fact that it is available exclusively through the agent/MGA is a form of uniqueness.
William D. Brecht says that a program which is a candidate for reverse flow business should have a first year minimum annual premium of $5 million, and expand to $10 million within three years. Some regional expansion is expected, Brecht says, but usually not beyond 10 states.
Regional Program--The program should most desirably be offered in one or two states with regional development anticipated (usually not more than 10 states). There are always exceptions and those exceptions are normally associated with premium volume. It can be very expensive to develop form and rate filings for multiple states with limited premium volume.
Underwriting and Administration--Do you have the capabilities to segregate the underwriting and pricing from sales? Do you have the internal capabilities, or possible outsourcing arrangements, to handle the policy issuance and statistical reporting required? Your reinsurance intermediary can assist you in determining what the requirements are and direct your information services person to determine what the issuing carrier requires. The best arrangement is an electronic interface with the issuing carrier. Possibly outsourcing this segment makes more sense, and in that case, you could be directed to the appropriate outsource.
Now that we have established the areas of importance in the overall reverse flow process, let us comment about how the process works:
Whom do I contact?--Since the business is underwritten mostly by the reinsurance market, it would be best if the agent/MGA would contact a reinsurance broker that specializes in program development such as E.W. Blanch Company. It is very important that the program reach the reinsurer in a package with which it is familiar and through a reinsurance intermediary it looks to not only for traditional business, but also for access to the reverse flow process.
Arranging the issuing carrier (front company)--While not totally critical, it is probably best that the reinsurance intermediary handle the markets that the agent/MGA and the reinsurance broker have agreed to approach. Generally there is a confidentiality agreement between the agent/MGA and the reinsurance intermediary since a great deal of the developed information is proprietary. Also, there is generally a "Market Finding" agreement between the agent/MGA and the reinsurance intermediary that spells out the program, the responsibilities of the parties and generally a fee structure for arranging the issuing company (front) to act as the issuing carrier with the appropriate reinsurance. The reinsurance is usually an agreement of the agent/MGA, the issuing company and sometimes the lead reinsurer, mostly where excess of loss or stop loss reinsurance is involved.
The managing general agent's agreement--This is usually arranged through the reinsurance intermediary between the agent/MGA and the issuing company. Normally, the reinsurers need to agree regarding authority, etc., since their reinsurance agreement will generally need to follow the MGA agreement. This agreement lays out the various authorities given to the MGA, payment terms, and commission scale, reporting requirements and profit-sharing agreements. Most agreements will give underwriting and pricing authority with the requirement that the issuing carrier and reinsurers are entitled to audit all procedures at the office of the agent/MGA. This is usually two times per year, possibly more.
The reinsurance--The reverse flow market (reinsurers) generally provides quota share reinsurance of the issuing carrier to as much as 95% and in some cases for certain coverage 100%. The reinsurers agree to pay a ceding commission to the issuing carrier to cover their commission cost to the agent/MGA plus the agreed fee for the use of the issuing company's paper plus any taxes or assessments. This amount can vary widely depending on whether the business is admitted or nonadmitted (surplus lines), the tax rate for admitted paper in a given state and the overall premium volume of the program. The number could be as low as 2 1/2% or slightly in excess of 10% on the high side.
In summing up the "reverse flow" process, it is easy to see why it is not for everyone because it takes a large commitment on behalf of the agent/MGA. Having said that, it also should be stated that there are tremendous upside benefits to the agent/MGA for profitable programs. *
The author
William D. Brecht is executive vice president of E.W. Blanch Insurance Services. E.W. Blanch Holdings, Inc., is a leading provider of integrated risk management and distribution services, including reinsurance intermediary services, risk management consulting and administration services and wholesale insurance services. The company is headquartered in Dallas, Texas, with branch offices in Atlanta, Boston, Chicago, Cincinnati, Los Angeles, Minneapolis, New York, Philadelphia, San Francisco, San Jose and Wilmington. Swire Blanch Insurance (Holdings), Ltd., the company's international joint venture, has offices located in Buenos Aires, Copenhagen, Hong Kong, London, Mexico City, Miami, Singapore and Sydney.
More information on "reverse flow" business is available from any E.W. Blanch reinsurance broker or by contacting:
Blanch Program Services, 500 N. Akard, Suite 4500, Dallas, TX 75201
Attn: William D. Brecht, Executive Vice President
Phone: (888) 225-5392 -- Fax: (214) 756-7255
Rockwood Programs, Inc., 228 Philadelphia Pike, Wilmington, DE 19809
Attn: Glenn Clark, President
Phone: (800) 365-0816 -- Fax: (302) 764-5477
©COPYRIGHT: The Rough Notes Magazine, 1998
