Merton J. Segal, CPCU, is chairman and chief executive officer of Meadowbrook Insurance Group.
As we approach the new millennium, the most stable presence in the property/casualty insurance marketplace no longer is offered by old-line carriers with roots in the 19th century and earlier. Thanks to a wave of mega-mergers and a seemingly endless soft market, the so-called "big guys" have lost their near-total control over rates and capacity.
Coming on strong is the alternative market--flexible, aggressive, creative, and anything but traditional when it comes to designing risk management programs for an impressive and growing variety of exposures. Now estimated to constitute some 40% of the commercial property/casualty market, alternative risk managers have become a formidable force in the competition for premium dollars. What's more, a recent study by Conning & Co. on alternative markets suggests that traditional insurers may lose substantial business to alternative markets when premiums begin to rise again.
This finding comes as no surprise to a pioneer in the alternative market: Meadowbrook Insurance Group of Southfield, Michigan, whose slogan is "The Alternatives People." To find out just what kinds of alternatives Meadowbrook offers, and for what kinds of risks, we'll speak with the organization's top executives: Merton J. Segal, founder, chairman, and chief executive officer; Robert S. Cubbin, president and chief operating officer; and James R. Parry, Sr., vice chairman and chief marketing officer. First, we'll review Meadowbrook's history and examine its operating structure.
Formed in 1955 by Chairman Merton Segal, Meadowbrook, Inc., now serves as the umbrella organization for Meadowbrook's insurance company management, underwriting, accounting, agency, actuarial services, claims handling, loss prevention, public entity services, pool, and captive management. Meadowbrook is a vertically integrated organization that owns admitted and surplus lines insurers, retail insurance agencies, a captive management company, a reinsurance intermediary, and related facilities. Its subsidiaries are:
* Star Insurance Company: Admitted in 49 states and the District of Columbia, Star is a program insurer that offers workers compensation and professional liability coverages to the members of trade associations, public entity organizations, affinity groups, and individual businesses and professionals. Star also provides policy issuance, claims service, and reinsurance support to captive insurers and other alternative risk funding mechanisms. The insurer has a Best's rating of A-.
* Savers Property & Casualty Insurance Company: Chartered as a surplus lines insurer, Savers offers all lines of property and casualty insurance on either an admitted or surplus lines basis in all 50 states. Its Best's rating also is A-.
* Crest Financial Corporation: A leading producer of commercial trucking insurance in California, Crest owns Williamsburg National Insurance Company, Commercial Carriers Insurance Agency, a claims adjusting firm, a loss control subsidiary, a premium finance company, and a professional trucking association for 3,500 small trucking firms in California.
* Williamsburg National Insurance Company: A Crest Financial subsidiary, Williamsburg is a licensed carrier for program business and is rated A- by A.M. Best.
* American Indemnity Insurance Company, Ltd.: Domiciled in Bermuda, this insurer serves as a risk-sharing mechanism for clients who use Meadowbrook's rent-a-captive facilities.
* Meadowbrook Risk Management, Ltd.: Meadowbrook's Bermuda and Barbados offices provide captive insurance company management services, including accounting, consulting, reinsurance placement, policy issuance, and regulatory compliance.
* Meadowbrook Intermediaries (MINT) and Meadowbrook International, Inc.: MINT, based in New York, and Meadowbrook International in Bermuda offer reinsurance brokerage services on behalf of Meadowbrook companies and other clients.
* Meadowbrook Claims Services: MCS is a full-service claims administrator with offices throughout the country through which it provides claims and risk management services to insurers, self-insureds, captive insurers, purchasing groups, risk retention groups, and public entity funds, pools, and trusts.
* Meadowbrook Insurance Agency: Founded in 1955 as a retail property/casualty agency, Meadowbrook Insurance Agency is now one of the largest business agencies in Michigan. It offers commercial property/casualty and life, accident, and health coverages, as well as personal property and liability insurance, to clients of all sizes.
Now in its 45th year of business, Meadowbrook Insurance Group generates and manages over $400 million in premium and boasts an enviable retention rate of well above 90%. Over the last 10 years, the group's GAAP combined ratio has consistently remained under 100%, significantly below the industry average; in 1997 it posted an impressive 89.7%, its lowest combined ratio ever. Including its home office, Meadowbrook has 19 offices around the country and employs some 700 people, half of whom are based at the home office with the other half in regional facilities. "Our offices are distribution and management centers," President and Chief Operating Officer Robert Cubbin explains. "They're full-service facilities, providing underwriting, claims, and loss control to our clients."
Merton J. Segal founded Meadowbrook as an insurance agency in 1955. Today the agency is one of several companies in the Meadowbrook Group which also includes five insurance companies, a captive management company and a reinsurance intermediary.
Clients can choose from more than 120 programs and can purchase services on either a bundled or an unbundled basis. "We have some national programs, but the majority are local or regional," Cubbin says. "Our regional network gives us the advantage of being close to our agents and policyholders," says Vice Chairman and Chief Marketing Officer James Parry. That network is likely to grow over time, says Founder and Chairman Merton Segal. "We're seeking to expand our presence in various parts of the country for both sales and service."
Multi-level distribution
To distribute its products and services, Meadowbrook relies on not one but many distribution channels, Parry explains. "We work with national and regional brokers and independent agents, on both a wholesale and retail basis, as well as with third-party administrators, reinsurers and reinsurance intermediaries," he notes. "We also see significant opportunities in marketing on the Internet." Meadowbrook's Web site (www.meadowbrookinsgrp.com) was chosen Insurance Web site of the Year for 1998 by Hales Report, and Parry views the World Wide Web as an integral segment of our future marketing plan.
Not for the Fortune 500 only
In the early days of alternative risk management, clients tended to be drawn from the largest corporations--those that had the cash and the clout to assume a portion of their own risk. Although many corporate giants use its alternative facilities, Meadowbrook emphasizes that it offers its wide range of services to agents, brokers, and insureds of all sizes. Through Meadowbrook, these clients have access to the same kinds of sophisticated solutions that previously were available only to the largest corporations.
Robert S. Cubbin is Meadowbrook's president and chief operating officer.
Meadowbrook is no newcomer to the market of smaller and mid-sized risks. "In the 1960s, we became active in commercial mass marketing through association endorsements and other kinds of groups," Segal says. "In this way we were able to bring the benefits enjoyed by larger companies to smaller and medium-sized insureds. We put together a number of programs through carriers who entertained that kind of business. In the early to mid-'70s," he continues, "the capacity crunch caused the cancellation of many of these programs. We formed our first captive in 1976 to provide products liability coverage for heavy equipment manufacturers. At that time, products coverage was virtually unavailable. A captive was an ideal solution for that group, and we began to expand our involvement. When the next crunch came in 1985, we formed our own reinsurer and fronting company to provide underwriting, loss prevention, claims, and other services to our clients with captives." Fifteen years later, Segal observes, "That same expertise in today's market is helping agents cope with the challenges of competition."
James R. Parry, Sr., is vice chairman of Meadowbrook.
Agency orientation
Meadowbrook's origins as a retail independent agency give it a unique and valuable perspective on the needs of today's agencies and brokerages and their clients, Parry points out. "As an agency, we understand the concerns and challenges of the marketplace from the producer's standpoint," he notes. As an alternative market specialist, Meadowbrook also enjoys the advantage of not getting caught in the downward spiral of pricing that's characterized the traditional market for the last several years. "Even in the soft market, our net agency commissions are up over 30%, and our agency's retention rate is above 90%," Parry says, adding, "We have the flexibility to offer our clients both traditional and alternative risk management solutions."
Underscoring Meadowbrook's strong identification with the agency side, President and Chief Operating Officer Robert Cubbin explains, "We manage five U.S. insurance companies, but we don't consider ourselves an insurance company. We're a risk management company that can provide all insurance company services. We have an agency orientation, history, and culture. Working with us, groups and associations can control their own business and participate in underwriting profits and investment income."
Benefits of risk sharing
Risk sharing takes place when an insured and/or an agent participates with an insurance company on a percentage basis to retain a portion of the risk and pay a portion of any losses. At Meadowbrook, risk sharing "is the biggest difference between us and our competitors. It is the essence of what we do." Both agents and insureds can form risk-sharing partnerships through a variety of captive structures: onshore, offshore, owned (by a large individual client or by a group), or the increasingly popular "rent-a-captive" option. Under this approach, the policyholder "rents" the capital and structure of an existing insurer and receives a preferred class of stock from the insurer. Captives can be set up as stock, mutual, or reciprocal entities.
Whatever its structure, the Meadowbrook executives emphasize, the captive approach offers insureds a degree of control not possible in the traditional market: price stability, coverage availability, focused loss control efforts, direct access to reinsurers, and participation in underwriting profits and investment income.
In the traditional market, Segal points out, "An agent can try to get a contingency or special bonus for moving a book of business from one insurer to another, but you can't do that every year. Being involved in a risk-sharing arrangement gives agents the opportunity to enjoy real profit sharing. The alternative market offers good coverage, reasonable rates, and stability--there's no need to shop every year. We focus more on the individual participant than on the market as a whole. We think what people are seeking most in today's market is stability."
Captives in action
Risk sharing through a captive structure clearly offers agents and brokers an attractive opportunity to participate in the underwriting profits and investment income on the business they produce. "We talk to producers about risk-sharing relationships, which are our core strength and competitive advantage," Cubbin explains. "This gives us the opportunity to form a true partnership with the agent. We do so by using a captive owned by an individual agent or a group, focusing on business they've been writing. The captive or rent-a-captive acts as a reinsurer. We buy excess of loss reinsurance in the market at $100,000 to $250,000 above the retention amount. In the working layer, we create a pro rata or quota share arrangement with the agency captive on, say, a 50-50 basis. The captive pays 50% of the losses and expenses, and we share 50% of the premium. This gives the agent a financial incentive not just to produce business but also to select the best risks, so the agent receives compensation not only through commissions but also by sharing in the underwriting profit and investment income on that business. This allows the agent to participate in the growth of the program and play a role in its expansion."
Most of the alternative market, Cubbin observes, is oriented toward workers compensation risks. Agency captives, however, "work well for other classes, and in some cases can even be used for personal lines." A large portion of this business is placed in agency-owned captives. For example, a group of producers in Massachusetts created a group captive for workers compensation. Policies are issued through our Star Insurance subsidiary, and we have a reinsurance arrangement with the captive." How is this approach faring? "It's very successful; we've enjoyed substantial growth with this client. It started as an insured program; then we helped the agents raise capital, form their own captive, and start earning a profit on the business."
Public entity leader
From its inception in 1982, Meadowbrook's public entity division has grown to constitute a substantial part of the organization's revenue, Cubbin notes. "In the late 1970s and early '80s, public entities couldn't find coverage anywhere," he comments. "That's when we decided to get involved." On public entity business, Meadowbrook serves as a risk manager, not an insurer. "We have six programs nationwide encompassing cities, towns, and other municipalities.
In addition to serving some 2,500 municipalities nationwide, Meadowbrook's public entity division also develops and services government risk management operations for transit authorities, counties, and road commissions.
Looking ahead
In the early days of the alternative market, some insureds may have tended to regard it as a stopgap solution until the traditional underwriting cycle became less volatile. As recent history shows, however, the old three-to-five-year cycle of hard and soft markets no longer prevails; and, given the myriad of changes in the nature of the property/casualty business over the past several years, and its inexorable move toward becoming an integral part of the financial services industry, no one realistically expects things to go back to the way they were 10 or even 5 years ago.
During all that time, the alternative market has been growing in premium volume, as well as in the sizes and classes of risks it manages--and Meadowbrook firmly expects that trend to continue. "The alternative market is becoming more of a mainstay," Cubbin declares. "Its role and its place are firmly established in the overall market. Quite simply, it's a better way of selecting, producing, underwriting, and controlling losses on business--and it's definitely a more efficient way to handle program business."
Despite the growth of the alternative market in both premium and popularity, Cubbin says, "There's still a role for the traditional market; the two can coexist. And if the market hardens, we're positioned to grow much more rapidly than traditional carriers. Even at a 10% to 11% growth rate, the alternative market is growing three to five times faster than the traditional market. We'll be able to ramp up much more quickly for the hard market."
Adds Parry, "We feel our future is bright. We have a strong management team and a multidimensional distribution system. We enjoy direct relationships with banks, financial institutions, auto manufacturers, and others. We pride ourselves on being not just risk managers but relationship managers; that's at the very heart of who we are and what we do." *
©COPYRIGHT: The Rough Notes Magazine, 1999