MARKETING
It's "business unusual" at Alea Alternative Risk,
where tough risks can find a stable home
By Elisabeth Boone, CPCU
Alea Alternative Risk's Senior Vice President and Chief Underwriting Officer Vance Sawamura (left) and President and Chief Executive Officer Rob Byler at the corporate offices in Rocky Hill, Connecticut.
In a market beset by terror threats, economic uncertainty, and insurer instability, agents and their clients who once relied exclusively on traditional carriers are now asking: "What's the alternative?"
For a growing number of agents, brokers, and commercial insureds, the answer to that question is "the alternative market." Born in the severe capacity constriction of the mid-1980s, the alternative market offered agents and their clients with challenging exposures a way to escape the volatility of the underwriting cycle, enjoy stable protection, and participate in both underwriting and investment profits. The price? Assume some or all of the risk, be religious about loss control, and give up the security blanket of traditional coverage.
Viewed by many pundits as a temporary solution to a temporary problem, the alternative market wasn't expected to last much beyond the first few rate cuts announced by big standard carriers. Although some business did move back to traditional insurers once premiums started heading south, the alternative market definitely didn't fold its tent. Today, in fact, reliable estimates say that fully 50% of commercial property/casualty premium volume now resides in the alternative market. While many traditional insurers lick their wounds and bemoan their falling ratings, the alternative market continues to grow not only in volume but also in creativity and flexibility. No longer just a haven for tough risks that can't find a home elsewhere, the alternative market has become a powerhouse of capacity, ingenuity, and entrepreneurial solutions that go way outside the box. Unburdened by asbestos and environmental exposures, unencumbered by endless layers of bureaucratic turgor and the fallout from go-go investment mania, the alternative market runs lean, mean, and savvy amid the myriad challenges of the new millennium.
Newcomer with a history
The brave new world of the alternative market abounds with players: some with established, respected credentials and others as fresh as the ink drying on their articles of incorporation. Even among the most extreme risk takers, few commercial enterprises want to bet their assets on an untried alternative provider. Enter Alea Alternative Risk (AAR), new in name but deep in experience. AAR is a member of the Alea Group (Alea Group Holdings [Bermuda] Ltd.), a global, multi-line entity that offers a wide range of property and casualty reinsurance, insurance, alternative risk, and finite products. The Alea Group was organized in 1997 by management and an affiliate of Kohlberg Kravis Roberts & Company (KKR) to pursue targeted growth and acquisition opportunities in the insurance and reinsurance industry. The Alea Group, rated A- by A.M. Best and Standard & Poor's, has $660.7 million of operating capital and in 2002 posted gross written premium of $931.6 million. The group has licensed operating companies in the United States, London, Bermuda, Switzerland, and Jersey.
Alea Alternative Risk offers alternative risk products and risk transfer mechanisms for individual accounts and program business. Through Alea North America Insurance Company (formerly Seven Hills Insurance Company), AAR provides workers compensation, general liability, auto liability, and property insurance to clients who share risk, unbundle services, and use alternative funding mechanisms. Alea North America Insurance Company is fully licensed in 48 states.
Heading up Alea Alternative Risk is Rob Byler, president and chief executive officer. Byler also serves as executive vice president of Alea North America Insurance Company, based in Rocky Hill, Connecticut. He has overall responsibility for alternative risk operations at Alea Group and brings to his position more than 20 years' experience in the alternative risk area. He describes AAR's objectives in the context of the Alea Group's history and operating philosophy.
Global reach, local power
As its first step in forming the Alea Group, he explains, "KKR in 1997 bought Rhine Re, a Swiss reinsurer that was primarily a property underwriter in the European market. KKR's intention was to use Rhine Re as a platform to create a global insurance and reinsurance operation. Since then we've made a number of major acquisitions, and in 2000 we changed Rhine Re's name to Alea to reflect its expansion into a global operation." In establishing Alea, Byler continues, KKR had several objectives.
"First, we wanted to be an underwriter in the major markets around the world. Second, we took steps to acquire licensing in all those markets. Third, we wanted to develop an integrated, highly disciplined underwriting process, including IT and communication of information, as well as appropriate corporate oversight. Finally, we strove to put underwriting decision making in the right locations. We put as much underwriting authority as possible in our local franchises, or business units," he says. "At the same time we recognize that there's still a strong corporate underwriting standard, and where necessary seeking corporate involvement to make sure that we maintain this disciplined bottom-line underwriting focus." In support of this objective, Byler says, "We have put together a very experienced and talented professional staff, and each of our offices is focused on the underwriting and business plan developed for its particular franchise."
"An excellent way for retailers to have more control over their destiny is to become involved in alternative market structures like captives. By putting some of their own money at risk, they create another revenue source."
--Rob Byler, President and Chief Executive Officer, Alea Alternative Risk
Alea's management team, Byler continues, "is somewhat different from most because each of us has invested his or her own money in the organization, in line with the KKR philosophy. There is truly not only a mental but a financial commitment by the management group, and that goes pretty far down into the company. Probably 40% or 50% of our employees here in Rocky Hill have put some of their own money into the organization."
Another difference between Alea and some of its competitors, Byler remarks, is "since 9/11 we've seen a lot of startup companies with some big capital numbers. We started this organization in 1997, and we had time to put together the infrastructure, bring on the people, and have the systems in place so that when 9/11 occurred, we'd already built a solid base and were ready to move forward very aggressively when a lot of the newer players were building their infrastructures. Like many of them, we have limited legacy issues, so asbestos and some evolving latent-injury exposures have no significant impact on our balance sheet."
Many of the newer entrants, as Byler observed earlier, have come onto the scene highly capitalized. "If you start with a significant amount of capital, you have to write a substantial volume of business to make your capital work," he says. "Our company is somewhat different. We have significant capital in the organization, but we don't put in capital just for the sake of doing so. We're very focused on developing a highly efficient economic model for the company. We'll always have sufficient capital, but we want to make sure we can make that capital work." KKR, he continues, has made a commitment to support a capital enhancement program for Alea, "so that as we seek additional growth, we will bring capital in through KKR or, if necessary, other private investment, as and when appropriate. (Alea is privately held.) This way, we can be economical with our capital and we can use it in the most efficient manner, yet we don't have any constraints on growth. As we develop our business plan and put forward pro formas and achieve sufficient ROEs, we can grow the capital to match it."
Alternative risk strategy
Like its parent company, Byler says, Alea Alternative Risk has focused on assembling a team of talented professionals with solid experience in the alternative risk business. "Even though there's a significant amount of business in the alternative market, it's not easy to find people who have been heavily involved in this type of business for a long period of time and have the ability to work through hard markets, soft markets, and carrier entries and exits," he observes. "We've put together a great group of people who have that kind of ability and experience. I've been involved in the alternative risk market since 1984, and all of us have seen the business evolve over the years. Depending on which industry estimate you use, the alternative market has nearly doubled in size over the last 10 years," Byler asserts. "We think we have a big market segment to work in. The alternative market is not just a hard market fix; it has lived through both hard and soft cycles and has become a substantial part of the U.S. property/casualty market. We know we can write long-term business, and that's what we intend to do."
Vance Sawamura, Alea Alternative Risk's Senior Vice President and Chief Underwriting Officer.
At AAR, Byler says, "We know that taking risk in this business is the key to success. We've all seen the problems with fronting carriers that try to live on fee business. Because of the issues surrounding fee-based fronting business, that model is very difficult to work with, and unfortunately we've seen it fail with a number of carriers. That's why we think taking risk is really the driver. We bought an insurance company in 2001 so that we would have the ability to issue paper and take risk. When you're a reinsurer in the alternative risk world, all you think about is paper, because without it you really have a difficult time participating in the market. We are also a licensed reinsurer so that in addition to writing insurance, which is the majority of our business, we also can provide reinsurance."
In the alternative risk market, Byler remarks, there are a number of reinsurance options that don't involve fronting carriers. "Reinsurance can be arranged for captives, for risk retention groups, and for public entity groups that are allowed by statute to issue their own paper, and we like having the flexibility to do all those things," he says. "We focus on selecting high-quality risks that are among the top performers in their peer group, and in providing unbundled services we work with partners who rank high in their field. Between the risks we select and the service providers we deal with, we think we have a quality team with the expertise to support the alternative risk mechanism. We're trying to get repeat business from our producers, so we limit the number of TPAs and other service providers we deal with to ensure we can manage those relationships effectively. We've seen from the experience of some competitors that when you have too many TPAs or underwriting managers or producers, you begin to lose quality and lose the ability to understand how each of those parties is managing your individual accounts. So for us, having a manageable number of service providers is an important piece of the puzzle."
A number of reinsurers, Byler comments, have gotten involved in alternative risk with an insurance company and have not succeeded. "Alea Alternative Risk is set up so that all insurance functions are handled out of our operation--compliance, finance, underwriting, loss control, claims--and all of those functions are supported by people who have extensive insurance backgrounds, not people from the reinsurance side," he explains. "In our underwriting department we have both insurance and reinsurance underwriters so that we have the expertise to manage each of those disciplines. That's a critical difference between AAR and some of our competitors that I think will make our insurance operation very successful."
Target risks
As noted earlier, Alea Alternative Risk focuses on providing solutions in the areas of workers compensation, general liability, auto liability, and property. "We have a very broad underwriting appetite across our four major lines of business," says Vance Sawamura, senior vice president and chief underwriting officer. "Among our preferred classes are retail operations, wholesale distribution operations, franchises, habitational business, light to medium artisan and trade contracting, light to medium manufacturing, all kinds of trucking--long haul, intermediate haul, short haul--as well as public entity business except employment practices liability exposures." On program business, Sawamura explains, target risks are in the range of $5 million on the small side up to $20 million or more on the large end. "Our average program size is currently in the range of $12 million to $14 million," he says.
"We don't have a significant amount of business below $10 million," Byler remarks, "but we do believe there are some well-structured programs that a lot of the market is running away from, so we like to keep an open mind about business in that price range. We do entertain those risks, but they're a smaller part of our overall volume."
Adds Scott Roe, senior vice president and chief marketing officer, "A number of our competitors have quite high thresholds--$20 million or more--and we believe there are some good opportunities in that $5 million to $10 million range. Our preference is to look at homogeneous programs by class of business, but we'll also consider heterogeneous deals. In terms of geography, we prefer regional to national accounts--but again, we're willing to entertain national programs that fit very specific parameters."
Meeting market challenges
In a market like today's, challenges abound, for alternative risk providers as well as traditional insurers. "The biggest problem in our market is capacity, in that there's not enough of it in the alternative market arena," Byler comments. "At the moment there aren't enough quality providers who understand the business and know how to handle it. Clearly, like our competitors, we're interested in growing. Many providers have exited the market, and few new players have come in to provide that lost capacity, so we and other players are entertaining mountains of submissions."
Depressed capacity inevitably is accompanied by reduced competition. "Over the last 12 to 18 months, competition has definitely lessened, both on a voluntary and involuntary basis," Sawamura observes. "In the market where we operate, capacity has been the driving issue. You need to be competitive and you need to price appropriately, but we're able to get good prices in part because there is a lack of capacity in the alternative market."
Adds Byler, "Because of the prolonged soft market, there is definitely a need for everybody--traditional insurers and alternative risk facilities--to pursue stronger pricing and improved terms on the underwriting side. With the lack of growth on the investment side of the house, underwriting is king right now. No one has the ability to play the cash flow game, and there's so much focus on the bottom line that clearly stronger pricing is needed for the long-term stability of the market."
ART solutions
As the alternative risk market has gained ground over the last two decades, a growing number of newcomers are seeking ART solutions. "There's a higher level of interest in the alternative risk market by players who have not historically been in the market," Roe remarks. "A lot of agents, brokers, and groups are approaching us with new accounts and new deals that have not traditionally been in the alternative risk market. We're an unbundled market. We look at excess over qualified self-insurance, risk retention groups, captives and rent-a-captives, pools and trusts, combined line aggregates, large deductibles, and combinations of those types of programs. I think the approach that differentiates us from a lot of other players in the market is that we're willing to unbundle to third parties, whether it's claims, loss control, or underwriting. We control the ultimate underwriting authority through our guidelines, but we allow the individual account underwriting and programs to be done through a managing general underwriter or a general agent. We try to create a win-win arrangement with our third-party administrators and vendors."
"I think the approach that differentiates us ... is that we're willing to unbundle to third parties, whether it's claims, loss control, or underwriting. We control the ultimate underwriting authority ... but we allow the individual account underwriting and programs to be done through a managing general underwriter or a general agent."
-- Scott Roe, Senior Vice President and Chief Marketing Officer, Alea Alternative Risk
AAR's Bermuda affiliate, Alea Bermuda, maintains a finite underwriting team. "We have put together some joint products that have a finite flavor," Byler says. "That's another area where we can offer a different approach to our clients."
Of necessity, clients who move into the alternative risk market must be prepared not only to assume risk but also to practice rigorous loss control. "Clients have a vested interest in achieving good underwriting results as they share the risk with us, either wholly or partially," Sawamura says. "Many have a significant retained layer and may take 100% of a loss up to $500,000, so they do have a strong interest in forming a true partnership." Adds Byler, "We've always said that the greatest incentive to develop a good loss control program is having to pay $250,000 to $500,000 of every loss."
Access for agents
A significant amount of Alea Alternative Risk's business comes from mega-brokers like Aon and Marsh. "In most parts of the country, an agent or broker will have a class of business that's desirable, or a block of business in a class that the MGU is underwriting, and the agent seeks an appointment from that MGU to be part of its program," Roe explains. "We get a lot of calls from smaller agents in California because of the crisis in work comp. We maintain relationships with MGUs that do most of the underwriting of our programs in California. Those MGUs usually have appointed relationships with retailers. Most of our deals in California are brought to us by MGUs or underwriting managers that for the most part have an agency plant."
The alternative risk market, Byler notes, offers exciting opportunities to retail agents and brokers. "An excellent way for retailers to have more control over their destiny is to become involved in alternative market structures like captives," he says. "By putting some of their own money at risk, they create another revenue source. It's clear to us that retail agents know their risks better than anybody else, so if they're involved in the selection process, it can be a very advantageous situation."
Today's alternative market clearly abounds with opportunities for retail agents and their clients to share in both risks and rewards. Alea Alternative Risk, with its seasoned players, disciplined underwriting, and creative solutions, stands ready to meet the challenges of clients with an appetite for risk. *
For more information:
Alea Alternative Risk
Phone: (860) 513-4180
Web site: www.aleagroup.com