Program business gets smiles from carriers
Survey shows insurers seek profitable new programs
By Phil Zinkewicz
Program administrators—who depend on the availability of markets for their growth—can feel secure these days. It appears that carriers are looking favorably upon program administrators, especially during the current soft market. Insurers are anticipating diversification that might bring in new premium dollars at a time when competition in the standard market is increasing and rates are decreasing.
Glenn Clark, president of the Wilmington, Delaware-based Rockwood Programs, and the man behind the creation of the Target Markets Program Administrators Association (TMPAA), says that the number of carrier members in the association has increased significantly since its inception.
“When the Target Markets Association was formed in 2001, we had seven carriers as members. Today, we have 41 members and six more have applied for membership. These new carriers are bringing in new capital, not only from within the United States but also from Bermuda and other markets. They are looking for pockets of aggregate business,” he says.
Clark’s assessment of the climate for program business is supported by Guy Carpenter & Co., a leading global risk and reinsurance specialist that is a unit of the Marsh & McLennan companies. In its third survey of domestic insurers that write specialty program business through program administrators, Guy Carpenter examines issuing carriers and their appetites for program business, touching on program administrator criteria, claims administration requirements, monitoring and control practices, reinsurance purchasing practices and views of specialty program market conditions.
The survey shows that specialty program markets appear to be actively seeking profitable new business, from both new program administrators and existing partners, by building product and volume. Underwriting appetites remain robust across multiple lines, the survey says, with carriers looking for new ways to maintain premium writings while maintaining profitable rate levels.
“Change and evolution are the watchwords in the specialty programs marketplace,” says Carl Bach, senior vice president and head of Guy Carpenter’s Program Manager Solutions Specialty Practice. “We are seeing a continued flow of new capital into this market segment, resulting in the emergence of new markets as well as ongoing merger and acquisition activity.”
Bach adds, “Based on the survey results, we expect carriers operating in this space to be interested in most program opportunities presented in 2007. However, the key to successful marriages between program administrators and carriers is a clear understanding of carrier requirements and program needs, as well as program administrator experience, expertise and servicing capabilities.”
Among respondents to this survey, 50% estimate the size of the program administrator specialty program market segment at $20 billion to $30 billion of annual gross written premium, with the remainder of the respondents split between less than $20 billion (27%) and greater than $30 billion (23%). These numbers indicate a perceived smaller market size than noted in last year’s survey. In addition, 48% of respondents describe themselves as writing specialty program business exclusively, compared with 65% in 2006.
Further, respondents indicated they are looking to both new and existing program administrators for premium growth and expansion—adding new lines of business to existing programs (69.6%), expanding territory (60.9%) and growing by acquisition (43.5%).
Among the survey’s other key findings:
• Growing program appetite: Carriers continue to look for growth across most commercial lines of business, including general liability, professional liability, property, auto and inland marine. The two most notable changes from the 2006 survey were in the workers compensation line, where 48% of the respondents are looking to grow their books (a 20% increase) and umbrella liability, where only 26% of the respondents are looking for growth (vs. 65% in 2006).
• Personal lines: The 2007 survey indicates a declining interest among responding companies in growing their personal lines programs, with 60.8% of respondents indicating a desire to grow personal lines, compared with 65% in 2006. Interest in homeowners growth dropped 28% from 2006, while umbrella decreased 13%. There does, however, appear to be increased interest in growing personal auto, as 30% of respondents are seeking growth in this line compared with 25% in 2006.
• Geographic preference: Consistent with the 2006 survey, responding carriers seem to prefer regional programs (65.2%), as opposed to national (26.1%) and single-state (8.7%) programs. Interest in single-state programs was down 13% from 2006.
• Claims administration: Responding carriers are becoming more flexible about the use of third-party administrators (TPAs) to manage claims. Though many still require or prefer that claims be handled internally, others feel comfortable using TPAs. While 31.8% allow the use of TPAs, down from 45% in 2006, 54.5% prefer to use their own in-house claim department (up from 40%), and 13.6% require the use of their in-house claim department. In 2006, 15% of the respondents required use of their in-house claim department, down from 2% in 2005. Forty-two percent of responding carriers will not allow the use of a program administrator-owned TPA, a significant decline from the more than 75% who said it was not acceptable in 2006.
Reinsurance is key
The Guy Carpenter survey also touched on reinsurance, calling it “an important specialty program partner.” The survey noted that a carrier that supports specialty programs can either roll a program into its corporate treaties or elect to purchase program-specific reinsurance. Fifty-two percent of carriers responding to the 2007 survey indicated a preference for rolling a program into the corporate treaties, compared with 60% in 2006. In 2007, respondents were 55% more likely to prefer excess of loss over quota share structures. In 2006, respondents indicated they would be 85% more likely to use an excess of loss structure vs. quota share.
More than 30% of responding carriers approach reinsurers through an intermediary, according to the survey. The remainder of respondents report using the services of both intermediaries and direct reinsurers. When program-specific reinsurance is not placed, more than a third (36.4%) of respondents indicated they will pay a finder’s fee to the source that brings them the program, while another 55% indicated they will increase the program administrator’s commission, allowing them to pay the source.
Finally, the survey points out: “Over the years, the specialty programs market has grown to include both traditional insurance companies with a specialty programs division and companies whose business model is to write specialty programs exclusively. This year’s survey respondents were fairly evenly spread between traditional carriers (52%) and specialty carriers (48%). Regardless of whether their business model focuses exclusively on specialty programs or not, the survey suggests that carriers have the ability to write programs in most states and utilize both admitted and nonadmitted paper in 40 more states. Of those having nonadmitted paper, 27% had it available in 25 states or less states.”