Program market continues to grow

Guy Carpenter survey examines trends

By Phil Zinkewicz

In the past few years, property and casualty insurers’ appetite for program business has grown considerably, and it continues to grow through this year, according to a survey by Guy Carpenter & Co. LLC. The leading global risk and reinsurance specialist’s survey finds the program market evolving as insurance carriers remain focused on the core concerns of new business production, premium writings and profitable rate levels.

However, according to Carl Bach, managing director of Guy Carpenter’s Program Manager Solutions Specialty Practice, several new trends emerged in 2008 as the market’s appetite for mergers and acquisitions increased, along with a growing interest in the use of outside capital to fuel new endeavors.

This fourth annual survey conducted by Guy Carpenter elicited the views of domestic insurance companies writing program business through program administrators and managing general agencies in the United States.

“The program market remains vibrant and has become an increasingly attractive target for new capital,” says Bach. “Across programs of all sizes, organizational structures, technology platforms and servicing capabilities, we continue to see a strong interest from carriers in doing business with program administrators and MGAs.”

Bach adds: “This interest extends across a number of areas, including providing insurance for programs, partnering in expanding operations to grow revenues, and even purchasing a PA or MGA operation via merger or acquisition. Given all these positive trends, all indicators point to an exciting and active year in the program marketplace.”

The survey shows that 56% of respondents expect the program market to grow in 2008, while 32% expect it to remain flat. Only 12% expect the market to contract. Almost uniformly, respondents perceive the PA-MGA market to be large, with 92% estimating the total market to be at least $20 billion in gross premium. Thirty-three percent specified a range of between $20 billion and $30 billion, with 38% estimating the market at between $30 billion and $40 billion. More than 20% believe that the PA-MGA market generates gross written premiums in excess of $40 billion.

The study also says that 92% of respondents estimate a combined ratio for the market of 90% to 100%, with 68% putting the ratio at 90% to 95%. Respondents identified their primary challenge as new business production (77%), premium growth (66%) and maintaining rate levels (58%).

Regarding program size, survey results indicate interest in programs of almost all sizes. Eight percent of the respondents are targeting programs with gross written premiums below $5 million, while 12% are seeking programs of greater than $20 million. The remaining 80% seek program sizes between the two extremes.

In commercial lines, program administrators and managing general agents remain focused on growing inland marine, property and auto liability. In personal lines, the survey indicates a growing interest in the homeowners segment (up 31% from 21% in 2007), while interest in auto dropped from 30% in 2007 to 15% in 2008. Personal umbrella is a growing area, according to the study.

The study also shows that carriers continue to be flexible with regard to system use and claim handling. More than 80% of respondents expect the PA-MGA to underwrite, rate, quote and bind the business, as well as issue and service policies. Other services, such as loss control and premium audit, remain important to some carriers. Respondents continue to have robust procedures in place to monitor results and control the processes involved in working with PAs and MGAs.

On mergers and acquisitions, a large majority—72%—of respondents indicate an interest in M&As, with 54% focusing on acquiring other PAs-MGAs, and 39% interested in carriers. Twenty-three percent would like to acquire wholesalers.

Finally, on reinsurance purchasing, the study shows that reinsurance continues to play a major role for program-issuing carriers. They continue to buy both from reinsurance intermediaries and directly from reinsurers, with 83% of respondents using a combination of both approaches. However, the preferred structure has shifted slightly. Respondents preferring quota share increased 67%—from 30% last year to 50% this year. Carriers preferring excess of loss structures dropped from 61% last year to 50% this year, a change of 18%.

Says Bach: “Given that a number of this year’s respondents were small carriers, divisions, units or start-up markets, we noted an increase in those looking to buy program-specific reinsurance versus rolling new programs into existing treaty structures.”

Grace Meek, business officer for the program insurer Delos Insurance, agrees with most of the Guy Carpenter study findings, especially the study’s projections for growth. “The soft market represents an excellent opportunity for MGAs to find expansion opportunities,” she says. “We anticipate that the soft market will continue into 2008 and expect that our outsourcing model will enable Delos and its MGAs to discover new methods of growing our business.”

Delos is relatively new to the program market, having opened for business in 2006; however, each member of management has more than 15 years of experience. “The first year, we had eight programs and did about $125 million in written premiums,” says Meek. Last year the company had $262 million in gross written premiums in 16 active programs and expects further growth in 2008 in both number of programs and premiums written.

Meek says that the current soft market has resulted in a good many MGA start-up program operations and the expansion of MGAs both geographically and by line. That expansion is necessary, she says, because more companies are writing program business, which results in increased competition and lower premiums. The Delos executive says she agrees with Guy Carpenter’s observations regarding increased merger and acquisition activities in the program market.

“There are companies buying MGAs, and MGAs merging or acquiring other MGAs,” says Meek. “However, that’s not the way we’re planning to go. When you acquire an MGA, it changes the landscape of things. We would, in effect, have acquired MGAs competing with our own existing MGAs, and we have no intention of creating channel conflict.”

On the reinsurance side, Meek says that, in the current soft market, primary companies are retaining more business rather than buying reinsurance.

To read the full survey, go to www.guycarp.com. Click on “Our Insights” then “Briefings.”