Special Section sponsored by

Program Business 101

A presentation reviewing the fundamentals of programs and program administration was among the special seminars highlighting Target Markets’ mid-year meetings in Baltimore this past April. Richard S. Weidman, Jr., vice president of the Tower Group’s CastlePoint Management division, conducted this informative Program Business 101 workshop session.

Weidman stressed that no single standard definition of “programs” exists. “There’s a need to be aware that a program may, or may not, be homogeneous. Others are heterogeneous—programs that take on several characteristics,” he said. “There are many ways to define programs. Some programs focus on specific industries while others grow from trade groups or include related categories of business. Some are regional in nature, driven by capacity shortages, while others have a national, even global character.”

The workshop cautioned audience members to avoid confining their thinking on just one approach for examining program business sources and the manner in which new programs are identified. Existing general agents are major sources to explore. Retail agencies and brokers are other entities that have access to blocks of business. It’s not uncommon to find retailers anxious to take on additional levels of authority, such as binding or policy issuance, with a book of their existing business.

An underwriting and marketing veteran of more than 25 years, Weidman’s specialty has been insurance distribution through multiple channels. “When people talk to us about creating a program, we say, ‘First let’s look at the market and who’s already doing business within it.’ Sometimes we’ve found that companies were shortsighted in viewing the competition. A year or two later they’ve come to the realization that the chosen program segment was not really a good fit for them.” Workshop attendees were strongly advised that “…controlling your own destiny is critical. Especially in the areas of systems, claims…and underwriting authority.”

Systems

It is vitally important to have your own operating systems in place when creating and managing a program. Often, insurance carriers will provide new program administrators (PA) with a system as an incentive to do business with the carrier. This seems great for the PA just getting started, but, in the event the relationship should end, it can be difficult to gain access to your historical data. Be certain to shop around. You’ll want to consider markets which provide flexibility and options.

Claims

Sometimes companies will require that their in-house claims department be responsible for a specific program. But, by and large, third-party administrator (TPA) firms with expertise in specific areas can also bring value to the equation. Several national TPA firms have offices or branches which have expertise that has been developed over the years from handling specialized programs.

Underwriting authority

Program administrators must look toward having some level of authority and they need to have the ability to make underwriting decisions. That sets them apart from a traditional wholesaler or traditional retailer. Along those lines you want defined levels of authority within the program administrator, i.e. someone who has authority for binding to a certain level, another with the authority to cover a higher level, and so on.

When studying a company’s model of operation, it is important to know if your carrier traditionally goes outside to buy reinsurance, or works basically with in-house treaties. Treaties can be more efficient, assuming the class of business is covered within the treaty. But reinsurers also often bring additional levels of expertise which can contribute to a better understanding of the class of business. Know the company’s system of operation. Become familiar with legal, with IT, and with accounting departments. If you have your own system, then their IT people need to know how to build a bridge to that system, and what modifications might be required. Perhaps the PA might buy the software/hardware pack. Maybe it needs to be modified. Familiarization with the partner’s models of operation is critical for mutually satisfactory business success.

Most companies now require that you have an actuarial study done on your book of business at least every few years. These studies can cost as much as $10,000 or more. Among other issues, upon interpretation of the actuary’s completed examination, the study should define what your ultimate loss ratio might be. Generally, 60 or better puts you in a range where you should be. This actuarial work should be done regularly to ascertain how well, or how poorly, the program is performing. Do not wait for confirmation before acting. Know along the way what quality of performance is expected, and be proactive.

The manner in which new carriers are found proved to be one of the topics of keen interest during the April workshop in Baltimore. Attendees were reminded that they can seek out new companies in different ways.

Consider contacting major reinsurance brokerage firms as a starting point. Their fees range from 1% to 1.75% and are negotiable. PAs can also, if comfortable in collecting the data, submit their information directly to a carrier. But, it’s imperative that the PA know the particulars that companies are seeking. An effective submission usually runs 85 to 90 pages. Bios, company history, and underwriting guidelines are among the key issues to be reviewed.

Program Business 101 concluded with a lively discussion regarding those factors which general agents should be sensitive toward when considering entering business with a carrier. What are some paramount common sense signs and causes for concern?

Among them: Has a corporation recently disposed of nonessential business activity (a company whose primary business is book publishing, for example, selling off a sports franchise)? Has the company’s stock been downgraded? Major changes in business strategy? Pay attention to names of new “family tree” executives. Based on track records with other companies, might they opt to withdraw particular programs? Are you aware if other general agents, who represent the company, are comfortable there or looking somewhere else? Is the company now recruiting general agents for program activity as opposed to receiving unsolicited resumes and inquiries? If several of these matters raise red flags, then looking elsewhere to establish program relationships seems to be good advice.