Get with the program: Insurers and managing general agents in program business have one eye trained on underwriting results and the other on the hard-hit reinsurance market. (Property/Casualty).

Like their counterparts in the traditional world of property/casualty insurance, the managing general agencies, brokerages and carriers that deal in the specialized realm of program business are operating in a hard market. After coming through the post-Sept. 11 reinsurance renewals relatively unscathed, many are predicting even better times ahead, while acknowledging that their ranks are bound to shrink in this ongoing survival of the fittest.

If they continue to see promise in the prospects for growth of program business--a form of alternative risk transfer that brings together commercial and personal insureds with agents representing large blocks of premium volume--it's because they think they've barely scratched the surface. In recent years, program underwriters have introduced new policies to cover everything from dance clubs, gymnastics centers and adult day-care programs to garages, elevator contractor companies and fuel oil distributors.

"Program business, and the program market in general, have an incredible short-term and long-term future because of the way this business is done," said Richard Weidman, vice president of Clarendon Insurance Group Inc., New York, a leading program business insurer. "Think of the economies of the transaction--you're not looking at individual risks, you're looking at a book of business."

In personal lines, for example, a managing general agent with underwriting, claims-management and service capabilities, in addition to strong relationships with agents selling nonstandard automobile coverage, could well create a nonstandard auto program. On the commercial side, this managing general agent could provide separate programs for anything from restaurants, churches and gas stations to an association-endorsed liability program, provided each category of business had sufficient volume and the risks within each category were fairly homogenous.

"The transactional costs in doing program business in this manner under a traditional agency/company model are so much more efficient for an agency than it would be to take a submission, send it to three or four companies, wait to hear back from them and then have them say they'll take it," so long as they can impose some requirements first, Weidman said.

While the insurance industry remains very interested in program business, there seems to be no firm figure on just what its value may be, said Bernd G. Heinze, executive director of the American Association of Managing General Agents. He did note, however, that managing general agency business, which includes program business, was $8 billion to $11 billion for 2001, based on premium volume. Within that estimate, he added, there is no breakdown as to individual vs. program business.

In program business, profits usually are shared with the managing broker/producer, with reinsurance purchased specifically for the program. The managing general agency is both the customer and partner of the carrier and must ensure underwriting profitability. The managing general agency also is charged with designing custom products for the insurer's agents and brokers to sell, and is responsible for production, underwriting, collecting premiums and meeting reporting requirements.

Presidio Insurance Agency Inc., Walnut Creek, Calif., a managing general agency, is fairly new on the program scene. It offers three forms of this business: employment practices liability insurance, lawyers errors and omissions, and real estate errors and omissions.

Presidio began business in 1999 as an offshoot of a California wholesaler formed by three principals, said Alan Janes, Presidio's founder and chief underwriting officer. "I knew those three people from doing business with them through the 1990s," he said. "They decided to venture into the MGA/program arena and they gave me a call to see if I wanted to start it."

His three contacts already had a large book of employment practices liability business with a Lloyd's syndicate. "It was just a natural progression--the form was there," he said. "I added a few tweaks, and we went from there." Janes, who has been underwriting program business since 1994, says he is one of the longest-running employment practices liability writers in the industry.

Last fall, Presidio introduced two new products designed for the real estate and law industries. Its Legal Edge program offers comprehensive professional liability coverage through Lloyd's for law firms ranging in size from one to 50 attorneys. The Real Estate Edge program provides professional liability coverage for small residential and commercial real estate agents and property managers. Real estate agents with fees up to $1.5 million are eligible for this coverage.

Janes, who worked for some years as an underwriter at a major company, said he faces a different challenge in his new endeavor. "Being at a major insurance company, your goal is to write business," he said. "As an MGA, there is pressure to write good business that will enable you to be profitable. If my loss ratio goes through the roof, I may be out of a job."

Presidio's total book of business was close to $10 million for 2001, Janes said. For the lawyers program, introduced only a few months ago, he has written close to $500,000 in business, he added. He expects the lawyers and real estate errors and omissions to drive his company's growth in 2002. While he wants to grow his total book to $20 million, he vows to take his time and resist "underwriting everything that comes through the door and pricing it so I get the order," he said.

In deciding to create the lawyers program, Janes and his colleagues were largely influenced by what they were seeing in trade magazines. "Every article we were reading was basically saying the lawyers market was going to implode, the rates were going to go through the roof," Janes said. They began wondering if they could fill that niche. "And we did, because we could get into the market, charge higher premiums and offer very good form," Janes said. "Basically, when four or five markets pull out of writing a class of business in California, you can start seeing a lot of submissions, because you may end up as one of the only games in town."

Competitive Pressure

For E.G. Bowman Inc., a full-service commercial lines agency in New York, only 5% of its business involves programs, which it participates in just to remain competitive. "We're virtually forced to do program business," said Harry Ennevor, executive vice president and chief operating officer of the brokerage, formed in 1953. "We write a lot of not-for-profit agencies," he said. "We may be providing coverage for a client of ours for years; then all of a sudden another broker comes by and he tries to put them into a program. Sometimes we're fortunate and we can join that program. Sometimes we can't if the people who set up the program have a monopoly on it."

Bowman says it is the largest minority-owned and largest woman-owned insurance brokerage in the nation. It used to insure two radio stations in New York. "Then somebody offered them entry into a program and we lost the coverage because we just could not compete," Ennevor said.

Lately, the brokerage, which has sometimes used nonprofit, real estate and hospital programs, has been rethinking its approach and wants to add to its program volume. "As we expand our business, we realize in a lot of cases that programs are the most competitive market," said Jacqueline Forster, vice president and sales manager. "If we expect to have more broadcasters, we realize we need to use the broadcasting programs that we have access to. If we want to do more business with not-for-profits within certain sectors, we realize that the best thing out on the street is often the program."

Ennevor said the brokerage currently has a sales plan that is targeting more nonprofits. "Obviously, if we go to a nonprofit and we find it is with a commercial carrier, we try to steer them to a program," he said.

"If it's within the criteria of the programs that we have access to, then we can get excited because we know we have something better to offer them in most cases;' Forster said.

Pros and Cons 

Programs can provide clients with some distinct advantages, Forster noted. Often, higher limits are obtainable "because you have such a large group that there's more negotiating power," she said. That also makes it more affordable for a smaller client to sign On.

Administratively, a program will often have a single renewal date, and that's beneficial to a client, Forster said. Also, carriers within a program usually have good ratings. But if their ratings change, the program's creators have clout from the size and the power of their group to negotiate with another carrier to assume the coverage. Through a program, clients often can receive dividends, own the programs or serve on their boards.

"Programs are set up really because of the neglect of the market," Ennevor said. "They provide easy access, they give people with the same type of business a common identity, and they provide for these entities low cost."

The down side for clients is that these policies often can be more expensive and restrictive. "We find that a lot of the programs are very stringent," Forster said. "It's difficult to get some clients into programs because of their underwriting guidelines. Also, from the perspective of a broker, when you do put your clients into a program, to a certain extent there's a disadvantage because you feel like you might lose some control of the client relationship."

Ennevor points out that one reason more programs haven't been written so far is that the same carriers writing the traditional business are participating in the program business, too. "What programs do is to tend to force the insurance companies to defend themselves," thus driving the price of the program market, he said.

Insurer Strategy

For their parts, insurance companies can approach program business in several ways. In the case of Clarendon Insurance Group, the company sets up the managing general agent or agency that is doing the program as a branch office for that product line in the states where the product is marketed.

"We create a box with them of acceptable risks within the class, they define the pricing for us, they define the underwriting standards, and then we bring in three or four reinsurers into the process," Weidman said. "As a company, we'll retain anywhere from 10% to 35%, depending upon the exposure."

He calls that level of input from agents very unusual in the business, noting that many companies will dictate the underwriting criteria and tell agents that this is what they must abide by.

"We believe that the folks managing the program know the business better than anyone," Weidman said. However, Clarendon does require agents to justify their proposals by showing how their book has performed well based on their pricing and underwriting standards.

The company prefers to negotiate program business in large numbers. "From time to time, we may look at a $7 million or $8 million deal if it is in support of something else." But generally, Clarendon requires a minimum of $15 million in program size, he said.

The Clarendon Insurance Group, which began as a captive and then moved to program business about 10 years ago, has five property/casualty insurance companies writing program business and will do virtually any class except for professional liability and long-tail products. These companies are wholly owned by Hannover Finance Inc., a subsidiary of Hannover Re, Germany. Clarendon writes about $2 billion in premiums a year.

The company's strategy is to identify blocks of homogeneous units that are a little more difficult to insure than the average type of book. For example, the company has become the third-largest writer in the homeowners market in hurricane-prone Florida after taking over the Allstate book several years ago.

"We repriced the book and we reinsured it in a big way," Weidman said. "Fortunately, we haven't had a major storm, but that's the kind of thing that works in program business--picking a class that's more difficult. And in our case, we pass on a large portion of the risk to the reinsurance market."

Among proposed products, Clarendon recently was considering a California workers' compensation program representing several hundred million dollars in written premium, a motorcycle association program, a large, national child-care and social-services agency representing about $80 million, and a bulk fuel-oil dealership in the Midwest representing just under $20 million.

Where programs don't function well, however, is with classes of insureds that otherwise can obtain coverage in the general market through national or regional carriers. For example, homeowners policies in Central Pennsylvania or Central New Jersey would fall into this category, Weidman said.

Opinions differ on just how competitive the program market is these days. Weidman points to insurers that are exiting the market, shedding program business because of poor results or because it doesn't fit their strategic direction. Even a change in a company's financial strength rating from an A- to a B+ can place a program in jeopardy, he said.

Niches and Quality

Bill Mecklenburg, senior vice president, property/casualty, for Kempes Inc., doesn't find the level of competition as high as it is on the open market, where many more companies are contending for the same business. Created by its parent company, Kemper Insurance Cos., to focus on program business, Kempes' strategy is to find underserved customer groups and carve out a niche there. "Typically, insurance companies focus on writing office buildings, restaurants, that sort of thing, and they're competing against hundreds and hundreds of companies on a day-to-day basis," Mecklenburg said. "Consequently, they're going to their independent agents and trying to convince them to do business with them. In our customer groups, we're dealing with less than a dozen competitors going after that same business."

Mecklenburg agreed that the tightening in the standard market has produced more program opportunities, allowing Kempes to be much more selective. "We're positioned to achieve rate increases that will help sustain the profitability of the company going forward," he said.

Barrett Hubbard, vice president, marketing, of Markel Insurance Co., thinks the program market is in the throes of a "remedial review" by insurers and reinsurers. The past five years of program business, he noted, were marked by an aggressive reinsurance market that created "a glut of underperforming programs." This has primed the program market for what it is experiencing now, Hubbard said.

"What we're seeing--and this makes it tough on the MGAs and the retailers--is they've got programs that they're shopping, but the results make it very, very difficult to recreate them and add some value in the marketplace," he said. "We're careful where we jump in. We're seeing lots of opportunities, but often, they're not of the quality that we'd like to have."

These days, it's more important than ever that program underwriters maintain the long-term discipline of risk selection and pricing, Hubbard said. "Many programs are well-intended but fail due to unceasing pressure to capture market share," he said. "Inevitably, they squeeze pricing, soften risk selection and class guidelines."

Before long, these programs prove unprofitable and are no longer viable. "The toll from this approach both inside and outside the industry is enormous," Hubbard said.

Weidman of Clarendon predicts that changes may be coming in the way reinsurers approach program business. "You may see less and less quota share and more excess of loss in support of that, or you may see differences in terms," he said. But none of this will diminish the level of industry interest in programs, Weidman said. "If anything, it's going to continue to be very, very strong."

RELATED ARTICLE: Kempes Puts Programs to the Test

Kemper Insurance Cos. created its subsidiary, Kempes Inc., more than three years ago to focus on program business. Although Kempes is young, its management group and most of its employees have been dedicated to program business for years, said Bill Mecklenburg, senior vice president property/casualty, Scottsdale, Ariz. Kempes has four divisions: professional liability, public entity and two property/casualty units.

The company targets programs that are property and casualty based, then has them run by program managers who specialize in that given area. "Typically, program managers control a $10 million book of business that is homogenous in nature," Mecklenburg said.

Kempes provides about 20 programs backed by 38 program managers who have forged relationships with thousands of independent agents. While proposals for new programs sometimes come from agents, Kemper branch offices or reinsurance intermediaries, the usual sources are the program managers, themselves, he said.

The company is very selective in bringing on any new program. In the three years it has been operating, Kempes has turned down more than $1 billion worth of insurance opportunities in programs, Mecklenburg said.

A proposed program gets a thumbs down if it doesn't have the history and the data to support it, ends up unprofitable, is not underwritten to Kempes' standards or the company can't see how the product being offered by the program manager really differentiates itself from the competition, he said. "Sometimes a business plan doesn't make sense to us," Mecklenburg said. "Many times, it's not in an underserved customer group, so we want to make sure that we're targeting those where we're not going to deal with the rest of the insurance industry on a day-today basis from a competitive perspective."

Kempes recently turned down a hotel-motel program for many of those reasons. The program had not been profitable, but proponents said they could get substantial rate increases and were moving in that direction. However, Kempes reasoned that when the market turned soft again, the hotel-motel industry was likely to be a target class for other insurance companies, Mecklenburg said.

New business counts for about 15% to 20% of Kempes' growth. The company is always looking for fresh opportunities, but it's also wary of growing too fast by adding on too many new programs, Mecklenburg said. "Our preferable growth is through our existing business, because the controls already exist to generate profitable growth," he said.

Markel Insurance: Looking for Needs

Markel Insurance Co., Richmond, Va., creates programs based on a perceived need or opportunity and then identifies appropriate distribution channels to sell them. Markel Insurance is the risk-bearing entity formed by Markel Corp. in 1989 in its reshaping of an acquired managing general agency, which had brought Markel various program pieces.

The insurer's current portfolio includes camp and youth recreation, child care, martial arts, gymnastics, swim clubs and dance schools. The company has an accident and health division that focuses on colleges, and it has an equine division. Recently, Markel developed a garage program through a true MGA relationship and a campground program with a retail MGA.

The company also has expanded into coverage for the social-services arena, including abuse shelters, adult daycare centers, handicapped training programs, Meals on Wheels, the Salvation Army, Boy and Girl Scouts and YMCAs. Barrett Hubbard, vice president, marketing, describes the social-services program, which is more retail-agent oriented, as one of the company's bigger markets that is growing well.

"The only thing we avoid in this area is health care," Hubbard said. "Other than that, it's a very broad class. From my perspective, it's a marketing challenge to some degree to carve out the kind of business we want without getting the bunch of submissions that we don't. But we're working through that."

Markel considers new products when they mesh with what the company has done in the past. To some degree, Markel's camp program begot its equine and child-care programs, and its tuition-refund program was an outgrowth of its college accident and health business." So they all work together," Hubbard said. "We look internally first to expand our current offerings."

Hubbard views programs as a proverbial double-edged sword. If a company designs a program that is successful, it inevitably invites competition. "So there is this cycle of people coming in and trying to nibble away at your program, oftentimes hurting everybody in the process," he said.

New Association Brings Program Professionals Together

Last fall, some 140 program administrators and sponsors gathered at a summit in Tempe, Ariz., where organizers proposed the formation of a new association to serve the needs of those involved in program business.

That was the start of what has become the Target Markets Program Administrators Association, which is the brainchild of Glenn W. Clark, owner and president of Rockwood Programs. Rockwood is the nationwide administrator of several management liability programs.

"Glenn did a bit of research and found that there really wasn't an organization or a place where the people who carry programs could share information to help them do business better," said Ray Scotto, the association's executive director.

But there was interest. Rockwood Programs sent surveys out to more than 1,400 program managers nationwide to see if the idea of an association held wide appeal. From the 874 who completed the questionnaire, the results were overwhelmingly positive, with 80.4% voting "yes," 8.1% replying "no," and the rest choosing not to answer.

The survey also found that prospective members would find national and regional meetings with other producers most valuable, followed by cross-selling and networking opportunities with other administrators. Respondents also welcomed the opportunity to meet new carriers, receive Internet assistance and attend direct marketing and reinsurance seminars. Lower on the totem pole were seminars on carrier negotiations, alternative markets support and having a newsletter.

On its Web site (www.targetmkts.com), the association says it will concentrate on five themes:

* Technology. Recent innovations will be reviewed for their application to program business.

* Workshops. Through the association, members can add a new skill or develop an existing one.

* Meet the Markets. Program managers will have the opportunity to hear from carriers directly and learn about company strategy.

* Networking. The association will be the backdrop for professionals who make their living in program business--the managers, vendors and carriers--to interact.

* Cross-sell. Through their membership, program administrators will be able to expand their portfolios of current offerings or find partners to help distribute their products.

The new group, based in Wilmington, Del., plans a second summit for Oct. 21-23, again in Tempe, Ariz. Meanwhile, the association is encouraging members to visit its Web site frequently. It hopes to add more "partners"--namely, carriers and vendors--to the ranks of the membership.

"We're not expecting people to just sign up, but to work for the association," Scotto said. "This is a way of sharing ideas. After all, the strength of our organization is in people and ideas."