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Relationships Between Program Carriers, Administrators Crucial to Success

Apr 21, 2003, Source: Insurance Journal

The relationship between program carriers and program administrators or managers is fundamental in determining the success of particular program. With the hard market still going strong, the programs marketplace has not seen any loosening either. Developing a good rapport between carriers and administrators is essential not only to the success of current programs, but also to the viability of future and new programs.

On both fronts, carriers and administrators have expectations of one another. Meeting these expectations determines whether or not the relationship will develop a bond and grow from thereon out. A strong relationship equals a longstanding, successful program, as both carriers and administrators will tell you.

Challenging carriers

While the developing a strong rapport with carriers is essential to the program administrators' well-being and success, some would like to see the carriers step up to the plate and take some more risks within the programs marketplace.

"At this time, the carriers are unable to see the advantages and potential profit opportunities that new programs can provide," Darren Lewin, CFO of Los Angeles-based Abacus Insurance Brokers Inc., said. "Those carriers that have the vision now for new programs are the ones that will be in the drivers' seat when and if the hard market softens"

"I do think carriers need to be a bit more flexible," Roger Maharaj, branch manager of Houston-based Burns & Wilcox, agreed. "However, insurance is a cyclical type of industry and most of these reinsurers and insurers have been around and have gone through the process. You will see in the last 20 or 30 years the trends in the market and what lines of business have gone up and down. They are very aware. The key right now for them is that pricing is adequate in each market that they do business in. If the pricing is adequate then they are more apt to go along with the request of putting these types of programs together.

"I do think it will change eventually—carriers will start to take more of a chance, but it's not there yet," Maharaj added.

Carriers present their own sentiments on what they expect from their program administrators. As the market contracts, standards go up as carriers look for the cream of the crop in terms of administrators. Standards are held to the highest, and sales representatives from prospective carriers search the country for the best administrators who will meet their needs.

"The industry is really raising the bar in terms of what they demand from program administrators," Mary Lavoie, vice president of XL Programs, said. "There are more standards. We look for program administrators with demonstrated underwriting and marketing expertise in a targeted class. We look for strong financial condition with the program administrator and we also like to have a demonstrated understanding in areas such as compliance, technology, and insurance statutes and regulations."

"One of the things that has been very positive in terms of our business strategy is that we typically partner with a program manager who is a leader in their respective niche market," Bill Donnell, president of Programs Business for GE Commercial Insurance, said. "As a result of that strategy, in a firm market like we have now, they tend to gain additional share. The reason for that is not only the rate increases going on in the market, but also because they have a very good reputation, they have a track record. When those folks go out of business, they tend to gravitate to the program leaders. The good news for us, and I would say a vast majority of our programs are in high demand right now."

However, Donnell said they are wary of putting together start-up programs, due to the considerable risk involved. "There is more risk associated with those types of programs. I don't see us doing a start-up program in the near future. It's a lot easier to forecast a loss ratio when you have an existing block of business."

Dealing with issues

While the hard market has promoted growth for many program carriers and administrators, both are still faced with a myriad of challenges, particularly when it comes to placing new business or creating new programs altogether. Many carriers have dropped out of the programs market altogether, leaving their insureds scrambling to find coverage. "It's pretty much next to impossible to put a new program together," Lewin said. "The carriers just don't have capacity or appetite for any new ideas. The loss of capital and 9/11 implications are probably the reason for company unwillingness to really participate in what the market really needs."

"We have seen program oriented companies disappearing," Mike Hill, president of Freberg Environmental Inc., said. "Reliance, Frontier, Legion and Kemper are some of the big ones. That means that there are a lot of good programs out on the market looking for homes. The companies that remain in the program business are increasing the size of program they will entertain. A lot of companies want to see $10,000,000 in premium for a one state or regional deal and $25,000,000 for a national deal."

Another issue, Hill explained, is the use of actuarial data. Freberg actually employs a full time actuary, Dr. Alan Potter. "In both new and existing programs up to date information spanning many years is critical. Many program companies will not allow a new program to go to underwriting until the actuary has approved it."

Maharaj said the biggest challenge of writing programs these days is "trying to write them where it's profitable for the carrier and its cost effective for the insurers. Right now, with insurance costs as high as they are, it's real difficult."

In addition, Maharaj said, the continuous litigation in many states, in particular Texas, is putting a strain on the programs market. "Right now Texas is a difficult market to write any type of commercial business and carriers are taking a long hard look into Texas. A lot of carriers are pulling out. Texas is tough to place risk right now, and it doesn't show any signs of letting up."

Maharaj said Burns & Wilcox has been forced to cut back on certain coverages within their programs due to the hard market. "With the pricing and the way the market is [right now], carriers are cutting back and are no longer giving those different types of coverages. Right now the basic program is property liability and that is about it."

The right stuff

Bottom line, putting together a program is a very specialized process that takes a considerable amount of expertise from both the part of the carrier and the administrator.

"You need to have an idea for a niche that you can serve," Hill said. He emphasized the need for underwriting knowledge and skill and then a solid presentation of underwriting, rating, policy form and distribution. Along with that an actuarial study is needed.

"You need systems in place to handle the program," he added. "You may have to find reinsurance to complete the premium and limits capacity that you require. Then you need to be able to market the program in a manner that meets the company requirements, matching desired premium production with acceptable loss ratio."

Lewin said that technology is vital to the success of a program and its administrators. "The independent program managers are really leading the charge towards the rapid implementation of common standards through technology, as it is just to difficult for agency employees to really become familiar and proficient with carrier 'in-house' program administration. Abacus is accomplishing this through the APM Platform." Distribution within an automated environment is key, he added.

With technology, Lewin said, "we can run seven programs with one person."

One of the major advantages of the APM Platform is that users do not have to learn individual company procedures as each new program introduced, is based on the legacy that the distribution plant is already using.

Donnell emphasized communication between the carriers and the administrators. "We have expectations with the program managers, they have expectations with us. When we find that we've identified those, and communicated them, and dealt with them on the front end, then our relationships tend to go better. We need to under promise and over deliver."