“If you don't have data and expertise, the [other] survey results are moot,” he said. In fact, “a start-up program is next to impossible to place,” he added, unless the program administrator has done market research, can draw upon Insurance Services Office or National Council on Compensation Insurance data, and can show quantitatively why the program will be profitable.

Carrier executives interviewed by National Underwriter said they would entertain start-up programs under certain circumstances.

“It depends who the people are,” said William Berkley, CEO of W.R. Berkley Corp. in Greenwich, Conn. “If they're bringing particular expertise from past lives that's perfectly applicable to what they're doing, sure I would.” If, instead, someone says, “'I'm brilliant, [but] I've never done anything like it before,' then no, we wouldn't have any interest,” he added.

Robert Groff, vice president of the programs division of ACE Westchester Specialty in Philadelphia, agreed. “With any of those, they've got to have a good, sound business plan [and] marketing plan,” he said, adding that ACE would need to be convinced that the class is underserved.

According to the Guy Carpenter report, carrier appetites vary by line of business, with 95 percent of respondents saying they would write general liability, while only 38 percent will write workers' compensation.

Doug Bennett, senior vice president of Benfield Program Solutions in Westport, Conn., observed that “there tends to be a lot of companies interested in the same types of programs,” such as specialty general liability, specialty property and non-medical professional. There's still a shortage of capacity for workers' comp programs, those that have heavy commercial auto exposures, and umbrella and excess programs, he said.

He added that insurers typically look for large programs–starting at $10 million, or even at $20-to-25 million for national programs. Programs smaller than $10 million represent “an area of opportunity for carriers,” he said.

Both Mr. Bennett and Mr. Bach said there are new markets participating in the program arena. Mr. Bach said that at the time of the survey there were four–three of which had developed out of known reinsurance markets, and one a traditional insurer that has expanded into the program market. (Keeping identities of all carriers confidential was a condition of the survey.) Mr. Bennett said that some London markets now have onshore capacity, and Bermuda companies, including Axis and Aspen, have entered.

At least one Bermudian–Arch Capital–scaled back relationships with some managing general underwriters last year. In February, during an earnings conference call, Arch CEO Constantine Iordanou said that of 14 MGU relationships existing at the beginning of 2004, only eight were in place by year's end. “We like what we have, but we don't want to have a significant part of the business of this company subject to contractual agreements–where they [MGUs] can walk out at any time subject to no notice,” Mr. Iordanou said.

While most market experts said that competition has increased in the program business segment, Mr. Berkley sees different trends. “At the moment, more people are leaving the business than going into it, because it's a hard business to control,” he said. “But traditional markets are competing against the specialty niches more now,” he added, noting that this is happening in all specialty areas, not just programs.

“Other specialty insurers aren't being aggressive competitors. It's standard markets that are being stupid [and] coming into things they don't know anything about.”

The Guy Carpenter carrier survey, in addition to looking into appetites by line, includes information about service expectations and control processes. The survey reported that over 75 percent of carriers expect or allow program managers to perform the underwriting function (81 percent) and issue policies (76.2 percent).

“We found that the traditional insurers that have specialty program units tend to give up less underwriting authority than the true specialty carriers,” Mr. Bach said.

With respect to claims handling, the survey found that 75 percent of responding carriers won't allow the use of a third-party administrator owned by an MGA. Benfield's Mr. Bennett explained: “There's been some bad experience historically where program managers handle claims and also set reserves. There's a potential inherent conflict.”

Mr. Bach added that if there is a financial issue at the MGA, the carrier “not only gets hit with the financial impact of the flow of premium but also has issues with the financial strength of the claims TPA.”

Carrier executives interviewed by NU described expectations about program manager services that were in line with survey results but stressed control processes they have in place to scrutinize performance.

At Clarendon, Chief Program Officer Juergen Lang said there's been more monitoring of general agents during the past three years. “In each area–underwriting, claims, financial, data processing, regulatory compliance and actuarial–we do at least one audit per year,” he said, noting that larger programs may have quarterly audits. On the other hand, for those MGAs with whom Clarendon has had long-term relationships, fewer audits are needed. “It depends on how familiar we are with the operation and what previous audits produced,” he said.

Mr. Berkley said his company oversees accounting and claims, and that all payments go through its system. In addition to audits, company representatives “just visit” program managers. “We get to know them and they get to know us. We don't just do audits sitting in our office, having them send us data. We have people go out to their locations and sit and talk,” he said.

Are carriers doing enough monitoring? “That's a fundamental question,” said George Lagos, CEO of Syndicated Services Company in Manchester, N.H. While it's impossible to answer for the industry, he said “an energetic audit process is critical.”

“I don't mean…a police-type function,” he added, describing an ineffective process where a carrier “sends out an auditor, who justifies his existence by finding a bunch of things wrong” and releases a report 120 days later. “There's no implementation or follow-up”–and the same issues are bound to arise on the next audit, he said. “The point…is to improve operational capability, so the quality of services improves.”

While Mr. Berkley and Mr. Lang also described profit-sharing commission arrangements used to align carrier and MGA interests, the Guy Carpenter survey revealed that nearly half (48 percent) of respondents are still paying flat commissions.

Flag: The Survey Says

Head: Growth Projected

Guy Carpenter's May 2005 “Issuing Carrier Survey” exploring carrier appetites in program business found the following key results:

70-80:

The total number of new programs that responding carriers project they will write as a group in 2005.

$20-$40 Billion:

Gross written premiums in the specialty program marketplace estimated by nearly three-quarters (72 percent) of survey respondents

81 Percent:

Percentage of respondents indicating they expect or allow program administrators to perform the underwriting function.

11:

Eleven out of 23 respondents–nearly one-half–still pay flat commissions.

70 Percent:

Percentage of respondents indicating that AAMGA and NAPSLO meetings nurture program business relationships.