The absence of the “fronting model” popular back in the last 1990s is one big distinguishing factor between now and then, market participants say.

Wayne Carter, EVP, Crump Professional Programs, recalls that “back then, in many situations, the risk bearer was the reinsurer. Occasionally, you would have the MGA take a piece of the action. But often, the insurance company didn’t take any risk, which is why they were called fronting arrangements.”

When reinsurers stopped paying claims, it was “a house of cards,” recalls Andrew Burger, VP, Gill & Roeser.

Carter adds that managing general underwriters—a term he reserves for MGAs with specialized underwriting expertise—were the exception, not the rule in the late 90s. Instead, there was a proliferation of MGAs that “were an outgrowth of agents and brokers,” controlling a “tremendous amount of capacity. Those two things don’t necessarily mix well from an underwriting profitability standpoint.”

Burger says “the marketplace was not terribly sophisticated” in the l990s, referring specifically to the lack of actuarial models and mapping programs to support underwriting decisions.

“Underwriting managers did not have the equipment, the IT, the underwriting talent for the most part,” he says, adding that partnerships between reinsurance intermediaries, carriers and MGAs sprung from “old school ties”—situations where they may have worked together at a company together or a brokerage firm.

“There was more of a push for top-line growth,” Burger recalls. “Cash-flow underwriting was more or less an accepted practice” at a time when interest rates and investment returns were higher.

Contrasting the current environment, Steve Dresner, head of the specialty insurance business unit of Endurance, says “companies are just a lot smarter and the technology is a lot more advanced.”

“All of our key competitors are taking a lot more risk up front and managing the programs better than a reinsurance company could,” he adds.

While Endurance has both insurance and reinsurance operations, “in the program space we primarily play on the insurance side,” he says. “That’s where you’re closer to the market. It’s where you can drive underwriting control and profitability.”

“Today, there’s not as much reinsurance,” says Bob Kimmel, EVP/program specialty practice leader, Guy Carpenter, who authors the firm’s annual survey of the program-business carriers. “Most of the business is held net by the insurers. You used to see a lot of program-specific reinsurance—quota shares on individual programs. It doesn’t happen as much anymore,” he says.

Because carriers are keeping the business net, Kimmel believes they do more due diligence before signing on to programs. The programs are more closely monitored when they’re on the books, he adds, citing a trend in survey results. Six years ago, half the market was doing only one underwriting audit per year. Now the majority are doing at least two, he says.

NO FRONTING, NO PROBLEM?

“You can still find a way to build a bad book of program business,” says George Lagos, principal, GL Insurance Partners. “If you look at the quality of books across various companies, they’re not identical,” he says, noting that while some carriers have seasoned program books and longstanding relationships with administrators, others are breaking into the segment. “Inevitably when you’re in that position, you’re not able to attract the big, stable programs. You end up working with those on the other end of the continuum,” he says.

Still, Lagos believes the industry will see fewer “spectacular crashes and burns” during the next turn. The absence of fronting won’t solve all problems, “but it certainly solves some bigger ones,” he says. “That can be a very quick way to get into trouble—when there’s no alignment of interests and people are doing things that are strictly driven on volume.”

“The big mistakes that have been made are well known,” he concludes.

But Bob Abramson, managing director, Bliss & Glennon, disagrees. “The market won’t change until the Legions of the world go broke,” he says, referring to one of most renowned insolvencies of the last turn. “I have been in this business for 34 years and I have never seen the market turn without some carriers going down.”

(For a financial analyst’s perspective on the proximity of the market turn and the strength of program business carriers, see related article, “No Red Alerts In Program Business Segment.”)

Crump’s Carter, referring primarily to professional liability niches in which he has experience, notes the significant amounts of capital—and competition—in both the current market and the late 1990s.

Contrasting the two periods, however, he says there are more people with expertise in the business today. “They have a track record. They can tell a good story and they can raise capital,” he says. “The capital is much less naïve than it was in 1999.”

Still, competition prevails because carriers have made commitments to investors. “They are actually forced—probably against their better judgment—to drive premium and prices and business into their operations to satisfy those commitments.”

“The dynamic seems to be different now as to what drives the competitive positioning,” Carter concludes. “But the end result is exactly the same—too many dollars chasing too few accounts.”

That means carrier exits “will have to happen” when losses emerge on underpriced business. “Eventually they’re either going to pull the plug or shut their doors because they’re upside down with respect to results,” he says. “We’re seeing too much irrational behavior from certain markets. And it’s classic. It always comes full circle.”

EXIT RAMPS CLEAR, BUT…

Burger sees exits coming sooner than others. “I’m not going to name names, but it’s happened to me already this year,” he says, going on to describe carrier moves to retrench rather than wholesale exits.

Only RenaissanceRe has completely exited, announcing the sale of its program business operations to QBE in November 2010. (RenRe CEO Neill Currie explained the move to NU in March. See related article, “RenRe’s CEO Explains U.S. Ins Ops Sale.”)

But Burger says insurers are moving off unprofitable programs more quickly than in the past. Before, they might have given a program manager a year to fix things. Then it was two quarters. Now, they’re withdrawing in 90 days.

“They’re raising the bar regarding information and return requirements, and that’s starting to be more ubiquitous,” he reports. “Companies are starting to say, ‘No, we don’t envision we’ll get our market share,” or “we can’t get our ROE,” or “you don’t have critical mass.”

The business, he says, “isn’t being controlled by underwriters anymore. The business is being controlled by financial people making financial decisions, not underwriting decisions.”

That can be a bad thing for some program administrators that have had some misfortune in their underwriting results, he says. “You could follow all the protocols, all the procedures, rate it appropriate, have the right risk selection and you get a bad claim.”

Kimmel says carriers are “hungry for the business” despite their recognition that underwriting profits are disappearing. Two years ago, only 8 percent of program carriers pegged the program market combined ratio above 100. This year 30 percent put it there, he says.

In addition, he notes that three years ago, 60 percent of carriers said they wanted MGAs to use their systems. Today that’s down to 6 percent.

“They’re doing things looser. They’re letting the MGAs use their own systems. They’re writing the business at higher loss ratios, and they’re letting the MGAs handle more of the servicing,” Kimmel says.

That last item actually helps carriers work on the expense side of the combined ratio. Carriers expect program administrators to take on more responsibilities than in the past—for policy issuance, loss control, premium audit, claims, for example—but for the same commissions, he says.

Both Kimmel and Lagos said startup programs remain difficult in this market, since carriers need to look at historical experience as they perform their due-diligence work. But Lagos adds that he’s seen movement among carriers to entertain what he referred to as “quasi-startups”—startup situations “where there’s some reason to believe there’s some volume that would be there at the outset.” An example might be picking up an experienced underwriter who can bring a specified amount of business.

Like Burger, Lagos also sees some retrenchment—“a little bit from the standpoint of insisting on getting prices up and paring their books.”

“Most carriers have had sort of a hunker-down mentality,” he says. They are trying to “preserve and protect” their better programs while “weeding out the ones that can’t hold up in a soft market.”

“When you get down to the bottom of portfolio, those [programs] that haven’t been able to generate volume or where [carriers] can’t get the pricing they need to generate a profit are the ones most likely to be looking for new homes,” he says.

Carter says that while none of Crump’s professional program carriers has exhibited a desire to withdraw, “we have worked very hard with several to come up with approaches [to] help drive some less desirable business into competing markets.” He notes that program managers with a lot of experience in a class can analyze data to identify subclasses “trending in the wrong direction.”

“In a competitive market, price is the best way to drive business into another market,” he says, revealing the carriers’ likely follow-up actions.

With respect to lines and classes of business, Burger notes that programs are tough to place in regulated lines like workers’ compensation—lines where carriers believe they can’t get the rates they need.

Also on Burger’s list of tougher program placements are distressed commercial auto, non-emergency medical transportation and non-supported umbrellas.

Kimmel notes that while carrier interest in lines like auto and homeowners has been declining in recent years, carrier appetites have expanded for medical-malpractice and professional liability (E&O) programs.

According to Guy Carpenter’s survey results, only 7 percent of program carriers said they were interested in personal auto in 2010—a sharp decline from 40 percent five years ago. In contrast, Kimmel reports that 85 percent said they are looking for miscellaneous E&O programs in 2010, up from only 40 percent three years ago.

Giving a carrier perspective, Dresner says Endurance wants to be more visible in the market, but is very selective. “It’s not surprising that we have a very small number of programs,” he says, referring to Endurance’s current program book.

“We’ve looked at quite a few opportunities over the past year. Half of them have not gone very far either because there’s lack of actuarial pricing support or they’re in a class we’re just not really excited about,” he says, identifying personal lines and workers’ comp as two of those classes.

Endurance’s first program, written in 2006, was actually a California workers’ comp program. “We were concerned with the medical trend that we were seeing in the marketplace on comp business,” he says, explaining that the insurer has since exited the relationship.

The bottom line is the economics of the program and potential profit, he says. “We want long-term partnerships. If it’s not profitable for either the carrier or the MGA, it’s not going to be long term.”

“One reason that the relationships get challenged is when the books are not profitable,” Dresner says.

Related articles:

• MGAs Uncork Multiple New Program Niches

• No Red Alerts In Program Business Segment

• RenRe’s CEO Explains U.S. Ins Ops Sale

• Events: Program Administrators To Gather At TMPAA Midyear