The program underwriter business blooms
There’s ample reason to be optimistic about the future of program business.
The program business model has grown significantly over the last five years and has become a preferred distribution model for insurer capital that will ultimately lower expense costs and align more closely with the client, that being either the retail agent or policyholder.
As one of the founders of the Target Markets Program Administrators Association, I have witnessed that the professionalism and proven competency of this delegated underwriting authority model has never been more trusted and valued than in today’s insurance distribution marketplace.
Specialization is king: underwriter niche industry expertise, tailored coverage forms, enhanced claims and loss control services. Program underwriting managers — powered by a distribution channel that may include a directly-owned retail agency, third-party retail brokers who have a focus on your specialty, and/or wholesale distribution model, or a combination — drive strong retention, increased premium volume, market share and long-term superior loss ratios. In other words, it drives profits.
While enjoying healthy growth, there are challenges to remain relevant in a competitive marketplace.
Program administrators (PAs) generated $40.5 billion in premiums in 2018, and the estimated size of the market rose almost 12.2% from slightly more than $36 billion in premiums in 2016, according to “The TMPAA State of Program Business Study 2019″ released by the Target Markets Program Administrators Association at their Annual Summit in late October.
The report, which underscores the program administrator market’s dynamism, showed that since TMPAA launched the market study, premiums rose 131% from $17.5 billion in 2010.
The report also found that program business is outpacing the growth of the overall commercial insurance marketplace. While the size of program business rose 10.36% in 2018, the growth in direct premiums earned for commercial lines increased by 9.97% in 2018.
Meanwhile, the estimated number of PAs in the United States held steady at 1,000 despite active consolidation in the industry, according to the study.
In their effort to take advantage of favorable market trends, however, PAs face significant challenges in how they manage themselves, their client (broker and policyholder) relationships, and their carrier partnerships.
PAs must be agile and able to provide a solution to a client in a very rapidly changing environment. Clients want speed of delivery in getting policies out, claims updated in real-time, enhanced policy coverages, as well as focused loss control services.
Perhaps most importantly, they want someone who can educate them on the industry challenges and act as a trusted advisor regarding specific risk situations.
The future is delegated underwriting authority and unbundles open architecture of services
One of the major challenges and opportunities I see going forward is how carriers will engage and evolve with the delegated underwriting authority model. Many do not embrace delegated underwriting authority, and those that do place significant barriers to maximizing the success of this model.
The roadblocks include required carrier proprietary automation systems, claims handling, limited underwriting authorities, loss control and lack of real-time transparency/sharing of information with the client. Bucking the traditional underwriting model is a big challenge to the legacy carriers that have built-in costs that are not easy to abandon.
The road map to win in the program space will incorporate an unbundled open architecture of services approach that, over time, will determine which carriers and program underwriting managers will be the winners and losers. Restrictive legacy approach models are not working as well as they once did.
Carriers have no choice but to drive down costs. They must reduce their operating expenses, and partnering with a program underwriting manager is critical to addressing this issue.
Technology further allows carriers to check on the underwriting manager’s office in real-time to see that underwriting guidelines are being followed. Unbundled claims services leverage the third-party claims administrator’s expertise along with pushing out increased technology spend to them with a focus on reporting results, trends, etc.
Critical program administrator 101 rules of engagement
There are several steps a program administrator needs to closely review when choosing a carrier with which to partner:
- First, make sure you have alignment with the carrier’s culture and people. Take a hard look at your potential partner and commitment to the program space. Look at their historical position and if they have been in and out of the business. What dedicated program resources have they committed/? Get referrals from their existing partners.
- Second, review your proposed contract from the carrier and be prepared to spend a lot of time with your lawyer. Hire a lawyer with knowledge of business contracts and insurance distribution. Issues such as “exclusivity,” “ownership of renewal rights,” and the underwriting manager’s “authorities” need to be spelled out along with the “divorce” conditions if the deal falls apart in the future. Understand profit-sharing arrangement limitations and conditions, including any retrospective cancellation of this agreement, to pay out if the program is canceled or moved to another carrier. Before you sign, make sure you’re comfortable with the contract before going any further. The probability that your contract terms and conditions will come into play at some point is high and can be very costly to the PA.
- Third, make sure you’ve established additional market relationships in case something goes awry. The programs market has been as successful as it has because of the commitment to long-term relationships. The last thing any PA or carrier wants to do is make a large disruptive move. But the program carrier market can be like the stock market–up and down, and not always predictable. Markets change and insurance environments change, and thriving PAs are wise to foster relationships should they need new capacity or new capabilities for their clients.
- Fourth, it’s important to hire an independent actuary to capture your data, making sure pricing and results are in line with the loss ratio established by the carrier on the program. Remember, “He who controls the data wins” — you can’t just rely on the carrier’s data. It makes for a much more transparent relationship and ensures everybody’s working toward the same goal. It’s a significant — and critical — investment to make sure you have the data. Always obtain a confidentiality agreement before providing your data to a carrier.
- Finally–especially if you are a retail broker looking to get into this space–you’ve got to build out a separate underwriting department that employs non-broker, non-retail employees trained in underwriting operations. All authorities rest in this department. If you want to take on underwriting authority, you must have the right talent and controls in place to make that work.
There’s ample reason to be optimistic about the future of program business. The opportunities to grow and be successful are bright.
Marty O’Brien is the co-founder of Ascinsure Specialty Risk, a premier program administrator focused on the crane and construction access insurance market and recognized recipient of the Target Markets Program Administrators Association Best Practices Designation. O’Brien is a founding member and charter board member of TMPAA and a prior board member of the Council of Insurance Agents and Brokers. Opinions expressed here are the author’s own.
Related: