Will Market Turn Prove Traumatic
(Again) For Program Business?
BY SUSANNE SCLAFANE
WITH CHATTER about the next market turn heating up, it’s a good time
to explore the potential impact on
program business—to see if there could be a
replay of the gut-wrenching turmoil that left
some program administrators (PA) out in the
cold during the last soft-to-hard transition.
EXIT SIGNS, TURN SIGNALS
Additional insight into the program-business mar- J A preview of the
ket is available on PropertyCasualty360.com: Target Markets
J An expanded version of this article
with more commentary from market
Just how rough was the last such turn?
NU’s June 12, 2002 edition, displaying an
image of a PA wearing a sandwich board
that said “Markets Wanted For Program
Business,” told the story of bankrupted
program carriers—and some that abruptly
exited the business—leaving PAs desperately searching for new markets.
J The perspective of a financial analyst,
J A profile of program manager V3
thoughts on the proximity of a market
David Paul of ALIRT, who shares his
Insurance Partners, in which CEO Susan
turn and the strength of program Rivera describes the advantages of
carriers based on a proprietary starting up in 2008 during a financial
scoring method. crisis and soft market.
Thanks to changes in the way program business is conducted today, experienced niche-market participants don’t
anticipate widespread damage like that
seen a decade ago.
riers and MGAs sprung from “old school
ties” rather than specialized expertise.
tained this time around, casualties will occur.
But the turn will still prove traumatic
for some, observers predict.
NO FRONTING, NO PROBLEM
One reason why history is unlikely to repeat itself is the absence of the “fronting
model” popular back in the last 1990s. That
is one big distinguishing factor between
now and then, market participants say.
That contrasts sharply with the current
environment, where “companies are just
a lot smarter and the technology more
advanced,” says Steve Dresner, head of the
specialty insurance business unit of Endurance. “All of our key competitors are taking
a lot more risk up front and managing the
programs better than a reinsurance company could.”
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 [and] you can drive
underwriting control and profitability.”
“You can still find a way to build a bad
book of program business,” says George
Lagos, principal of GL Insurance Partners.
“If you look at the quality of books of
various companies, they’re not identical,”
he adds, noting that while some carriers
have seasoned books and longstanding
relationships with PAs, others are breaking
into the segment. “Inevitably when you’re
in that position, you don’t attract the big,
stable programs. You end up working with
those on the other end of the [spectrum],”
Wayne Carter, EVP at 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
When reinsurers stopped paying claims,
it was “a house of cards,” recalls Andrew
Burger, VP of Gill & Roeser. “The marketplace was not terribly sophisticated,”
he adds, referring to a lack of actuarial
analytics and technology to support underwriting decisions—and describing an
environment where program partnerships
between reinsurance intermediaries, car-
“Today, there’s not as much reinsurance,” says Bob Kimmel, EVP/program specialty practice leader at Guy Carpenter, who
authors the firm’s annual survey of program-business carriers. Because carriers are keeping
the business net, he believes they do more
due diligence before signing on to programs
and more closely monitor those on the
books. Six years ago, half the market was doing only one underwriting audit each year.
Now the majority do at least two, 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 MORE THINGS CHANGE…
But Bob Abramson, managing director
of Bliss & Glennon, disagrees. “The market won’t change until the Legions of the
world go broke,” he says, referring to a renowned past insolvency. “I’ve been in this
business 34 years and have never seen the
market turn without carriers going down.”