Laying the Groundwork for New Insurance Programs

While many new insurance program ideas emerge from various sources, very few result in the actual formation of a program. It is generally only those that are well-thought-out, include substantive information, and are well-presented that have a good chance of getting off the ground.

Program opportunities arise in two general ways: the formation of a new program, starting from little or no renewal book; or the transfer of an existing program either through a sale or carrier replacement.

Before getting into the nuts and bolts of building a successful program, it is important to consider the primary reason for the formation of an insurance program.

While there are a multitude of reasons for the formation of a program, it is easier to think of it in two main categories: 1) programs are often formed by the fact that a particular class or industry group is not sufficiently served by the standard market, and/or 2) programs are often formed out of an entrepreneurial opportunity to “build a better mousetrap.”

Establishing a new program
One scenario that might lead to a new program is targeting the underserved class. Often times a certain class of risks find themselves painted with a broad brush as part of a larger grouping. This may have the effect of perceived excessive rates. A program can be designed with an underwriting philosophy to carve-out classes of business and treat them according to their unique characteristics. If successful, insureds in the program should see rates and structures tailored to their risk characteristics.

Another scenario might be targeting an existing book of business controlled by a producer. An insurance producer, over time, can develop a book of significant size with a specific class. The relationships with their clients coupled with becoming intimately familiar with the class and their issues leads to expertise that may surpass that of a general underwriter. This expertise has real value and is often the major selling point in getting a carrier to back a program.

Another option might be targeting association production. Unique classes of business are quite often represented by one or a few trade associations. These trade associations bring many individual businesses of like kind together for multiple purposes–from political lobbying to group purchasing. Often times, a key role for the trade association is to arrange for insurance coverage through a program designed exclusively for their members.

Some considerations
There are a series of steps and considerations that need to be taken in going from the initial idea all the way through actually placing risks in the program and then maintaining the health and success of the program.

Clearly, a successful insurance program must be backed by a risk-taker. Many insurance programs are actually embedded within an insurance company with all staff being employed by the insurance company. The focus of this article is on those programs which are independently structured–where the relationship between the carrier and the program is through an appointment and a letter-of-authority rather then as an employee/employer.

The search for a carrier should be based on the desire for a long-term relationship. No one wins if the carriers are constantly being replaced. Carriers who already have successful experience with programs are the likely candidates, but even carriers that do not currently support program business may be a good fit.

Once the program business proposal is in place, the selection process in choosing a carrier can be outlined as follows:

Identify potential carriers. Carriers can be identified as potential candidates through many sources. It is useful to narrow (rather than a shotgun approach) the search down to a very few potential partners.

Initial discussions. In this simple yet critical step, a phone call or meeting with a key contact at the carrier to discuss the idea at a high-level will ensure that there are no major obstacles.

It is important for the carrier to acknowledge that they will consider the plan once formally presented. This step is enhanced by providing them with a high-level document describing the opportunity. Providing a thick, detailed business plan too early in the discussions can result in the plan never being read.

Mutual confidentiality agreement. Once the select carriers have been identified and they have expressed an interest in proceeding with more detailed discussions, it is time to provide the formal program submission. It is beneficial to have a mutual confidentiality agreement (CA) signed by both parties at this stage. Once the CA is signed, both parties should be comfortable with a free flow of information pertaining to the potential program. Confidentiality agreements can be specific to the program being considered or may be broader and apply to any information for a specified period of time.

Key components of submission
After establishing mutual interest and signing a CA, it is time to provide the carriers with the formal program submission.

Overview of opportunity. Describe the parties involved, class of risks, lines of business, premium potential and expected underwriting results.

Market analysis. Describe the population for the targeted class and their risk management issues. It is within the market analysis that the purpose of the insurance program is established. Existing competitors should also be mentioned.

Actuarial analysis. Virtually all programs will be reviewed by the actuaries at the respective carriers. A program presented with an actuarial analysis already performed increases the likelihood of success dramatically. An existing book of business of $10 million annual premium or more generally has the credibility to stand on its own with an actuarial analysis. Anything smaller than $10 million must be supplemented with industry information.

Industry information can prove to be exceedingly difficult to obtain. To compound the problem, the only industry sources for historical class-specific premium and loss data are NCCI (for workers’ compensation) and ISO. Most carriers will not accept the ISO detailed class information as credible since it is generally several years old and subject to problems in the data submissions from various carriers.

Underwriting philosophy and guidelines.It is critical that the carrier understand the selection and pricing philosophy for the program. Getting very specific in the area of class selection in the business plan provides clarity to the carrier. Providing a copy of the underwriting guide can help the carrier gain clarity in how individual risks will be treated.

Presenting the team. Providing an organizational chart along with biographies of the program staff is very important.

Portfolio analysis. Providing as many views of the proposed book is essential, accompanied by graphs to help visualize the make-up. The most critical slices are class, lines of business, geography, size of risk, and production sources.

Future plans. Planning for the upcoming year and subsequent years is a key process at every carrier. As such, the insurance programs which the carriers support need to provide future plans.

Other key areas
In addition to the carrier submission, there are several areas which should be considered when structuring a program.

Class of business. Not every class of business is suitable for an insurance program. Classes ideal to a program are those that are unique and not well-understood and correspondingly not well-served by the standard market.

Superior expertise. A successful insurance program requires a significant competitive advantage over the standard market. Key is the head of the program or program manager. The program manager should not only understand the insurance issues related to the class, but should also possess an intimate knowledge of the general operations of the class of business.

Size of risks. Insurance programs are generally characterized by small-to-medium sized risks. Larger risks will usually catch the attention of standard market underwriters and brokers. While a program should be flexible enough to handle the needs of larger accounts, the business plans usually will consider only small-to-medium risks the main source of production.

Service tailored to class. The product offering in the program should be tailored to the class of business. Inherent risks within the class, not present generally, should be clearly addressed through coverage clarifications or perhaps exclusions. Loss control services should also be tailored to the class.

Knowledge of underwriting results. Is it long-tail business? Frequency driven in nature or severity driven? Has the regulatory environment changed such that the nature of the claims can also be expected to change?

Team selection. The team which supports the program should be carefully selected. Special consideration should be given to those who make underwriting decisions and price the business. Those who correspond with clients and markets should also be well-versed in their respective areas of responsibility.

Technology platform.Today, technology is no longer a “nice-to-have.” Rating, document production and management, business tracking, and marketing all require state-of-the-art technology.

Conclusion
Most important in any program is the need for it to even exist. It should be clear that programs are not simple to establish. They require talented staff, an infrastructure for underwriting and policy service, regional and national marketing, and a contractual relationship with one or more risk-bearing entities. The carriers requires an underwriting profit, the insured requires good risk management at a reasonable cost, and the program manager requires enough commission to pay expenses and generate a profit. If all these are well established in the program proposal, there is a good chance of success.

Scott Reynolds is chief actuary and chief administrative officer at American Wholesale Insurance Group. www.amwins.com.