Communication is Key When Managing Program Contracts

The insurance industry survives on relationships built between agents and carriers. The two parties can strive for a harmonious partnership with few problems. Yet when communications break down and there are disagreements, they most likely will be resolved according to what’s stipulated in the agent-carrier contract, according to panelists at the recent Target Markets Program Administrators Association Annual Summit.

Greg Katz, deputy managing partner for the New York office of Wilson Elser, likened the managing general agent agreement to a prenuptial agreement with a carrier. “You want to know from day one who gets the dog, the silverware, the children and so on,” he said. Because if there is a disagreement and it winds up in court, “you will live and die by what’s on the 8 and a half by 11-inch contract.”

One “thorny” issue faced by program administrators and carriers when negotiating contract terms is customer data, and who owns it, said Franklin Sanders, vice president of Chubb Custom Market. If the MGA supplies the data, as long as the data is not public, it belongs to the MGA, Sanders said.

Greg Thompson, chairman and CEO of Thompson Insurance Enterprises Inc. (Thomco) and TMPAA board president, however, questioned what carriers’ opinions were regarding claims data owned by the carrier that the agent pays for to be analyzed in an actuarial report. If the PA needs to move the business for whatever reason, is it a violation of the terms of the PA/carrier agreement to take the report? Or, do the carrier and MGA share joint ownership to the claims data and the report? he questioned.

Sanders said who owns the data and report depends on the reason for termination

Craig Fundum, president of Zurich Program Business, and Stephen Fitzpatrick, senior vice president of QBE, said their companies would view the data and report as items both the MGA and carrier have mutual rights to.

Another area to discuss when developing the contract is the length of the cancellation period or notice of nonrenewal. Often, 90 days of cancellation is standard, but according to Phil Harvey, president of Venture Programs, “it is almost impossible to replace a program in 90 days.”

Fitzpatrick said 90 days used to be the norm at his company, but it now recognizes that 180 days is more reasonable. And his company is willing to extend the period of termination to one year or longer, if necessary. Sanders said the length of the termination period depends on the nature of the program.

MGA-carrier conflicts can arise over exclusivity as well. Generally, agents prefer carriers not offer competing agents the same program. Yet the carriers said most deals today aren’t exclusive and instead are semi-exclusive at best.

Fitzpatrick said his company normally does not allow exclusives, but QBE works hard not to have two program administrators in the same space. “Generally, we write deals that are small- to mid-sized,” he said. “It’s hard to write national exclusives.”

Sanders said exclusive programs are generally reserved for difficult products that are not available in normal channels. “We may look at exclusives in that regard, such as for a certain locale,” he said.

Thompson cautioned, however, that exclusivity should be a two-way street, and isn’t always in the MGA’s best interest to obtain. He explained that if the carrier can’t provide everything the clients need, then exclusivity with the carrier isn’t in the customers’ best interest. “If something happens to the carrier, you may need off the deal,” he said.

Ultimately, Fundum summarized, is that all of these issues — data ownership, nonrenewal periods, nondisclosure agreements and exclusivity — plus any other contract items, should not be 11th-hour issues. The key to developing a sound agent-carrier contract is to have open discussions before signing.

“You should see a sample contract early on, and as you do your due diligence, you should look at the access you have and define the process early on,” he advised.

There are many idiosyncrasies in MGA-carrier contracts, Harvey added. “Negotiations are important. A lot of new carriers are coming into target markets.” Thus, it’s important to “keep on communicating with your partner,” he said. “If (something in the relationship) isn’t working, say, ‘let’s take a look at this.’ Communication drives all relationships.”

Following is a checklist of important areas of discussion for managing general agents and carriers when forming a contract, and items that should be clearly articulated in contracts.

Key content to discuss:

• Confidentiality agreement/non-disclosure agreement between parties;
• Recognition of the data/information/ intellectual property being requested by the carrier;
• Rights and propriety of model data (now and after);
• Underwriting guidelines and authorities (made as part of the contract or agreement); and
• Ownership of expirations and confidentiality to insureds (clients).

Termination provisos of the agreement:

• For Cause — definition of fine-line of cause. Who gets what and why, and when this comes into play;
• Non Cause — Voluntary termination by carrier or program administrator/MGA;
• Notice of nonrenewal — What is the appropriate period (90/180/365 days)? What happens when it’s 90 days and some states require 90 days notice? (i.e., insured notified before PA/MGA has an opportunity to react);
• Collection issues and responsibilities — Endorsements/audits/returns;
• BOR issues on business on the books as to other brokers raiding existing program book and rewriting with the same market through agency contacts;
• Protection to PA/MGA in the event a carrier partner cannot be replaced;
• Under what terms or conditions can the former carrier partner become a competitor? And
• Ownership of records, expirations and claims data.

Source: TMPAA