Program Business Revenue Doubles in 5 Years

The pace of growth in the program market may be slowing but it is in no way standing still.

According to the most recent study from the Target Markets Program Administrators Association (TMPAA), program business premiums increased by 7.4 percent reaching $32.3 billion in 2014 up from $30.1 billion in 2013. That’s in contrast to the growth in direct premiums written for commercial lines which increased by only 1.7 percent between 2013 and 2014.

While the rate of growth of the program industry has slowed from more than 12 percent in 2013, the overall program business market is still growing year-over-year, said Christopher L. Pesce, president of Maritime Program Group based in Westbrook, Conn.

“Premiums in the program market are still growing; it’s just not growing as quickly,” Pesce said.

In the past five years since the TMPAA study began tracking the market, program revenues have nearly doubled from $17.5 billion in 2010 to $32.3 billion in 2014. The number of insurance programs increased slightly with approximately 2,100 programs and 1,000 program administrators.

Tracey Carragher, CEO of Breckenridge Insurance Services, said given the sluggish economy and strengthening soft insurance market, the program sector is doing great.

“Specialty programs are going to continue to grow. It’s one of the only growth areas in the business,” Carragher said. “That’s pretty great.”

The program business sector has been able to bend and stretch to fit the market, says David Brown, senior vice president of Specialty Markets, Munich RE.

Specialty niche underwriters are “a little bit more resilient than the general market cycle,” Brown said. “And programs tend to be a little bit more resilient in and of themselves than the general P/C space overall.” That resiliency has led to continued growth in programs and will continue to drive growth going forward, he added.

Arthur Seifert, president of Glatfelter Program Managers, says that the program sector benefits from its steadiness.

“We’re in what I call the trading account phase,” Seifert said. With the slow economic recovery, new business is hard to come by. That means a new account must be “taken” from somebody else.

Because programs by nature tend to be “stickier than the retail business,” program administrators see shorter “peaks and valleys” in the market cycle, according to Seifert.

“If we see a movement of our retention by a point or two, retail would probably experience a swing of four to five points,” Seifert said. “The ups and the downs tend to be mitigated a little bit on the program side, because it’s stickier business. It’s more targeted business. The clients that we go after tend to have been in business longer, so you don’t have as many business failures. That business tends to stay with you longer.”

TMPAA released the results of its annual research to document the size, characteristics, growth and other baseline information about the program insurance market. The TMPAA defines program business as insurance products targeted to a particular niche market or class, representing a book of similar risks placed with one carrier.

“The State of Program Business Study” was presented at the association’s 15th Annual Summit in Scottsdale, Ariz., in October.

Data Management

Like the overall property/casualty market, the program sector sees both challenges and opportunities in industry data collection and analysis.

Pesce says in many ways program administrators are ahead of the data game relative to others in the insurance industry. “Program administrators after all have been in the business of collecting data for a long time,” he said. However, the amount of data that is being collected and utilized today is mind-boggling.

“On one hand, it’s, ‘thank God for the data.’ On the other hand, it’s ‘oh my God, the data,'” he said. It’s a data management evolution, he said. Utilizing data to become more intelligent about the rating schemes requires not just a collection of the data but collection in a meaningful way.

“There’s a bigger effort now to capture more data than ever before and to analyze that data to look for meaningful trends and that’s hard,” Pecse said. “It could be finding a correlation in your data that shows yellow cars have a greater frequency of loss than blue cars. You don’t know what data is going to correlate into something meaningful.”

Pecse says program administrators that embrace the data evolution and get out ahead will have a better chance of capitalizing on an opportunity.

According to the TMPAA study, both program administrators and carriers show that data collection and program analytics need to be improved.

Predictive Modeling

Responses to a series of questions on predictive modeling in the survey revealed limited use among administrators. They have yet to fully see its impact on program profitability, the survey said.

According to the TMPAA survey, almost 40 percent of program administrators do not engage in predictive modeling. Twenty-six percent said they engage in predictive modeling, while 28 percent said their carriers use predictive modeling.

Pesce said that one challenge for program administrators today is that many carriers are coming out with their own internal proprietary predictive modeling algorithms and this trend can be difficult for the program administrator to manage.

“Because it’s a proprietary model for the carrier it requires a greater level of integration and exchange of data between the PA and the carrier. So there’s a lot more data being exchanged between the carrier and PAs than ever before and that’s a challenge,” he said.

The study showed mixed views about the impact of predictive models on program profitability.

Only 23 percent of program administrators saw a positive change when using predictive models in programs.

The majority of program carriers polled (73 percent) said they use program analytics, while 17 percent do not. Some carriers reported good initial results, saying program analytics has enabled them to share better information to administrators.

Future of Programs

Pesce and others in the sector see a strong future for program business.

“It’s clear that this is a distribution channel that is compelling and attractive to the carriers,” Pesce said. “With the amount of capacity in the market right now, more carriers are utilizing program distribution as a fast way to get to market, a fast way to build a program of scale without sacrificing underwriting because you are using a partner that has a good niche.”

But a good future rests on program administrators becoming more technical, Pesce added.

“We have to get equally as confident at managing technology as we are at understanding insurance,” he said. “While I think there’s a lot of good PAs that are unbelievable insurance experts in their niche, they need to be an equal technology expert to meet the needs of the future.” That means understanding and managing data more and more. “That’s a big part of our future that’s not going away and it’s a struggle.”

The annual TMPAA research study was sponsored by Allied World, BMS Intermediaries, The Chubb Group of Insurance Companies, Ironshore, NetRate Systems and Rockhill Specialty Programs. The study was conducted by the research firm Advisen. A copy of the executive summary is available on the TMPAA website.

Amy O’Connor contributed to this story.