Program Business Administrators Outpace Market
The financial performance of commercial property/casualty insurance program administrators continues to outpace the performance of the overall property casualty insurance markets, according to the Target Markets Program Administrators Association.
The TMPAA’s latest annual survey revealed that program business premium revenues increased by 9.8 percent reaching $30.1 billion in 2013, up from $27.4 billion in 2012.
That’s compared to a 4.6 percent increase in direct premiums written for the overall commercial lines marketplace.
“Carriers are attracted to program administrators for several reasons, the biggest being the segment’s ability to outperform the general marketplace through focused underwriting and deep understanding of the industries being served by expert underwriters,” said David Springer, group president and COO of NIP Group, who also serves as president of the TMPAA.
“Additionally, it is a more efficient distribution model for a carrier as they can ‘pick up’ volume through a single source rather than building distribution in a class over time,” he said.
Chris Pesce, president of Maritime Program Group and a member of the TMPAA Advisory Board, said the success of the program business is driven by “two specific reasons.”
“Firstly, there’s a record amount of capacity in the market that needs to get deployed,” he said.
“Carriers have the capacity and desire to grow and expand but often lack the distribution. The PA model allows the carrier to quickly gain traction in a niche industry segment for which they had no prior experience.
“Through the PA, they get immediate penetration with the retail distribution that’s driving that class of business without having to incur the expense of finding them one over one.
“For example, a commercial auto underwriter isn’t likely to succeed as a yacht underwriter.” – Chris Pesce, president of Maritime Program Group and a member of the TMPAA Advisory Board
“Secondly, the PAs typically engage in a niche class for which they develop a deep expertise and often a personal passion.
“From an underwriting perspective, this leads to a much more intimate knowledge of that class and understanding of how to underwrite the class profitably. This is hard for the carrier to replicate using staff underwriters that have no specific passion or expertise directly in the class of business they’re underwriting.
“For example, a commercial auto underwriter isn’t likely to succeed as a yacht underwriter,” Pesce said.
“In addition, the overall acquisition cost of utilizing a PA is more attractive than trying to build a profitable portfolio organically when contemplating the cost of building the retail distribution, underwriting talent and systems support. If a PA brings all of that to the table, it’s a compelling model for the carrier to consider.”
However, a number of challenges were also identified by the study, including technology, which was highlighted by both administrators and carriers as one of the top issues facing the program space.
“Technology, when deployed effectively, can be a game-changer,” Springer said, but he noted program underwriting operations “can be expensive to run and interaction with carrier systems can be very manual.”
“Deployment of technologies that can gather and move information into and out of our agency management, rating, policywriting and CRM solutions can generate big expense savings over time, which help program administrators reach their full potential.”
“The required experience and skills,” he said, “are as unique as the niches the programs serve and finding the right talent — or growing it — can be difficult.” – David Springer, group president and COO of NIP Group, and president of the TMPAA
Pricing is another challenge.
“With so much capacity in the market and cheap reinsurance that’s overly abundant, there will be continued pricing pressure in all directions,” Pesce said.
“Unfortunately, the market entrants that have capacity to deploy will inevitably buy their way into the desired market share at pricing that is often unsustainable until the results catch up to the portfolio, which often takes years, not months.
“This all means continued downward pressure on pricing for the foreseeable future,” he said.
The survey highlighted a number of talent recruitment and training differences between insurers and brokers, especially as related to professional certifications.
And, according to the study, hiring and retaining qualified personnel in the program space continues to be a major challenge — with administrators saying they are boosting training programs to better support the needs of both new and experienced underwriters.
“Nearly half of the administrators polled do not require their applicants to have professional designations,” according to the study. “Thirty-six percent say they prefer underwriters with professional designations and will pay more, while 21 percent prefer underwriters to have professional designations, but will not pay more.
“In the case of insurers, half of those polled prefer underwriters with professional designations and are willing to pay more. Thirty-seven percent of the respondents do not require their applicants to have professional designations, while 13 percent prefer underwriters with professional designations, but will not pay extra.”
Springer said “scale and funding” could explain that difference of opinion.
“It is interesting that positions with expertise in program administrator shops are some of the hardest to find good candidates for but most program administrators don’t have the resources that a carrier does when engaging in recruitment or even formalized training programs to grow future talent.
“That is one of the driving forces behind the investment our association has made in Target University — where we endeavor to make available education to program administrator teams and the carriers and vendors that serve them.
“The required experience and skills,” he said, “are as unique as the niches the programs serve and finding the right talent — or growing it — can be difficult.”
Insurance Industry Seeks Talent
Insurance executives frequently cite a lack of new talent and an aging workforce as top concerns for the future of the industry.
That difficulty in recruiting newcomers to the industry was affirmed by a labor market study released by The Jacobson Group and Ward Group earlier this year. The study also found, however, that there was potential for growth as new skill sets become increasingly important.
Nearly two-thirds (63 percent) of companies surveyed said they expect to increase staffing over the next 12 months. That figure is down from January of this year, but still represents the second-highest percentage reported since the survey was first administered in 2009.
Most staffing will be in technology, underwriting and claims roles, according to the survey.
“We know the industry faces a big demographic challenge, which I think will cross a lot of disciplines and positions in the industry.” — Pete Miller, president and CEO, The Institutes
“Traditionally, actuaries and underwriters have been in demand, and I think that continues to be the case,” said Pete Miller, president and CEO of The Institutes.
The survey also targeted technology, actuarial, analytics and executive roles as being the hardest to fill. According to Greg Jacobson, co-CEO of The Jacobson Group, the issue comes down to simple supply and demand.
“Supply of skills in some of these areas isn’t changing as fast as demand,” he said. “Primary reasons for adding staff are related to ease of doing business and big data. Technology recruiting is suffering from changing technical requirements and increasing demand.”
Companies need to hire for the future, and many experienced people in the field today simply don’t have the knowledge and skill with data and technology to meet the industry’s needs.
“Technology continues to evolve, particularly around data science,” Miller said. “The insurance industry is kind of the original big data industry, and the industry has a big need for people that know how to use rapidly evolving tools to analyze and manipulate data, and how to spot trends.”
The industry will have to attract young, tech-savvy graduates to the industry in order to develop the skill-sets it needs to take advantage of technology’s capabilities.
“This is a relatively new discipline and the insurance industry is competing with many others for people who have the skills to build analytics capabilities,” Jacobson said. “There’s been a boom in demand given the growth of information and the way it’s used.”
“We know the industry faces a big demographic challenge, which I think will cross a lot of disciplines and positions in the industry,” Miller said.
The problem in recruiting isn’t lack of opportunity, experts said. Rather, the insurance industry has roles for every interest and college major. It offers chances for advancement, flexibility, and the sense of fulfillment that many young people entering the workforce look for.
“The ability to keep up with the pace of change while maintaining an organizational focus is a new responsibility for execs that has changed over the past 10 years.” — Greg Jacobson, co-CEO, The Jacobson Group
The Institutes conducted surveys to determine what young people think of the industry. The result?
“By and large, they don’t think about the industry, or they have misperceptions,” Miller said. “Part of what we’re trying to do is point out that this is a big industry with a lot of opportunities that is aligned with what a lot of young people want.
“There’s competition from banking and finance and tech companies,” he said, “but regardless of what you’re interested in, there’s a spot for you in this industry. To be able to understand and underwrite risk, you have to understand your customer’s business.”
Raising awareness has become a core mission at The Institutes, born out of the industry’s struggle to market itself effectively to college graduates.
The speed of technological change has posed challenges for some company leaders.
“The ability to keep up with the pace of change while maintaining an organizational focus is a new responsibility for execs that has changed over the past 10 years,” Jacobson said. “It’s hard to get executive teams to focus on what’s going to happen in the future, versus what’s happening today.”
Some carriers and brokers have their own internship or training programs for college students, but The Institutes has taken a centralized approach with its MyPath initiative, which aims to raise awareness among young people about the opportunities available and the rewards of working in the insurance industry.
“Our board is made up of senior level people at large P/C organizations, and they really look to us as an educational organization,” Miller said. “They’ve asked us to be a focal point for this effort.”
Created in 2013, MyPath serves as an online resource center for both college students and insurance companies, who can post internship or job opportunities.
Students can follow a step-by-step questionnaire that guides them to a position in the industry that best suits their skills and interests. It’s also the first significant effort to explain the role of insurance as the bedrock that supports all other industries and the safety net that keeps the economy humming.
Despite all the emphasis on technology and analytics, Miller said it’s important to highlight the human interactions that make a career in insurance rewarding. People skills still matter.
“My experience is younger people are more connected more completely because of technology,” he said. “They want a rewarding career, and they still want to work with people; they just do it differently.”
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.