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By DAN REYNOLDS, senior editor of Risk & Insurance®

If this year's Target Markets midyear meeting in Baltimore in April was any indication, the territory patrolled by program administrators and their opposite numbers among the insurance carriers is a fertile one, at least these days.

And this at a time, as was illustrated by the 23 percent reduction in attendance at this year's Risk and Insurance Management Society's conference in Orlando, when many conferences are seeing fewer, not more attendees.

Program administrators, who collate, analyze and present to market the risks of groups of like middle and smaller market businesses, have never been more popular among carriers, to hear experts tell it.

Perhaps it's because over the years, the level of underwriting sophistication of program administrators has increased, thus decreasing the risk to carriers. Certainly, market conditions are at work as well.

Carriers have more faith than they once did in program administrators, because unlike in the past, administrators are operating less as superbrokers and more as underwriting houses that have the industry-specific knowledge carriers need them to have to feel secure in underwriting the risk.

"Most of these guys, ladies, have their own actuary or contract with an actuarial firm today," said William Kronenberg, the president of the Target Markets Program Administrators Association and a principal with Exton, Pa.-based Marsh Creek Corporate Services. "That was unheard of even three or four years ago."

And about the cycles of the insurance markets, how are they playing into this increased popularity of the program administrators?

"Part of it is a soft market," said Kronenberg.

"Carriers are hungry for premium, they are looking for a managing general agent (MGA) or a program administrator to get a lot of premium," Kronenberg said. "But if you don't know what you're doing you can get hurt."

"Target Markets or an MGA can help a company like us in terms of being more efficient, covering a wider economic base than we would normally if were just simply writing open market," said Carl Bach, a New York-based Executive Vice President with Hiscox USA, which is a new member of Target Markets.

Bronek Masojada, Bach's London-based CEO, said Hiscox would like to grow its U.S. business at the rate of $100 million per year. Bach said Target Markets is one way to do that.

"There are advantages to that for a company that is in the development stages or building up their business like we are," Bach said.

Jeremy Hitzig, who like Kronenberg is a board member of Target Markets, is the CEO of Distinguished Programs, a New York-based program administrator that specializes in the real estate markets.

Hitzig said the popularity of program administrators tends to run in cycles, because, in part, there have been times in the past when unwary or greedy carriers got led astray by uneducated or unethical intermediaries and got burned.

"I think programs have been around for a long time and they have periods where they are in favor and out of favor and in the moment we are in an era of increasing membership," Hitzig said.

At this year's meeting in Baltimore, Hiscox, Aegis Security Insurance Co., Liberty International Underwriters and RLI Corp. were all approved as new carriers by the Target Markets board.

BAD ACTORS

Historically, program administrators, or brokers who were masquerading as program administrators or managing general agents, were able to find naïve carriers to accept their bundle of middle market risks, make their money, and then step aside when on occasion the whole mess blew up in carriers' faces.

"There are a lot of guys who used to be superbrokers, doing nothing more than calling themselves MGAs and doing very little underwriting and burned the carriers," said Mike Russo, the managing director of the Brownstone Agency Inc. in New York, like Hitzig's group, a program administrator in the real estate space.

"Obviously, the carriers became skeptical and we had to grow out of that reputation," Russo said.

One carrier that has been in the program space for a long time and is doing everything it can to remain there in a substantial way is the New York-based property/casualty carrier now known as AIU Holdings Inc.

Mark Mahanna, a Boston-based assistant vice president and marketing officer for the programs division of AIU Holdings, said the company, which we all once knew by other names, has been in the programs business for more than 40 years.

"We like to stress that we have been doing this for quite some time," Mahanna said. "We have known this business to be profitable and you can build a real solid operation from it," he said.

Estimates from lunch table conversations at Target Markets were that AIU has about a $2 billion piece of what Tom Rogers, a Philadelphia-based vice chairman with Aon Benfield, estimates is a $30 billion to $40 billion business.

But neither Mahanna nor some of his program space associates with AIU wanted to discuss exactly what AIU's premiums' written totals look like right now in programs.

Suffice to say, and it's an obvious point but one that bears repeating, is that there has been significant, what professionals call "market dislocation" in insurance this past year. XL, Hartford and AIG, AIU's parent, are three names that have been bandied about, among others, as having plenty of problems.

That's another reason why more carriers may be pouring into the program administration space, according to Marsh Creek's Kronenberg, who mentioned AIG's surplus lines carrier Lexington and the still-intact Zurich as traditionally larger players in this space.

"What (the dislocation)'s done is take away some of the concentration in this business which is usually never the best," Kronenberg said. And now may be the time, as their actions indicate, that other carriers might want to step in.

"Where before where I wanted to get in this field but why was I going to fight Lexington, why was I going to fight Zurich?" Kronenberg said.

"AIG is very solid and a very big supporter here," Kronenberg said by way of clarification as he gestured out into the expansiveness of one of the ballrooms at the Renaissance Harborplace hotel in Baltimore. "And once (AIU) gets spun off I think they're going to be OK. They just better do it damn fast."

QUICK IN, QUICK OUT

But just as quickly as carriers enter programs, they can exit them, according to the Distinguished Programs' Hitzig.

"After all, you can find one program manager who can bring $5 million, $10 million, $50 million, $100 million dollars in premium at the stroke of a pen and you can just as quickly unload that business that way if you feel like it's going the other way."

Hitzig said carriers who have business through a more traditional broker network can't pull out of that business as nimbly as they can a program.

"It's probably easier to say I'm going to fold up my programs tent and exit stage left," Hitzig said. And although Target Markets is pleased that it has new carrier members, that doesn't mean that programs will stay popular with this many carriers.

"I think you have carriers who have entered the program world in the last few years who may not have the appetite to be in programs through thick and thin," Hitzig said.

But like anything in insurance or any other business it's the relationships that matter and the diligent maintenance of them that can ensure success. Both carriers and program administrators said they have plenty of astute, trustworthy partners to work with, for now.

"Simply put, I am very impressed by the program administrators," said Paul Boris, a Berkeley Heights, N.J.-based assistant vice president for programs for the Small Business division of AIU Holdings.

"We simply need them to actively seek out these groups of similarly situated clients that have these unique insurance needs. In today's environment everything is changing and what may have been in the past there is a new exposure out there, it needs to change and it has to be a living thing," Boris said.

"That becomes a win-win because clients get a product that satisfies all of their requirements and we can grow our business."

"It is now growing quite significantly and you see the growth we have in the markets that have been attracted to this business," said Marsh Creek's Kronenberg.

He said Target Markets has been instrumental in that.

"Because we can all play golf, we can all eat good meals we can all go on trips to Hawaii together but why are we doing that and wasting our money just to be nice to each other. Let's create a network forum in a place where people come to get to know people and to work at it."

August 1, 2009

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