Editor's note: In a pair of interviews with Risk & Insurance®
Managing Editor Cyril Tuohy, Nancy D. Glennon, managing director, Liberty Mutual Commercial Affinity, noted some surprising trends in the small, specialized world of target markets, The Target Markets Program Administrators Association (TMPAA).
Q. Was the fact that there were more insurance carriers at the annual TMPAA conference last fall relative to the number of program administrators (PA) an unusual occurrence?
NG: Relative to the actual conference, yes it seems rather unusual. It was the first year that if you looked at the actual number of attendees it was about a 50-50 split. The soft market has something to do with it. When you look at the attendees at the Target Markets Program Administrators Association conference, you also had a handful of people representing the same company, so that could have skewed the numbers as well. The carriers were at the meeting to make sure their relationship with the PAs was healthy and protected. Some folks were there simply to educate themselves about one particular market. Some carriers were there not to generate new business with PAs at all, but to find out more about the industry and the different segments served by it.
Q Have you seen this pattern before?
It was certainly the first time I saw things so evenly balanced, but I must admit that it was a function of the marketplace more than anything else. I was struck by the number of wholesalers at the conference looking to aggregate their books of business and make it into a program. Those books of business didn't start as a program but the wholesalers had collected enough business in the segment for it to potentially grow into a program model. The wholesalers were looking for a carrier to analyze the book of business and the potential growth opportunities. From the perspective of the PA/wholesaler standpoint, there were more start-up opportunities instead of book movement from one carrier to another. That's a symptom of the marketplace trying to create more opportunities because the entire market is shrinking.
Q. Why is this pattern happening instead of, say PAs buying program administrators?
A: It's fair to say that in 2008 and 2009 and going into 2010, there's still some mergers and acquisitions happening in the form of carriers buying PAs and PAs buying PAs. In 2008 and 2009, some carriers were entering a niche market by buying PAs. Many of the companies buying PAs were foreign-based insurance carriers. We still see some of that. For other carriers, though, that's been their strategy in the last three or four years: to find strong managing general agents (MGA) and managing general underwriters (MGU) to help them quickly enter a large segment of business. Such activity gives the MGAs/MGUs more capital to expand. We continue to see PAs buying PAs. There's more activity from the financially strong PAs using existing capital instead of someone else's capital like activity from private equity, for example. The revenue pie is shrinking for all of us. With the larger PAs, like the ones that were at TMPAA, they are saying they are still interested in expanding geographically or by niche through acquisition.
Q: What does this mean for buyers in terms of pricing and in terms of coverage?
If the carrier purchases a PA, it means the carrier is committed to that particular niche, so committed that they want to make the PA part of their organization rather than just a partnership. They are building up a long-term relationship and there is a strategic commitment being made by the broker and the carriers. When the dynamics are about a PA buying another PA, it's more about economies of scale. There's more premium expansion opportunity, there's diversification of business. There's also consolidations going on as well. MGA and MGU consolidations are not bad for the market and the market is still healthy in terms of the number of PAs. Buyers don't need to be concerned about limited options.
Q. Can we expect to see carriers continue to look for PAs to buy given the softness of the market?
A: The market is very soft. The industry in 2009 was really hoping that in 2010 it would see a hardening. All signs should be pointing to a hard market: constrained surplus, investment income lacking for insurance carriers. The dynamic that makes this cycle more unique is the economic challenges. Even if the industry is trying to push for more price the buyer may not have the flexibility or the disposable income to spend.
Q: Have you noticed any new carriers coming into the market, and are they buying or looking for alliances with PAs?
A: We've noticed some new carriers come into the market. The Bermuda companies are prominent and a lot of the new entrants tend to be executives from other carriers that have had changes.
Q. Back in our October discussion, we talked about larger brokerage houses and the classes of risks or sector programs being serviced by Marsh, Aon, Willis and Lockton. Is
that still the case and why is this so?
The larger brokers can have a slightly different business model than your traditional PAs. The larger houses have been in this market for decades. The brokers are very successful with affinity groups and specialty practices. The programs will build around affiliations or certain classes or niches, and then use service centers to manage the book. They will also utilize their tremendous retail network to grow the program. Some of the brokers we're working with are looking for new niches and new opportunities for start-ups. Opportunities exist in areas where there are strong affiliations with buyers: franchisees and associations without much experience yet in buying insurance coverage. Another interesting dynamic that is worth looking at is the buying power of certain groups: the environmental movement, for example. There are program opportunities suggested where buying through a "green type" program may provide insurance dividends for doing so. There are also programs developed to capitalize on cultural buying behaviors, needs and social networks. The larger brokers tend to have research capabilities to determine market potential.
Q. In this soft market PAs are looking to differentiate themselves from the pack by holding on to their books of business. Does this make them more attractive to a carrier?
A: PAs and carriers are looking to find something other than price to differentiate themselves. PAs want to keep their relationships with carriers strong and they need to continue looking for brokers to steer business to them.
Q. Once a carrier buys a PA, is the PA allowed to operate as a subsidiary unencumbered by the
"mother ship," is the PA closed down, or later sold?
A: When a carrier buys a PA, they are buying the expertise and the control of that book so they will tend to leave them as-is. What you're seeing with PAs buying PAs, is that there's a healthy respect for that local small agent relationship and that value proposition. We see a lot of carriers leaving the PAs as-is.
Q. Given that prices are so soft and given the fact that carriers are looking to buy PAs may be a sign of contraction, do you see the TMPAA and the American Association of Managing General Agents (AAMGA) continuing as two separate entities for much longer?
The market for programs is estimated at somewhere between $14 billion and $40 billion in annual premium. It's a very big space and there's plenty of room for a couple of good associations. TMPAA is backed by Aon-Benfield. Attendees who tend to show up at the TMPAA meeting are the larger program administrators. There's a heavy emphasis on networking with the carriers and the vendors. The PA may be looking to move existing business or looking for partners for a start-up or expansion of their existing operations.
AAMGA has been supported by generations of professionals and families. It's well respected for the education programs they provide for the industry. AAMGA tends to have high attendance from reinsurance intermediaries as well. If you were to compare and contrast, the smaller MGAs/MGUs make up the membership of the AAMGA, whereas the larger PA's tend to make up the membership of the TMPAA.
What are you and your peers in the industry hot under the collar about?
A: Everyone is very concerned about a lack of underwriting discipline, not just in the program space but everywhere. The market pricing and risk selection is very competitive. With a shrinking market, there is a limited ability to grow profitably. The question is when is it going to change?
May 1, 2010
Copyright 2010© LRP Publications