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By CYRIL TUOHY, managing editor of Risk & Insurance®

The size of the U.S. program administrator marketplace is $17.5 billion in gross written premiums with an estimated 1,750 individual programs and 750 program administration firms, according to a new survey by the Target Markets Program Administrators Association.

The survey reveals one of the most complete views to date of the program administrators operating in the marketplace, and of the insurance carriers underwriting this marketplace.

James D. Blinn, a principal at the consulting and analytics company Advisen Ltd., said one of the surprises of the results was the gap between the perception of the risks covered by the program business, and the risks actually underwritten by program administrators.

Markets often perceive the program business to cover highly specialized niches, which is true, but programs also appear to cover what Blinn called risks facing "business America."

"There's a lot of service of business America, and it's not so specialty oriented, real estate, retail, hospitality -- business America type of stuff," said Blinn, who managed the survey and analyzed the results.

Program administrators develop and distribute insurance products for niche markets or products that represent a book of similar risks placed with one carrier. The programs are sold through retail or wholesale channels.

Specialized coverage through a program administrator might include coverage for the medical marijuana industry, or business interruption coverage for companies with plants near exclusion zones established in the wake of a nuclear meltdown, for example.

With $17.5 billion in annual gross written premium, the program business represents a fraction of the $478.7 billion in property/casualty premium written in the United States and Canada in 2010, according to A.M. Best Co. Inc.

Of the 34 insurers surveyed, 65 percent said they have at least one and as many as 19 distinct programs, 23 percent said they have 50 or more distinct programs, and 12 percent said they have between 20 and 40 distinct programs.

Rate adequacy is by far the most important characteristic of a program when carriers decide whether to write a new program or accept a rollover program, the survey found. Premium potential was a distant second.

Carriers consider overall profitability and underwriting profitability in particular as the most important factors in creating a successful program, the survey found.

Program administrators most frequently mention Lexington Chartis Programs, ACE, QBE Insurance Corp., Amtrust Underwriters Inc., and Munich Reinsurance America, according to the survey.

Maintaining a successful program, one insurer responded in the survey, requires "a portfolio that produces consistent underwriting profit" in a growing industry underwritten by administrators with experience and knowledge of the segment.

When considering whether to enter into a partnership with a program administrator, carriers consider experience with other programs the most important factor, followed by the amount of time an administrator has spent in the business, followed by the administrator's relationship with the carrier, the survey revealed.

A total of 61 percent of the insurers surveyed said it takes one to two years to evaluate the success or failure of a program, and 33 percent said the evaluation period is two to five years. The remaining six percent say they take less than a year.

The survey also found that 22 percent of carriers delegated all of their underwriting to the administrator, 61 percent delegated most of the underwriting to administrators, and 17 percent delegated only some of the underwriting.

A majority of the carriers -- 72 percent -- also said the programs they write "frequently" or "sometimes" included reinsurance, and 84 percent of the carriers surveyed said they "sometimes" outsource claims and risk management.

Digging deeper into the snapshot of the program marketplace, the breakdown of the 1,750 individual programs found the coverage distribution deeply fractured.

The five largest insurance coverages were comprised of: package programs (26 percent); professional liability (17 percent); all lines (10 percent); casualty (9 percent); and workers' compensation (9 percent).

The five biggest concentrations of programs were found in: professional services (10 percent); habitational (9 percent); real estate (9 percent); retail (8 percent); and hospitality (7 percent).

TMPAA member Argo Group International Holdings Ltd. sponsored the survey.

November 2, 2011

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