  News & InfoLike Minded1 November 2008 Best's Review Program insurance may not be the wave of the future in commercial lines businesses, but for many companies it is an increasingly larger chunk. The program business, an especially efficient way to underwrite and administer similar risks, has been around for a long time. But according to Hank Haldeman, executive vice president of The Sullivan Group, a privately held consortium of companies involved in the insurance brokerage business, its growth has accelerated in the past 10 to 15 years. Why the growth? Haldeman lists three consistent factors: an increasing diversity of insurance products; the drive within the insurance industry to serve specific niches more effectively; and increasingly sophisticated distribution. A soft market like today's typically provides a cyclical boost. "Frequently, soft markets drive advances in the program business as insurers and reinsurers seek new and different ways to distribute products and take on risk," said Haldeman. Success depends upon coordinating the entire process of prospecting, underwriting, distribution, administration and claims management on a focused book of business. While the concept may seem straightforward, there are many possible applications. The Sullivan Group's largest single program by policy count and premium, for example, is directors and officers liability for community associations and resort developments. Another example is Michigan-based Meadowbrook Insurance Group, which develops programs for select industries, trade and professional associations, affinity groups and government entities. Delos Insurance Co. of New York City writes commercial casualty insurance for auto liability, business owner protection, habitational and some professional liability and medical stop-loss. And Liberty Northwest, a subsidiary of the Liberty Mutual Group, has a specific niche: providing a property/casualty program to the Oregon Restaurant Association since 1984. Fully Outsourced Delos uses a unique model: It outsources everything. The firm's 45 employees manage and monitor the outsourced relationships, "but we don't try to duplicate what we hire them to do," said Bill Davis, chief executive officer. Each employee brings at least 15 to 20 years of experience in insurance and reinsurance to the company, and they are familiar with the businesses that the programs insure, he said. As of August, Delos had contracts with 23 program managers who tend to 25 different programs. Last year, they wrote $267 million in direct premiums. The pace quickened in this year's first half, with $155 million. Since being acquired in August 2006 by a group of investors led by Lightyear Capital LLC, Delos retained eight of its nine programs and added 17, Davis said. A typical Delos program focuses on a homogeneous group of policyholders or a territory. Examples include professional liability for small law firms, workers' compensation for businesses with only one or two employees, and a personal auto insurance program for teachers in Minnesota. "This is the kind of niche focus we look for, the Main Street type of business, something that gets us away from the real-large-account kind of vanilla business that a lot of companies go after," said Davis. Delos also values the flexibility the programs afford. "We can or could get into or out of a class of business or a territory quickly, whereas a large direct insurer can't because of the infrastructure issues," Davis said. "Several years ago," he said, "we were in a program of long-haul trucking. We thought truckers were facing increased competition for moving goods. Their pricing was going down, while fuel, insurance and maintenance costs were going up. We saw a lot of new drivers that didn't have the experience level you would have seen 20 or 30 years ago. So we got out of that class of business and redeployed our resources elsewhere." Delos explicitly states in written agreements what it expects from its program managers, and it rewards them for business that lasts. "We don't want them out there being premium merchants, writing business for the sake of commission, but to write business that ultimately produces underwriting profits," said Davis. "And if they do that, we will share a portion of those profits for producing an excellent book of business." Davis said his chief competitors are regional direct writers and mutual insurers. The Sullivan Group generates more than $1.5 billion in annual premiums, with its program business accounting for about one-eighth of that amount. In addition to its D&O business, its key programs are D&O liability for the health-care industry and a garage program for auto dismantling businesses. The latter provides coverage for the risks that insureds have if they house and service vehicles. Haldeman said the group acts as the program manager in a wholesale capacity. Through its reinsurance intermediary operation, it is involved in other programs as intermediaries and consultants for program managers. Underwriting is an essential function of the group's program managers, but the group leaves claims administration to insurers with whom it works, or outsources it. "If you're dealing with an Ace or AIG, and you have a program with them, they have extensive claims resources," he said. The Sullivan Group also operates a CARD (community and resort development) program nationwide. It is a package of property/casualty cover for large-scale planned communities, resort and timeshare condominiums, and large-scale luxury condos. Haldeman sees program business as an effective way for insureds to get the coverage they need. That's because program managers are able to develop expertise in specific niche businesses or coverages that allow them to tailor the insurance to that particular niche. "It's difficult for an insurance company, particularly a large one, to develop that kind of narrow focus," he said. "The program business also helps in the development of new coverages and to meet new needs as risk evolves over time. And in doing that, it then allows insurers and reinsurers to find ways to utilize their capital in evolving ways." Some or All Meadowbrook bills itself as a program partner to specialty insurance retailers. It develops programs for select industries, trade and professional associations, affinity groups and public-entity organizations. The group includes four insurance companies. The group tailors coverage by assuming some or all of the risk or by acting as a program administrator. The programs serve small to midsize accounts that include educators, livestock marketers, manufacturers, municipalities, pharmacists, doctors and lawyers, according to an A.M. Best Credit Report--Insurance Professional (Unabridged). The four insurers had direct premiums of $307 million in 2007 and $181 million through the first half of this year. Archie McIntyre, senior vice president of business development, said Meadowbrook's success in specialty programs is based on developing what he described as "barriers to entry." "Most programs are established because they have some uniqueness," he said. "We try to learn and identify what those are and then exploit those, because that's what really ties in and builds a long-term relationship between the agent and the carrier." Also significant is how the group works with so many different types of distributors. According to the A.M. Best report, Meadowbrook's program business is produced through about 100 independent agencies. McIntyre said the group also works with specialty program administrators, wholesalers, managing general agents, managing general underwriters and their trade associations. "At Meadowbrook, we design programs, which are many times invented and managed by the distribution system that brings it to us," he said. "But we also seek out association endorsements and build distributions where we see program opportunities." The program business model is better than the traditional insurance model because all partners--the people of the carrier, the agency and the claims handlers--apply their knowledge to conduct "a thorough vetting-out process for due diligence of new opportunities," said McIntyre. That due-diligence process is a "critical part" of establishing a long-term successful program, he said. Today's Specials Liberty Northwest's original work with the restaurant industry was a group workers' compensation program. It is a retrospective rating program that has returned more than $80 million to members since its 1984 inception. The association subsequently asked Liberty to create a property/casualty program for members, and the company in 1999 formed the Oregon Restaurant Association Safety Group Dividend Property & Liability Program, which is also based on retrospective rating. Last year, Liberty Northwest's board of directors declared a 10% dividend of premiums, the largest in the history of the program, which has paid a dividend every year. Most of the insurer's business is in personal and commercial lines; restaurant program businesses represent a small percentage of overall premiums. "That's because the restaurants are typically small, mom-and-pop," said Denise Moore, the company's hospitality program director. "It's not really premium-driven, but meeting the needs of these restaurants." To qualify for dividends, restaurant owners need to be members of the association. There are slightly more than 200 members currently, Moore said, though several hundred nonmembers also buy the insurance. Moore works directly with the restaurant association, keeping them informed while spreading the word about the program. "We don't outsource anything," she said. "We do utilize agency partners because that's our primary mode of sales distribution. We underwrite here, and our board of directors evaluates the experience of the program for purposes of dividend declaration." Restaurateurs who have both workers' comp and P/C coverage with Liberty Northwest also receive a 5% premium credit, called an "account completion credit," for having both lines with the company. "Part of it is because we feel we share all the services, audits, loss-prevention and in-house claims," Moore said. A number of carriers will always want to write restaurant business because the coverages and enhancements "are kind of easy to package together," and because there are a lot of restaurants, said Moore. "But not all carriers are here to stay," she said. "They come and go. They have a special program this year, but do not offer it the next year." When the association asked its members what benefits they wanted, the members asked for a "stable" P/C program from Liberty, Moore said. Haldeman predicted that program businesses will continue to grow both in numbers of programs and premiums. But, he added, they would probably not grow dramatically. Program businesses are not likely to become competitive against "the commodity end" of property/casualty lines, such as homeowners and some business coverages "where fundamentally there's not a lot of differentiation in risk," Haldeman said. The distribution of that kind of business will become more automated, he said. Likewise for the opposite end of the spectrum: The very large risks, especially Fortune 500 companies, where placement must be carefully tailored to the buyer, he said. Learn More:
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