by Paul Surdel
Managing General Agency (“MGA”), which is often used synonymously with the term “program administrator”, has certainly witnessed explosive growth in the program area in the past ten years. There were less than 15 insurance carriers back in 2007 that were dedicated to the MGA program space. That number has increased to approximately 60 carriers in 2017 depending on the line of coverage and the amount of authority that a carrier will grant a program administrator.
Industry data with regards to the number of existing managing general agents is a little more nebulous. Wholesalers with binding authority contracts will mistakenly get lumped into the same pool with program administrators even though the responsibilities for the respective entities are entirely different. Wholesalers with binding authority contracts are not managing general agents or underwriters by definition. Recent estimates indicate there are approximately 2500 managing general agents that have full underwriting authority on behalf of an insurance carrier. Managing general agents create their own set of underwriting guidelines and rating parameters. The carrier signs off on what the managing general agent has developed and proposed. Conversely, binding authority contracts are designed and structured by the carrier and their aim is to partner with strategic wholesalers to sell their product.
This article is written for wholesalers or retailers that have a specialty book of business, or have thought about becoming a program administrator. However, it could also be useful for managing general agents/ underwriters that may not have had to place their program for a few years.
The first step in the process for a MGA to place a program with a carrier is to make a determination on which carriers they are going to want to approach with a submission. The chances are good that somebody embarking on locating a carrier may not have full knowledge of the companies that would be best suited to their needs. In this scenario, a program administrator may want to consider soliciting the services of an intermediary to assist them in the process. The broker will be able outline the critical components that will be needed to satisfy the carrier requirements. An intermediary will also have direct knowledge of the program appetites of each carrier that they approach on a program administrator’s behalf.
One of the key components in placing a program will come down to the data that a program administrator will be able to share on their book of business. Most programs will not get off the ground if the carrier doesn’t receive sufficient data to evaluate the profitability of the business being submitted. A carrier’s actuaries will need at least three to five years of historical premiums and corresponding losses depending on the line of coverage. The loss history also has to have a current valuation date. Three years of data is the minimum and more years will be required on business with a long tail exposure.
Start-up programs will undoubtedly not possess any historical information. In this instance, a program administrator will have to collect industry data to support their case.
The next step in the process is to create an Executive Summary to send to the marketplace if the program administrator determines that they have the appropriate information to meet the carriers’ information requests. An Executive Summary has also been referred to as a “teaser”. Generally, an Executive Summary will not even mention the name of the entity approaching the marketplace. This is especially important in situations where the entity does not want their existing carrier to know that they are exploring other alternatives. An Executive Summary outlines key items such as: class of business, overall performance of the book, existing competition, geography of the program, lines of coverage, policy limits required, etc. However, the key point of emphasis should be an explanation of how the entity’s product will differentiate itself from the competition. It could be things such as the entity’s distribution network, their manuscript policy form or pricing methodology. Carriers will lose interest quickly if they perceive that the underwriting entity’s main selling point is that they can offer lower pricing than the going market rate.
The Executive Summary should be sent to a number of carriers that meet the general requirements. For instance, a public livery program should not be sent to a carrier that has limited appetite for auto liability. The carriers will respond to the Executive Summary by either stating that they would like to receive a full submission or by declining to move forward.
The Executive Summary will generate a number of interested carriers. This results in the next step of the process which is putting Non- Disclosure Agreements (“NDA”) or Confidentiality Agreements in place between the MGA and the interested markets. Most insurance carriers prefer to use their own version. The NDA is in place for one main purpose. The program administrator is being asked to share confidential information about the details of their program and they want to feel assured that the information will not be shared by the carriers with other parties. The exception to this would be if a carrier decides to purchase reinsurance on the program. They would be allowed to share information in that instance. The NDA holds even more importance at the point when the financials of the program administrator are provided to the carrier.
The submission process commences once both parties have signed the confidentiality agreement. The submission is the critical part of the process where programs move forward or not. The submission needs to include the following: a history of the program or business, an overview and background of the program, historical loss and premium information, rate level changes over the course of the program, coverage forms, underwriting guidelines, and resumes of the key underwriters and executives. NOTE: It will be nearly impossible to place a program if the carrier perceives that the program administrator does NOT employ underwriting expertise. Premium volumes in and of itself will not suffice. The program administrator has to demonstrate that they employ an underwriter or team of underwriters that have an expertise in the class of business that they are quoting.
Keep in mind that insurance carriers will only feel comfortable granting underwriting authority to individuals that demonstrate they have a better understanding of the business they are underwriting as well as a larger distribution network than the actual carrier itself. The process will usually entail additional information requests as the process evolves. Bringing a program placement to conclusion will usually average 6 to 9 months depending on the nature of the business and the preparedness of the program administrator in gathering the information.
Admitted programs will take longer depending on the states where rates need to be filed. The carrier will also have to do at least one physical audit whereby they will review files to make sure that they are being documented properly. Office procedures for underwriting, accounting and claims will all be analyzed. The program administrator’s operating system will also be reviewed to make sure that they can properly handle the responsibilities of rating, quoting, binding and policy issuance. A carrier may suggest using their own system to simplify the process but they will make sure that the program administrator’s system is compatible with their own and that it can populate the required data requests.
Assuming that everything goes well on the audit, the carrier will present a contract to the program administrator. The contract will outline the key responsibilities for both the carrier and the program administrator. Terms of compensation will also be identified and underwriting guidelines will be outlined. It is highly recommended that the program administrator solicit the services of an attorney that specializes in insurance contract law. Very rarely do agreements get signed without some additional negotiation or clarifications.
In conclusion, this article is a basic outline of the procedures and steps that are involved in placing a program. Each step referenced above could well have its own dedicated publication with much more detail but hopefully this overview will provide a flavor of the expectations that a program administrator can expect to face if they are considering approaching an insurance carrier about a program placement.
About the Author:
Mr. Surdel serves as Director of Program Insurance for Merger & Acquisition Services, specializing in the placement of insurance program business and creating underwriting partnerships between carriers and Managing General Agents (MGAs). He has 32 years of insurance and reinsurance experience, working with carriers and MGAs. Mr. Surdel began his career as a National Accounts underwriter with Travelers Insurance Companies and launched his reinsurance career two years later when he joined RFC Intermediaries. He remained with RFC for five years working with National Accounts underwriters assisting them with their facultative reinsurance placements.