Creating A Specialty Insurance Program

During the late 80s through the mid-90s, one of the hottest topics in the industry was 'specialty (niche) programs.' It seems that every insurer, MGA, and broker wanted to create and/or enjoy exclusive marketing rights to such a program.

A specialty program should have these goals:

• targeting a large group of homogeneous businesses whose shared exposures require unique underwriting skills (although the group’s exposures need not be catastrophic, they must be unique and generally not understood by standard markets);
• placing the business with a carrier that has exceptional knowledge of risk analysis and product pricing for the program group, as well as effective loss control and claims administration services;
• offering the most comprehensive and competitive product possible; and
• leveraging the target market, carrier, and product to eliminate competition.

As a rule of thumb, the program should develop significant premium volume and a viable retention rate, allowing the underwriter to focus on loss development and rate adequacy.

Unfortunately, in too many cases during the mid-90s sexy programs with high premium potential seduced specialty underwriters. Producers and underwriters alike lost sight of the reality that underwriting expertise and adequate pricing of unique exposures form the core of a successful specialty program.

Today, underwriters know that a combination of inexperienced underwriting with an ineffective national sales organization can kill almost any program. Because insurer program administration expenses (including commissions) usually come to more than 40% of premium written, insurers show little interest in new programs with a two-year potential premium of less than $5 million.

To launch a successful specialty program, I’d recommend these guidelines:

1. Do your homework. Learn everything possible about the industry you've targeted. If you don't know your stuff, there's no way to bluff a specialty company underwriter. To acquire industry expertise, take field trips to businesses, ask experts to make in-house presentations to your staff, analyze the legal and political factors that affect the industry, attend trade seminars and conventions, etc.
2. Work only with specialty carriers. Present them with a written proposal in bullet format that covers:
• the history of the industry and its need for a specialty program;
• underwriting guidelines;
• laws and regulations affecting the industry and its risks;
• insurance forms for specialty needs;
• recommended rates;
• marketing plans; and
• premium projections.
3. Make sure to base the proposal on reliable sources, rather than nebulous 'guesstimates.' For example, use quantitative risk analysis and loss projections to support the rates you recommend. You and your staff should do this statistical heavy lifting — after all, you're the experts. If you lack the time, resources, or skills to create a professional proposal, hire a consultant with expertise in specialty programs.
4. Obtain a specialty program reinsurance treaty that provides flexibility and accountability.
5. Negotiate equitable commission and profit-sharing arrangements. Make sure that 50% of your profits come from program underwriting. If you don't believe the program will generate underwriting profits, why should the insurer and reinsurer support you? Before negotiating commissions, analyze every aspect of the program's administrative and marketing expenses — and be sure not to underestimate these costs.
6. File the program's rates and coverages on an admitted basis. Trying to administer a surplus-lines program on a regional or national basis can turn into a nightmare!

Finally, bear in mind the admonition of baseball immortal Branch Rickey: 'Luck is the residue of design.'