In the last decade, you may have heard the term 'program manager' or 'program administrator' being used frequently. They're often used interchangeably. This article will use 'program administrators,' or 'PAs.'
A PA is a specialist in underwriting a particular industry or form of coverage on behalf of an insurance company or companies. Rarely do PAs administer claims, since their primary purpose is to administer, underwrite, rate, and market their product. Some PAs sell directly to the customer, but most generate sales through the insurance agency system.
A true specialty insurance program has unique characteristics that distinguish it from a standard insurance submission-say, the underwriting of a specialty class of business requiring expertise in exposure analysis, or rates and forms that deviate from normal terms and conditions to satisfy the customer's insurance needs. One often hears of a specialty program formed for restaurants, taverns, or certain construction trades, but I don't consider these specialty programs because an abundance of standard and nonstandard insurance companies will compete for this business with standard forms and rating criteria.
In a genuine specialty program, only a limited number of insurance companies have:
- The understanding or desire to compete for the class of business
- The rates or forms necessary to rate or insure the exposures properly
- Individual reinsurance treaties in place to give the primary carrier the flexibility and capacity necessary to insure the underwritten class
Keep in mind that standard reinsurance treaties, like standard ISO forms, exclude certain Liability and Property exposures, which in turn restrict the underwriter's ability to compete for many classes of business.
For the most part, a program offers multiple-line coverages to their prospective clients. Exceptions include Professional Liability, Pollution Liability, Errors & Omissions, Directors & Officers, and Products Liability policies. PAs have even progressed to the point of employing loss-control representatives who have the expertise to specialize in the underwritten class.
My firm underwrites the outdoor recreation industry, including such business as resorts, dude ranches, outfitters and guides, trap and skeet clubs, hunting and fishing lodges, hunting leases, snowmobile tours, RV parks, and campgrounds. The program offers a full compliment of package policy forms: Auto, Workers Compensation, Marine, and Umbrella Liability. The program is admitted in the United States; we have a separate division that underwrites Canada. Our insurer is Gulf Insurance Group, an A+9 rated company and part of the Travelers Property & Casualty Cos. Our insurance provider for Workers Compensation is the Legion Insurance Co., which is A8 rated.
We contract with independent insurance agents throughout the country to represent our products and commit to the marketing and sale of the program. We appoint agents based on their reputation within the insurance community and their proximity to the type of business being produced. Since many specialty programs have a limited prospect base, it's important that appointed agents be spread out geographically so that they aren't competing with each other for the same program. Loss-control and safety manuals address certain aspects of the insured's guest activities: equine, marine, shooting sports, and so on. This is provided by a team of seven loss-control specialists, all retired USMC officers.
More insurance companies are turning to PAs to underwrite and market their specialty programs. Insurance companies are focusing on specialty classes of business that they believe will give them an adequate underwriting return, since they can better control their expenses and apply actuary data (premiums, losses, expenses, and rates) associated with the program.
As in any industry, the fewer the competitors, the more adequate is the pricing of the product for the company selling it. Insurance companies will continue to seek experts in niche classes of business to improve the underwriting and pricing of specialty products. Delegation of authority and responsibilities will ultimately reduce the insurance company's expenses and improve services to the agent and the insured. Most of us old-timers remember when there was a rush to set up branch offices throughout the country so that the local underwriter knew how to write business associated with their territory. Now we're seeing branch offices being closed, underwriting being withdrawn to the home office, and the delegation of underwriting authority contracted to specialists.
Insurance companies recognize that the success of a program-in terms of rate, form, and limits capacity-is often driven by reinsurance. A reinsurance treaty created and built around a program reduces expenses and enhances capacity. Many PAs have entered into the captive reinsurance market, participating in the products they underwrite. Such an arrangement can be profitable and cement the relationship with the primary and reinsurance underwriters. Sharing in underwriting profits through profit-sharing agreements with the insurance and reinsurance underwriters-not commission revenue-should be the PA's bottom-line motivation.
Insurance agents must take advantage of the specialty market provided by PAs. The specialty-program market might not be an agency's primary focus, but it must be within its marketing scheme for capturing a certain segment of business within its sales territory. We advise agents to identify these classes of business and to seek out PAs to help find a market for them. A good PA will have a databank of prospects that meet their underwriting definition, and will generally share this information with his or her insurance agents. Usually brochures and mailing pieces are available from the PA. Many PAs will enter into cooperative advertising ventures. The agent should ask the PA for an exclusive or semi-exclusive territory in return for a commitment to market the program aggressively.
Because of the specialty nature of the product, the number of accounts available within a specific state or region is often limited. A form of exclusivity will benefit the agent and the PA. Agents that are successful in developing an exclusive or semi-exclusive contract will undoubtedly have few competitors to deal with. When a good product is available to a niche consumer, the agent will capitalize on word-of-mouth referrals to establish the agency as an expert in the business.
In your sales strategy, make certain you understand what information the PA will require (including specialty applications) to underwrite and compete for the business properly. PAs will attend conventions and generally ask their agents to man the booths with them. Sharing association endorsements with the producer is another way to share in a marketing effort. And, unlike the wholesale or Excess & Surplus Lines facilities, PAs pay more commission to the producer. Before devoting time and energy to a program, the producer should ask the PA what his or her renewal retention has been for the past three years. A stable and profitable program will have a renewal ratio of around 90%.
There are many ways of finding a PA. Most programs are listed in periodicals such as Rough Notes and the Crittendon Report, and most advertise in trade journals. Talk to the marketing representatives of your standard insurance companies. In our program, Travelers marketing and underwriting personnel are familiar with the specialty products offered by the Gulf Insurance Group. The use of PAs will add to the profits and retention of your business.