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Finding Markets: The Specialty Program Consultant
While a reinsurance intermediary operates between the ceding insurance company and the reinsurance company market, the specialty insurance program consultant operates between insurance agents and the insurance company. This document by Andrew Barile introduces you to this emerging type of consultant. Program brokers, marketing insurance consultants, and specialty insurance program consultants have all existed for a number of years. They perform a valuable service for an agent, and should be part of the agent's cadre of experts, together with lawyers and public accountants. Without a suitable insurance company market the agent can't exist. Insurance company market finders perform a unique service that agency staff members can't always perform on their own. The first question agency owners ask is 'Why should I pay a consultant for a service that I, the owner of the agency, should be able to perform myself?' Certainly visiting with insurance company markets is an owner's function. However, agency owners should quantify their time spent on an hourly basis. How much time do they really want to spend developing new company markets? Some consultants have adapted a formal approach to representing insurance agencies by using an 'engagement agreement,' or a 'consulting services agreement' which outlines the specific services that the consultant will perform, and the cost of these services. After providing agencies with this service for more than 25 years, I've noticed that each engagement agreement is different. Consultant's fees vary from a single flat fee to a specific percentage of premium volume. Some engagement agreements have a fixed time frame. Others run as long as an agency contract between the parties (agency and insurance company) is in force. FINDING A CONSULTANT In the past many agents used a reinsurance intermediary to place them with an insurance company. Now with more stringent regulations for reinsurance intermediaries, they should not perform this type of service. Use reinsurance intermediaries to structure the appropriate reinsurance program behind the company making the agency appointment. On this basis, agents must become more familiar with the difference between the insurance and reinsurance markets. Consultants who can access both types of markets perform better for agents. Interview consultants much the same way carriers scrutinize the appointment of reinsurance intermediaries. Based on the exchange of information, the appointment process is made. The agent must realize that this is only the beginning of the process in finding a company market. BUSINESS PLAN FOR AN AGENT Most company markets have standardized the information required to make an agency appointment. Some companies have standardized forms that the consultant must complete. To create a business plan for finding an appropriate company market, you'll need these basic ingredients: Copies of the agency's certified balance sheets and income statements for the current and prior years Biographical profiles of the agency principals and staff Premium and loss experience for three to five years, segregated by line, class, territory, etc. Sample policy forms and rating examples Analysis of trends in the rate level and company competition Copies of existing and prior agency agreements with companies Trade references When applicable, full details of the existing reinsurance program or proposed reinsurance structure Copies of cover notes, proposed placed reinsurance, and reinsurance agreement, where applicable MARKETING THE PROGRAM Once the initial business plan is completed, the marketing strategy targets the appropriate company. Although there are some 2,000 P/C carriers nationwide, there are significant differences among them. Licensed companies, non-admitted companies, regional companies, mutuals, stocks, and owner-operators all present opportunities to obtain an appropriate agency-company relationship. Company market knowledge is crucial. Knowing about P/C company purchases benefits a consultant, as does having relationships with top management at the companies. Treaty reinsurance brokers usually aren't good specialty insurance program consultants. Unfortunately, very few consultants have the technical knowledge to market programs. Once the program moves to company technicians, the consultant must negotiate with the underwriters and have the educational qualifications to answer their questions to complete the program with a good market. CASE STUDY Let's consider the placement of a general agency agreement for a hospital malpractice program requiring a $25 million occurrence limit. The first concern is to determine how many companies have the net worth to issue a $25 million gross policy limit before treaty or facultative reinsurance. Understanding this basic marketing strategy could save weeks of market research. Suppose the general agency has already built a favorable relationship with a direct writing reinsurance market. This limits the consultant because the direct writer has determined the terms and conditions of the reinsurance and controls the type of company security required. This could hamper the consultant with excessively stringent reinsurance terms. An effective consultant should have access to markets that use reinsurance intermediaries as their exclusive source of production. The agent is better protected when no one company dominates the reinsurance market. With the continuing vertical integration in the reinsurance business, suppose that a large direct reinsurance company, who's been writing the hospital malpractice program for many years, decides to purchase a P/C company. If the specialty program is running well, the reinsurer through the new insurance company vehicle could replace the agent's current company. Going a step further, the reinsurer might also purchase the general agent. If this is what an agent wants, they should inform the consultant at the beginning. TYPES OF PROGRAMS Consultants must have a broad understanding of the P/C business: Hospital Malpractice, Agents E&O, Private Passenger Auto Liability, Contractors Liability, Auto Default insurance, Crane Rigging Contractors, Truck insurance, Yacht insurance, Amusement Park risks, Hazardous Waste Haulers, Homeowners insurance. Consultants must be able to use agent-clients in-depth knowledge to accelerate their learning curve in all of these product lines. Many agents recognize that their future lies in developing specialty products that they can sell to groups of insureds and their associations. A comprehensive package can go a long way toward keeping clients for the agency regardless of the underwriting cycle. CONCLUSION The services of the specialty insurance program consultant don't end with the consummation of the agency contract. The challenge comes from listening to agents describe new products that require a specialty market. Agents are beginning to recognize that together with legal and accounting services, they can purchase company marketing services. The future looks bright for the specialty insurance program consultant who has a successful track record of agency-company accomplishment.

...transfer catastrophic layers to reinsurers; together they enable larger limits...

Cut-Through Endorsements
CUT-THROUGH ENDORSEMENTS   by the IIABA Virtual University Faculty   Sometimes when an insurer encounters financial problems, cut-through endorsements will be issued. Both the primary carrier and reinsurer usually attach a cut-through endorsement to the policy. The endorsement should specifically reference the policy by number and policy term. This document by the IIABA Faculty investigates what the endorsement actually represents.     Our “Ask an Expert” service recently received this question:   “We have just received official notification of Best downgrading one of our companies (let's call them ABC Ins. Co.) from an A- to a B+ rating. Best reportedly has them under review with ‘negative implications.' ABC's press release indicated that XYZ Ins. Co. will be providing a cut-through endorsement which, and I am quoting, ‘ ... means that ABC policies issued under the agreement are backed by the A++ rating of XYZ.'   “Since the cut-through endorsement is between ABC and XYZ, the insured has no direct contract with XYZ should ABC go under. What problems will we — or our clients — experience if we have to look to XYZ for coverage under the ‘indirect' contractual relationship our clients would have with XYZ? What legal or regulatory support would we have to help us deal with XYZ?   “There is debate among our staff as to the real value and protection to the agency and our clients that the cut-through endorsement provides. Any light you can shed on this would be greatly appreciated.”   FACULTY RESPONSE   A cut-through endorsement is an agreement between the insured and the reinsurance company. I don't think an insured has any standing with regard to an agreement between the insurer and the reinsurer. If the reinsurance company is serious about providing a cut-through endorsement, they need to provide evidence to the policyholder.   FACULTY RESPONSE   ABC is not the only company in 2002 to experience this situation. Earlier in the fall, another major carrier was put in the same position. Most of their agents are working with them. However, there are or will be clients that you'll need to move because they'll be uncomfortable. Most of these will be commercial accounts.   Although I am not aware of all of the legal ramifications, the first thing to do is to make sure you know why ABC was downgraded. Can it be isolated to a specific issue? Can it be corrected? If yes, then chances of the company “going under” are slim.   The cut-through endorsement process has been used for more than 35 years in similar situations. I have not heard, nor can I recollect, any of the concerns occurring that you outlined. However, caution is good. Check with your state IIABA association and E&O carrier for their input.   And by the way, most banks and mortgage companies are satisfied with this arrangement. You'll need to make sure to evaluate options for those that aren't. Unfortunately, I don't think this is the last time we'll see this happen.   FACULTY RESPONSE   Unless the cut-through endorsement is filed and formally issued to each client as an amendment to the policy, it has no guarantee. It is, in the absence of the aforementioned formality, an indication of goodwill that, knowing the reputation behind it, will in all likelihood be honored, but out of integrity rather than legal/contractual power of enforcement.   FACULTY RESPONSE   The “intended” purpose of the cut-through is to grant privity to the insured. In a normal reinsurance agreement, the contract is between the cedant and the reinsurer and the insured has no privity. The cut-through attempts to grant this missing privity to provide direct access to the reinsurer in the event of loss.   Now, there are quite a few legal, financial, and operational concerns with the cut-through. First the operational matters:   Does the cut-through apply to the entire insurance contract, or just for property causes of loss? This is important because most requirements for “A” ratings or better come from lenders. Many construction contracts also require the “A” ratings. If the cut-through doesn't cross over all coverage parts, this could cause a problem. Does the cut-through carry a sub-limit, or does it follow full policy limits? Are there joint loss adjustment conditions that might require dual loss notifications to “ABC” and “XYZ”?   In the area of legal concerns, you need to determine how the states of all of your insureds have enforced (or not enforced) cut-throughs. There are multiple positions taken by the courts and the departments of insurance. Some states have attempted to regulate them and others have just ignored them.   Another legal concern is whether the cut-through includes a novation . In a novation, XYZ actually takes the full place of ABC and ABC retains no legal obligations. This is not common practice in “normal” cut-throughs. But if it is a precursor to a transfer of a book of business, it might be applicable.   Finally there's the issue of financial impact. Although it's early in the financial problems of ABC, you should be cautious of how insolvency funds treat cut-throughs. Many insolvency laws don't recognize their ability to step in. They look at them as a preferential disbursement of assets. Please don't consider this as a statement that ABC is heading toward insolvency. It's just a warning as to a potential problem with cut-throughs on long-tail lines.   Beyond the direct issues of cut-throughs are the indirect issues, the most important being whether or not the insureds or their lenders will accept them. Most sophisticated buyers (e.g., risk managers) will not accept cut-throughs without direct negotiations and discussions with the cedant and reinsurer. Even then, acceptance is not guaranteed.   Reproduced, with permission, from the VuPoint Newsletter of the IIABA Virtual University. For more information on the Virtual University, click here. The members of the University Faculty offer expertise in every aspect of agency management and marketing. Many of these faculty members are available for in-house training or consulting. For contact information on faculty members, click here.