Elements of Successful Program Management, a 3-Part Series

Continued growth and interest in the specialty program/delegated authority market segments along with release of AM Best’s Market Segment Report entitled Rapidly Increasing MGA Premiums Warrant Greater Oversight, highlight the need for carriers to have effective governance in place.? As the report highlights and program business veterans have experienced, the past is littered with stories of programs gone awry, and in some cases resulting in program termination, carrier rating downgrades or even insolvency. In most cases this was due to lack of oversight in one or more areas that led to unprofitability and other issues.?

Programs are attractive to carriers because they involve a large volume of premium dollars generally at a lower expense ratio than the carrier might produce with its own staff and infrastructure. ?The process of managing program business; however, is considerably different than managing a portfolio of business produced by an internal team. This is due to the number of stakeholders outside the carrier itself, namely the program administrator/MGA, reinsurer and claims administrator (TPA).

Regardless of the class or line of business, there are three critical components to effective program management. Sproutr will explore each of these components through a 3-part series focused on the contracts and actions associated with the governance of programs. All of which are mechanisms designed for management by the talent of program professionals on both sides of the transaction.

Part 1: Perils in the Particulars: Thorough understanding of the contracts which govern the relationship between the carrier and its delegated authority partner/MGA and operationalize them appropriately.

Part 2: Metrics That Matter: Reporting the right metrics to spot performance indicators.

Part 3: Trust AND Verify: Managing programs through systematic audit including data analytics and human behavior to identify potential authority deviations.

Part 1 ??Perils in the Particulars

Understand and Operationalize the Contracts & Agreements Governing the Business Relationships

Scenario: The business development team has worked hard with the program administrator and reinsurance broker to ink the deal. First year premium is anticipated to be more than $50 Million.? Press releases are issued, all contracts are signed, and the program administrator is actively binding business. Now what? The old saying, “The Devil is in the details,” could not be truer.?

The first and perhaps most critical component of effective program management is understanding the details contained within multiple contracts and other documents which govern the terms of the program and mechanics to operationalize them. The documents include, but may not be limited to, reinsurance contracts, program/MGA/binding agreement, claim handling agreement, underwriting guidelines, and policy forms. ?Much like a puzzle, terms contained within these documents must fit together and be fulfilled by all parties for the program to function properly.?

Reinsurance contracts

In the case of the growingly popular hybrid/fronting carriers, there are generally several reinsurance contracts in place for each program. Parties to this agreement include the program carrier and the reinsurer. In other cases, multiple programs may be subject to the same treaty. Regardless, terms and conditions within the reinsurance agreement(s) are the underpinning of the entire program.? The teams responsible for program management, underwriting, claims, and accounting must be able to operationalize these terms. Some of ?the most important key terms in a reinsurance contract to understand include:

1.???????? What is Covered, Excluded, and Limited –

Within this section of the contract, the following questions are answered: What will reinsurers cover? Is the program appetite properly reflected? Are Program Underwriting Guidelines attached as an addendum to the contract? What will they exclude or limit? Noting that if the reinsurer excludes a specific risk or exposure, the company retains it unless it is addressed in other documents – more to come on that.?

2.???????? Policy/Premium Reports and Remittances –

Here, questions addressed include when and what must the carrier report to the reinsurer?? When are reports due to the carrier?? One critical and often overlooked term contained within this section of a reinsurance contract is the basis of premium remittance, options being net written or collected. The reporting, remittance and allowable payment plans for the program administrator must be structured in consideration of these terms.? If not clearly articulated, the carrier may find itself with a serious cashflow issue.

?3.???????? Claims Reporting –

The carrier and its claim handling partner(s) must understand what circumstances require a specific, earlier notice to the reinsurer aside from a standard monthly report of loss activity. It is common for a reinsurer to require more immediate notice of claims involving a fatality or severe injuries such as paralysis or traumatic brain injury. They commonly require notice of a loss reserved at certain thresholds or triggered by a change in the loss amount above a threshold.

4.???????? Ceding Commission –

This section in the contract outlines the commission structure to be retained by the program carrier.? Some agreements include a sliding scale commission tied to the program’s profitability performance. In this case, aligning the program management, underwriting, actuarial and accounting teams to understand the provisional commission and target loss ratio alongside the impact to commission when the loss ratio is greater or less than the target. This section articulates what is expected to be paid, how it is to be paid, and if applicable, the intervals at which the loss ratio will be reviewed for a commission adjustment.?

Program / MGA Agreement

Now that we have a better understanding of four key terms to be understood and operationalized from the reinsurance agreement, consider them in context of the agreement between the carrier and the program administrator. Carriers may call this agreement by several different names – program agreement, binding authority agreement, MGA agreement, etc. Regardless of its title, this document stipulates the various responsibilities, terms and conditions to be honored by the parties to it.

When there is reinsurance involved, the Program/MGA Agreement will mirror many of the terms and conditions of the reinsurance agreement such as commission, reports and remittances, and underwriting guidelines.? As with the reinsurance agreement, all stakeholders should be informed of the terms and execute accordingly. Depending upon the specific lines of business to be written, the reporting section may have more detailed specifications around premium and exposure as well as statistical reporting requirements if the program is written on admitted paper. This agreement will also provide terms and conditions around who is responsible for the policy administration system, who owns renewal rights, how policies should be stored or transmitted to the carrier, use of carrier name and logo in advertising, and termination provisions among many other points. It will likely also reference the Program Underwriting Guidelines as an addendum to the contract.

Underwriting Guidelines and Policy Forms

Underwriting Guidelines and Policy Forms are the most tactical of all the documents to be understood in effective program management. They are the roadmap for the delivery of the program and policies to the marketplace. ?

1.???????? Underwriting Guidelines -

Underwriting guidelines include the specifics on what types of risks are eligible for the program and conversely, what risks are expressly prohibited. The way in which these are expressed will vary widely and may include references to specific types of risks/businesses within a target industry, states/territory, years in business, loss ratio, and various other factors. Guidelines will also specify referral triggers and authority levels? ?TIP: The ineligible risks must be aligned with any risks excluded within the reinsurance agreement. Referral and ineligibility triggers can be used by the data/reporting team to structure exception reporting to inform program management/underwriting of potential authority violations. More to come on this in Part 3 of the series.

2.???????? Policy Forms -

Underwriting guidelines may also specify details around how to rate or price business, express limitations on discretionary pricing and permissible policy terms and conditions such as deductibles, retentions, and a policy forms list. ?

Best practices of a policy forms list includes the form number, edition date, intended utilization, and title of all forms available and applicable to the program. TIP: Any exclusions required by the reinsurance agreement(s) or carrier/corporate underwriting guidelines would be expected on the list if not embedded directly in the coverage form language. Commonly excluded exposures are war, asbestos and lead. Others may be very specific to the exposures of the program, the carrier, or reinsurer backing the program.?

3.???????? Interim Updates –Addendums, Bulletins, Moratoriums -

One last category of documents to consider are interim program updates, including but not limited to contract addendums, bulletins and moratoriums.?

Programs and the exposures they cover evolve over time. Accordingly, the carrier may amend underwriting guidelines or program/MGA agreements. Carriers may also issue bulletins or memoranda regarding impact to products or processes because of regulatory or appetite changes. Lastly, when there is a catastrophic event such as a windstorm, earthquake, flood or pandemic, insurance departments or carriers may issue moratoriums on binding business, policy change requests or sending notices of cancellation. When any of these communications prompting action are triggered, it is important all impacted functional stakeholders are notified.

Each specialty program is unique, and terms of the agreements vary widely. The guidance provided in this segment is broad but foundational in understanding the interrelationship among the key components governing the relationship among the program’s stakeholders.? ???

In conclusion, bringing an insurance program to market is a detailed and operationally sophisticated technical endeavor for both, MGA and carrier. Consulting with a trusted advisor who has experience building, launching, and managing programs from both angles ensures contract terms, operational expectations, product viability, and guidelines work together seamlessly to de-risk the launch.

Ask Sproutr how.

Next up:

Part 2: Metrics That Matter: Reporting the right metrics to spot performance indicators.

About Sproutr:

Sproutr is redefining the standards of insurance program design for its clients, simplifying the process of bringing regulated products to market. Learn more about how Sproutr delivers best-in-class insurance strategies by visiting our Services page or contact us by emailing [email protected]

About the author:

Candace Bourg, CPCU – Program & Underwriting Practice Leader at Sproutr

Candace is a deeply experienced programs and underwriting expert leading the program development, audit and underwriting-as-a-service business practice for Sproutr’s clients. Her expertise across commercial lines and specialty business extends to both admitted and non-admitted markets. Candace brings practical and hands-on experience to Sproutr having held senior leadership program management roles at fortune 100 carriers, fronting carriers, and currently at Sproutr.