Optimism has returned to the program market after faltering in 2020, while the “the bar has risen” among administrators leading to a divergence between those that have made investments in their businesses and those that have not, according to panellists during a Target Markets Program Administrators Association (TMPAA) town hall.
Chris Leisz, president of RPS Signature Programs, commented that the optimism in the program space that had been halted by Covid-19 has returned.
“Coming into 2020 there was a great deal of optimism not just for existing programs but even for more de novo start-up programs,” he said during the town hall, which was held virtually.
“In Q1 2020 that optimism stopped. We went back to the old rule of ten - give me your programs with $10mn premium, 10 percent margin, 10 years of experience and send that over.
“The reality there is: why would we do that? I have always told my program managers and underwriters that is truly the nuclear option. Anybody who thinks they are going to come out of that and still have $10mn - good luck if you take $5mn out that kind of rule.”
The executive said that going into this year the optimism that had been seen heading into 2020 was starting to return.
“Not just around the rule of 10 programs - we are seeing that still - but also in the de novo programs, or even those programs that had profitability issues but were able to pivot and come out of that better and drive underwriting profits and demonstrate that,” he said.
Leisz commented that no program administrator was immune to the impacts of social inflation and nuclear verdicts. This meant that even some programs that had been profitable for decades became unprofitable.
“It didn’t mean they were any less well managed or less well run, it was just the impact of the way the insurance was being provided changed and we had to change with it,” he said. “‘I am now seeing a renewed sense of optimism coming in from all programs.”
A time of rate on rate
Kevin Johnson, president of insurance programs for Munich Re Specialty Insurance (MRSI), said it is a period of rate on rate for many of the segments that were in the initial hardening phase in early 2019, such as property catastrophe E&S exposures.
“In some segments it is probably still not enough, in others maybe we are getting the risk adequate pricing,” he said.
He noted commentary from executives in Q1 results season of some flattening out of rates.
“We are projecting 2021 will continue to be rate increases, but may decelerate from what we saw in 2020”
Chris Leisz, president of RPS Signature Programs
“The big question for me is: how sustainable will those rate levels be if they truly do start to flatten out over Q1 and Q2?” Johnson asked.
“That’s the big question right now when you think about how much has happened both from a property perspective, which has dominated the headlines, as well as the casualty dynamics that kind of dominated the news in ‘18 and ‘19 really, which haven’t gone away.”
Johnson suggested the casualty market could be “in a period of false positives” in terms of tort dynamics as a result of the extended court closures during 2020.
RPS’s Leisz also highlighted that the momentum of rate increases may stall if the economy starts to pick up and balance sheets improve.
“For 2021 you will continue to see rate inflation but for some lines it will be decelerating,” he said. “We are projecting 2021 will continue to be rate increases, but may decelerate from what we saw in 2020.”
Pete Chandler, president and CEO of BMS Re, noted that the terms and conditions that a program administrator can get do differ by carrier.
“We had a panel that Target Markets hosted a few months back and I rather famously or infamously said, yes, absolutely ceding commissions with a three in front of them still exist,” Chandler said. “And they do, but it does depend.”
He continued: “They are not there for everybody. But the terms and conditions are superior for folks who have the ability to show exactly what their program has done or what it will do moving forward and how they are going to combat certain existential threats from the claims handling side and the resources that are available to them. It is just a fact.”
MRSI’s Johnson said “the bar has risen” for program administrators as more people have come into the segment. He said companies have risen to the occasion by investing in the business, teams, and actuarial and analytics capabilities.
“The amount of calls that I have where there is an actuary on the counterparty side, on the program administrator side, I would even say in the past 18 months is markedly different than the past three, four, five years,” he said. “So you see that level of investment taking place on the program administrator side.”
He added: “But it does make it a bigger challenge for MGAs and PAs who have not invested on that side to find your markets.”
The panel also discussed the new capital that has entered the space, including into new (re)insurers as well as a number of fronting carriers in recent years.
RPS’s Leisz said the new fronting carriers are providing a way to more efficiently deploy capital. He noted different companies are taking different approaches, some following the traditional model of taking no risk and others willing to take on 20 to 30 percent.
“I feel the fronts have been allowing a more efficient deployment of both traditional reinsurance capital and this new capital coming in, particularly when you think about middle market and smaller businesses,” he said.
“I could be talking out of school here, but I don’t believe that model has [previously] existed well for that SME to middle market business.”
He added: “This new capital coming in is really looking to take advantage of this inefficiency of deployment or this inequality of who is making the money and who isn’t. So I am really excited about 2021 and 2022 as we continue to look towards partnering with these new fronts or the new capital providers coming and looking to be more flexible and evolve how we deploy it.”