com3 mgas: managing for success

MGA's Managing for Success MGA's Managing for Success 11

COM3COM3

MGAs: MGAs: Managing for SuccessManaging for Success

Wayne Keller – Arch Insurance CompanyWayne Keller – Arch Insurance CompanyCameron Vogt – Munich Reinsurance America, Cameron Vogt – Munich Reinsurance America,

Inc.Inc.2007 CAS Ratemaking Seminar2007 CAS Ratemaking Seminar

March 8, 2007 - Atlanta, GAMarch 8, 2007 - Atlanta, GA


AgendaAgenda

• Overview of MGA/Program BusinessOverview of MGA/Program Business

• Due Diligence ProcessDue Diligence Process

• Managing a ProgramManaging a Program

• SummarySummary


OverviewOverview

• Program Administrator (PA)Program Administrator (PA)– An agency that provides some or all of the An agency that provides some or all of the

following services:following services:• MarketingMarketing• UnderwritingUnderwriting• BindingBinding• Policy IssuancePolicy Issuance• Premium CollectionPremium Collection• Data ProcessingData Processing• Loss ControlLoss Control• Claims ManagementClaims Management


OverviewOverview

• Program Administrator (PA)Program Administrator (PA)– Independent contractor, not a branch of Independent contractor, not a branch of

the companythe company– Could be called managing general agent Could be called managing general agent

(MGA), managing general underwriter (MGA), managing general underwriter (MGU) or simply general agent (GA)(MGU) or simply general agent (GA)

– Aggregator of retail agents and insureds Aggregator of retail agents and insureds that meet business model for programthat meet business model for program

– Some larger PAs employ an ActuarySome larger PAs employ an Actuary


OverviewOverviewInsuranceCompany

PA/MGA/MGU

Retail/WholesaleAgent

Policyholder

ReinsurerThird PartyAdministrator (TPA)


OverviewOverview

• Program BusinessProgram Business– A well defined and narrow segment of A well defined and narrow segment of

insurance marketplaceinsurance marketplace– Company interfaces with PA onlyCompany interfaces with PA only– PA “controls” businessPA “controls” business– PA assumes some underwriting riskPA assumes some underwriting risk– Specialized coverageSpecialized coverage– Proprietary rates and rating factorsProprietary rates and rating factors


OverviewOverview

• Other Attributes of Program BusinessOther Attributes of Program Business– Life span of program variesLife span of program varies– Premium rolls on and off in large, identifiable Premium rolls on and off in large, identifiable

blocksblocks– Meaningful expenses at both end points.Meaningful expenses at both end points.

• Due diligence process at the startDue diligence process at the start• Run-off expense without premium income at endRun-off expense without premium income at end

– Expired programs can pile up and strain current Expired programs can pile up and strain current resourcesresources

– The universe of established PAs is limited and The universe of established PAs is limited and known.known.

– More parameter risk than a book of business More parameter risk than a book of business produced directly through retail agents. produced directly through retail agents.


OverviewOverview

• Why discuss MGA/Program Business?Why discuss MGA/Program Business?– Significant Market SegmentSignificant Market Segment

– Past FailuresPast Failures


OverviewOverview

• Causes of Past FailuresCauses of Past Failures– Soft MarketSoft Market

• E&S Programs lead the marketE&S Programs lead the market

• Binding Authority granted to agency who’s Binding Authority granted to agency who’s compensated based on premium volume.compensated based on premium volume.

– Inadequate ControlsInadequate Controls• Too Much Binding AuthorityToo Much Binding Authority

• Lack of MonitoringLack of Monitoring

– Lack of Understanding regarding all aspects of Lack of Understanding regarding all aspects of the dealthe deal


Due Diligence Process Due Diligence Process for New Businessfor New Business


Introduction to Due Diligence Introduction to Due Diligence ProcessProcess

• Due Diligence Process consists of two phases:Due Diligence Process consists of two phases:– The decision to write the program; and The decision to write the program; and – Preparing the program for operationPreparing the program for operation

• Initial program conditions (e.g. rates, underwriting Initial program conditions (e.g. rates, underwriting guidelines, audit schedules, forms and other guidelines, audit schedules, forms and other contractual items) are crucial to program successcontractual items) are crucial to program success

• The due diligence process is interdisciplinary The due diligence process is interdisciplinary • A due diligence process that is arduous has A due diligence process that is arduous has

advantages. advantages. – The programs that succeed in the process know that the The programs that succeed in the process know that the

company’s program portfolio is of a high quality. company’s program portfolio is of a high quality. – A high quality portfolio implies stability and longevity for the A high quality portfolio implies stability and longevity for the

company in the program business and stability and longevity company in the program business and stability and longevity for each PA within the company’s program portfolio. for each PA within the company’s program portfolio.


Phase 1 – Program SelectionPhase 1 – Program Selection


Initial Program Guidelines and Initial Program Guidelines and Selection CriteriaSelection Criteria

• Business model: Business model: – aggregator of small risks aggregator of small risks – niche marketniche market– timing playtiming play

• Premium volume thresholdPremium volume threshold• Successful business planSuccessful business plan• Excellent reputationExcellent reputation• Strong PA financialsStrong PA financials


Initial Program Guidelines and Initial Program Guidelines and Selection Criteria Cont’dSelection Criteria Cont’d

• Competent underwriting and program Competent underwriting and program management skillsmanagement skills

• Existing market presenceExisting market presence• Agent participation keyed to profit-sharing Agent participation keyed to profit-sharing

returnreturn• Agreement on Avoided classesAgreement on Avoided classes• Program StructureProgram Structure

– Fronted or notFronted or not– Reinsurer participationReinsurer participation


Program Submission from Program Submission from Program AdministratorProgram Administrator

• Marketing PlanMarketing Plan– Staff experience and backgroundStaff experience and background– Historic and expected premium volumeHistoric and expected premium volume– Distribution of premium by line of businessDistribution of premium by line of business– Major competitorsMajor competitors– Size of potential marketSize of potential market– Program aspects that differentiate it from Program aspects that differentiate it from

other programsother programs


Program Submission from Program Submission from Program Administrators Cont’dProgram Administrators Cont’d

• Current Program StructureCurrent Program Structure– Existing carrierExisting carrier– Admitted / non-admittedAdmitted / non-admitted– policy formspolicy forms– policy limits profilespolicy limits profiles– current capacity limitscurrent capacity limits– reinsurance structurereinsurance structure– commission and other compensationcommission and other compensation– claims handlingclaims handling– loss controlloss control– processing and systems capabilitiesprocessing and systems capabilities


Program Submission from Program Submission from Program Administrators Cont’dProgram Administrators Cont’d

• Underwriting considerationsUnderwriting considerations– Changes to program exposuresChanges to program exposures– Pricing of new versus renewal businessPricing of new versus renewal business– account retentionaccount retention– Submit/Quote/Bind ratiosSubmit/Quote/Bind ratios

• Producer ProfileProducer Profile– Agency historyAgency history– insurance protection (fidelity, E&O)insurance protection (fidelity, E&O)– licenseslicenses– agency financialsagency financials– Producer profile questionnaireProducer profile questionnaire

• Submission is reviewed by Program Area Submission is reviewed by Program Area ManagementManagement


Underwriting ReviewUnderwriting Review

• Review and audit of information contained in Review and audit of information contained in submission submission

• In depth discussion of Business OpportunityIn depth discussion of Business Opportunity– Discussion of current programDiscussion of current program– Fit with company business modelFit with company business model– Alignment of interests between company and PAAlignment of interests between company and PA– Reason for PA changing carriers Reason for PA changing carriers

• Discussion of general U/W guidelines with PADiscussion of general U/W guidelines with PA– Excluded risksExcluded risks– Premium capsPremium caps– ReferralsReferrals


Actuarial Review Actuarial Review

• Major Objectives include:Major Objectives include:– Appropriateness of current rate levelAppropriateness of current rate level– Appropriateness of rates and rating Appropriateness of rates and rating

factorsfactors– Any characteristics of program that Any characteristics of program that

might affect profitability e.g., CAT might affect profitability e.g., CAT exposure or high severityexposure or high severity


Actuarial Review Actuarial Review

• Much of the process involves:Much of the process involves:– Collecting data from PACollecting data from PA– Validating the dataValidating the data– Selecting industry data to augment PA Selecting industry data to augment PA

data as neededdata as needed


Actuarial Review - LossesActuarial Review - Losses

• Claims runs evaluated at several evaluation Claims runs evaluated at several evaluation points to facilitate construction of loss and claim points to facilitate construction of loss and claim development triangles, and for auditing summary development triangles, and for auditing summary loss dataloss data

• Loss descriptions used to identify underlying Loss descriptions used to identify underlying exposuresexposures

• Large loss listing with detailed descriptionsLarge loss listing with detailed descriptions• Obtain industry LDFs (as needed) by studying loss Obtain industry LDFs (as needed) by studying loss

data.data.• CAT lossesCAT losses• TPA history: changes in TPAs with dates.TPA history: changes in TPAs with dates.


Actuarial Review - PremiumActuarial Review - Premium

• Policy listing by yearPolicy listing by year– Premium by coverage or LOBPremium by coverage or LOB– Premium by policy limitPremium by policy limit– Premium by state: CAT potentialPremium by state: CAT potential– Premium by class: ISO or program Premium by class: ISO or program

specificspecific– Audit summary dataAudit summary data


Actuarial Review – Premium Cont’dActuarial Review – Premium Cont’d

• Evaluation of rate level change historyEvaluation of rate level change history– Individual policy rating methodology Individual policy rating methodology

•Rating “grid”Rating “grid”• ISO base rates with company LCMsISO base rates with company LCMs• Individual risk ratingIndividual risk rating

– Comparison of same policy from year to Comparison of same policy from year to year.year.

– Comparison to rating benchmark, e.g.CIABComparison to rating benchmark, e.g.CIAB– Review the rating history for a well Review the rating history for a well

selected sample of insuredsselected sample of insureds


Actuarial Review – Premium Cont’dActuarial Review – Premium Cont’d

• Identify underlying exposures, classes or Identify underlying exposures, classes or coverage, e.g. premises versus products coverage, e.g. premises versus products GL or type of truck; light, heavy etc. or GL or type of truck; light, heavy etc. or type type

• Evaluate exposure trendEvaluate exposure trend– Bureau statisticsBureau statistics– BLS statisticsBLS statistics

• Discuss pricing monitoring with PADiscuss pricing monitoring with PA

• CAT exposure for modelingCAT exposure for modeling


Actuarial Review – Other Actuarial Review – Other ConsiderationsConsiderations

• Program expensesProgram expenses– Many expense items are contractually definedMany expense items are contractually defined– State premium taxes, if admittedState premium taxes, if admitted– TPA feesTPA fees

• compensation formulacompensation formula• evaluation based on type of claim and claim countsevaluation based on type of claim and claim counts

– Upfront commissionUpfront commission– Expected Profit commissionExpected Profit commission– Loss control feesLoss control fees– Brokers feesBrokers fees


Actuarial Review – Other Actuarial Review – Other ConsiderationsConsiderations

• U/W Profit (Reflect parameter risk?)U/W Profit (Reflect parameter risk?)

• Investment incomeInvestment income

• Benefit and cost of reinsurance Benefit and cost of reinsurance protectionsprotections

• Review of underlying rates and Review of underlying rates and factorsfactors


Accounting ReviewAccounting Review

• Review of Agency financialsReview of Agency financials

• Discussion of minimum net worth Discussion of minimum net worth requirementsrequirements

• Discussion of performance guarantees with PADiscussion of performance guarantees with PA

• Review of agency financial controlsReview of agency financial controls

• Background check on principalsBackground check on principals

• Review of agency physical plantReview of agency physical plant

• Discussion of premium trust and segregation Discussion of premium trust and segregation of assets with PAof assets with PA


Accounting Review Cont’dAccounting Review Cont’d

• E&O insuranceE&O insurance• Fidelity insuranceFidelity insurance• Financial audit scheduleFinancial audit schedule• Cancellation proceduresCancellation procedures• Use of collection agenciesUse of collection agencies• If acting as TPA:If acting as TPA:

– approval and timeliness of paymentsapproval and timeliness of payments– recovery of subrogation, salvage and deductiblesrecovery of subrogation, salvage and deductibles– control and use of loss fundscontrol and use of loss funds

• Advise on state premium tax and Advise on state premium tax and assessmentsassessments


Summary to Program Division Summary to Program Division HeadHead

• Commentary on PA personnel and historyCommentary on PA personnel and history• Discussion of Business aspects of submissionDiscussion of Business aspects of submission

– The motives of each partyThe motives of each party– The benefits to each partyThe benefits to each party– Possible areas of conflictPossible areas of conflict

• A general description of the program including:A general description of the program including:– Underlying exposuresUnderlying exposures– Coverage formsCoverage forms– LimitsLimits– DeductiblesDeductibles– GeographyGeography– Other unique and critical aspectsOther unique and critical aspects


Summary to Program Division Summary to Program Division Head Cont’dHead Cont’d

• Comments on any deficiencies in the Comments on any deficiencies in the submissionsubmission

• Preliminary Program specific U/W Preliminary Program specific U/W guidelinesguidelines

• The Actuarial report with rate level The Actuarial report with rate level indication and other observationsindication and other observations

• Required reinsurance with company Required reinsurance with company retentions, proposed reinsurance structure retentions, proposed reinsurance structure and reinsurance costand reinsurance cost


Summary to Program Division Summary to Program Division Head Cont’dHead Cont’d

• Pricing targets, estimated premium Pricing targets, estimated premium volume and proposed premium capsvolume and proposed premium caps

• Expected TPA and costsExpected TPA and costs• Type of PA IT system, know Type of PA IT system, know

deficiencies and possible certification deficiencies and possible certification problemsproblems

• Proposed start up date.Proposed start up date.• Decision is made on second phase of Decision is made on second phase of

due diligencedue diligence


Phase 2 – Program Phase 2 – Program ImplementationImplementation


Development of Program Development of Program Underwriting CriteriaUnderwriting Criteria

• Negotiation of deal structureNegotiation of deal structure

• Underwriting guidelinesUnderwriting guidelines

• Referral criteriaReferral criteria

• Individual risk eligibility criteriaIndividual risk eligibility criteria

• Underwriting audit scheduleUnderwriting audit schedule

• SIR criteria SIR criteria

• PA authority by lines of businessPA authority by lines of business

• Program geographyProgram geography


Development of Program Development of Program Underwriting CriteriaUnderwriting Criteria

• Prohibitions in general and by line of Prohibitions in general and by line of businessbusiness

• Required reports from PARequired reports from PA• Required underwriting information for each Required underwriting information for each

retail riskretail risk• Rules for Retail underwriting practicesRules for Retail underwriting practices

– Quote good for 30 daysQuote good for 30 days– Application of loss controlApplication of loss control– Fully completed applicationsFully completed applications– Premium auditPremium audit

• Retail Underwriting file requirementsRetail Underwriting file requirements


Policy Forms reviewPolicy Forms review

• Manuscripted policy forms unique to Manuscripted policy forms unique to the programthe program

• Reviewed by Underwriting, Claims Reviewed by Underwriting, Claims and Legaland Legal

• Must be filed, if admittedMust be filed, if admitted


Development of FilingsDevelopment of Filings

• Applies to Admitted programs onlyApplies to Admitted programs only• Creation of countrywide manualsCreation of countrywide manuals• Actuarial review of underlying rates Actuarial review of underlying rates

and factorsand factors• Filing strategyFiling strategy

– Priority statesPriority states– DOI regulation by stateDOI regulation by state

• Compliance review of filingsCompliance review of filings


Development of Filings Cont’dDevelopment of Filings Cont’d

• Filing regulationFiling regulation– File and useFile and use– Use and fileUse and file– Prior approvalPrior approval

• Typically most forms and rates are Typically most forms and rates are previously filed bureau products. Only the previously filed bureau products. Only the program specific rates and forms are filedprogram specific rates and forms are filed

• The filing process is costly and time The filing process is costly and time consuming. consuming.

• The filing process is one of the “hooks” The filing process is one of the “hooks” that ties the PA to the company.that ties the PA to the company.


Systems ReviewSystems Review

• Software Software – Analyze PA systems and their Analyze PA systems and their

capabilitiescapabilities•Policy informationPolicy information

•Financial reportingFinancial reporting

•Rating engineRating engine

•Claims system, if TPAClaims system, if TPA

•Outside reporting, NCCI , DMVOutside reporting, NCCI , DMV


Systems Review Cont’dSystems Review Cont’d

• Software Cont’dSoftware Cont’d– Create interface with company, if Create interface with company, if

necessarynecessary– Suggest third party vendor, if necessarySuggest third party vendor, if necessary– Testing -Various policy issuance Testing -Various policy issuance

scenarios are run with the PA system scenarios are run with the PA system and the results in the company system and the results in the company system are reviewed for accuracy and are reviewed for accuracy and completeness.completeness.


Systems Review Cont’dSystems Review Cont’d

• HardwareHardware– Ability to interface with companyAbility to interface with company– Ability to handle expected tasksAbility to handle expected tasks– Print capabilityPrint capability– Internet access, e.g. T1 lineInternet access, e.g. T1 line

• Disaster recovery planDisaster recovery plan

• Protocol for ensuring data qualityProtocol for ensuring data quality


Claims ReviewClaims ReviewInitial ReviewInitial Review

• Candidates for Claims Handling:Candidates for Claims Handling:– TPA from company approved listTPA from company approved list– ““Outside” TPA that meets program’s unique Outside” TPA that meets program’s unique

needsneeds– PAPA– TPA / PA mixtureTPA / PA mixture

• Review of claims logisticsReview of claims logistics– Types of claims and effort needed to handle.Types of claims and effort needed to handle.– geographic spread of claims handlinggeographic spread of claims handling


Claims ReviewClaims ReviewInitial Review Cont’dInitial Review Cont’d

• Description of Program coverage and Description of Program coverage and its impact on claims handlingits impact on claims handling– Discussion of policy forms or Discussion of policy forms or

endorsements that is unique to the endorsements that is unique to the program.program.

– Discussion of special perils, e.g. moldDiscussion of special perils, e.g. mold

• Size of claims inventory and claims Size of claims inventory and claims flowflow


Claims ReviewClaims ReviewSelection of TPASelection of TPA

• Review of PA candidacyReview of PA candidacy– Review of PA physical plantReview of PA physical plant– History of PA relationships with prior carriersHistory of PA relationships with prior carriers– Organizational structure and resumes of claims Organizational structure and resumes of claims

personnelpersonnel

• Level of PA claims serviceLevel of PA claims service– Timeliness of contact with claimant, Timeliness of contact with claimant,

investigation and settlementinvestigation and settlement– Claimant satisfactionClaimant satisfaction


Claims ReviewClaims ReviewSelection of TPA Cont’dSelection of TPA Cont’d

• SupervisionSupervision– Relationship between PA management and Relationship between PA management and

claims personnelclaims personnel– Relationship between PA and insurerRelationship between PA and insurer

• Reporting levelReporting level

• Written reports on claimsWritten reports on claims

• Overall DocumentationOverall Documentation– Hard copy filesHard copy files– Claims systemClaims system


Claims ReviewClaims ReviewSelection of TPA Cont’dSelection of TPA Cont’d

• Quality of InvestigationQuality of Investigation– Investigation procedure by type of claim Investigation procedure by type of claim – Use of outside vendors, by geography or Use of outside vendors, by geography or

type of claimtype of claim– Investigation documentationInvestigation documentation

•PhotographsPhotographs•Recorded statementsRecorded statements•Action plans for further investigationAction plans for further investigation

– Timely contactsTimely contacts


Claims ReviewClaims ReviewImplementationImplementation

• Claims Authority:Claims Authority:– Line of businessLine of business– $ amount$ amount– Special situationsSpecial situations

• Set up claims audit scheduleSet up claims audit schedule

• Litigation Management GuidelinesLitigation Management Guidelines


Claims ReviewClaims ReviewImplementation Cont’dImplementation Cont’d

• Licensing requirements by state (licensing for Licensing requirements by state (licensing for claims handling? Yes, for many states)claims handling? Yes, for many states)– Some states reciprocate (i.e. these states will recognize Some states reciprocate (i.e. these states will recognize

the license of certain other states), but some do not.the license of certain other states), but some do not.– Expensive and time consuming.Expensive and time consuming.– Some states require a presence in their state to be Some states require a presence in their state to be

licensed.licensed.– A vendor with in-state presence can be usedA vendor with in-state presence can be used– State unfair claims practice laws.State unfair claims practice laws.– Continuing education to retain licenseContinuing education to retain license– Compliance audits licensesCompliance audits licenses



• ALAE/Medical Case ALAE/Medical Case Management/Independent AdjustersManagement/Independent Adjusters

– Independent adjustersIndependent adjusters• Management ofManagement of

• Level of useLevel of use

– Impact of unique program coverage features Impact of unique program coverage features on ALAE, e.g. construction defect or pollution on ALAE, e.g. construction defect or pollution claims. Claims that are expensive to handle, claims. Claims that are expensive to handle, if not expensive to settle.if not expensive to settle.



– Compensation for TPA Compensation for TPA • Typically a flat fee per claim feature. Varies by LOBTypically a flat fee per claim feature. Varies by LOB• Can be time and expense under certain circumstancesCan be time and expense under certain circumstances

– size of claimsize of claim– specified type of claimspecified type of claim

• Can be % of premiumCan be % of premium• Cradle to grave service. Breakdown in relationship Cradle to grave service. Breakdown in relationship

could mean moving claims and extra expense.could mean moving claims and extra expense.

– Discussion of the overall cost to PA of claims Discussion of the overall cost to PA of claims operationoperation

– Expense of claims system and collection of Expense of claims system and collection of claims dataclaims data



• ReservesReserves– Level of authorityLevel of authority– Documented reserving philosophy or best practices.Documented reserving philosophy or best practices.

• Negotiations/Settlements/File ClosureNegotiations/Settlements/File Closure– Rate of file closureRate of file closure– Documentation for extended claimsDocumentation for extended claims

• Salvage/Subrogation/Deductible RecoverySalvage/Subrogation/Deductible Recovery– Meeting statutory reporting requirements for S&SMeeting statutory reporting requirements for S&S– Pursuit of deductiblesPursuit of deductibles

• Claim systemClaim system• Loss Run ReviewLoss Run Review

– LOB distribution by loss and claimLOB distribution by loss and claim


Review of Program ReinsuranceReview of Program Reinsurance

• Design of protectionsDesign of protections– Existing treatiesExisting treaties– Program specific placementsProgram specific placements– Use of facultative reinsurance Use of facultative reinsurance

• Approval of reinsurance contract wordingApproval of reinsurance contract wording• Reinsurance negotiationReinsurance negotiation

– New placementNew placement– Fitting new program into existing treatyFitting new program into existing treaty

• Oversight of relationship with reinsurerOversight of relationship with reinsurer


LicensingLicensing

• Admitted = agent, licenses requires for Admitted = agent, licenses requires for all states in which the agent all states in which the agent operationsoperations

• Non-admitted = broker, no licenses Non-admitted = broker, no licenses requiredrequired

• Company appoints PA in all states of Company appoints PA in all states of operationoperation

• No relationship with retail agentsNo relationship with retail agents• Compliance area audits licensesCompliance area audits licenses


ContractsContracts

Underwriter: “We need to adjust your Underwriter: “We need to adjust your contract.”contract.”

Agent: “The contract cannot be Agent: “The contract cannot be changed. It is like a marriage vow.”changed. It is like a marriage vow.”

Underwriter: “The contract is not for Underwriter: “The contract is not for the marriage. It’s for the divorce.”the marriage. It’s for the divorce.”


Contracts Cont’dContracts Cont’d

• PA is sent contract, reviews and PA is sent contract, reviews and replies with commentsreplies with comments

• Contract forms the basis for Contract forms the basis for subsequent audits and program subsequent audits and program terminationtermination



• PA Contract FeaturesPA Contract Features• Premium trust accountPremium trust account

– PA nets out commission and places remainder in PA nets out commission and places remainder in accountaccount

– An account for company separate from other insurersAn account for company separate from other insurers– TransmissionTransmission

• By company via signatoryBy company via signatory• By PABy PA

– company retains right to timely statementscompany retains right to timely statements– A time limit is placed on remittance of premium by PA to A time limit is placed on remittance of premium by PA to

accountaccount– Agent is liable for collecting all “uncollectible premium”Agent is liable for collecting all “uncollectible premium”



• Insurance coverages requiredInsurance coverages required– Fidelity for theft of funds held in trustFidelity for theft of funds held in trust– Error and omission for negligence by PA Error and omission for negligence by PA

in performance of his dutiesin performance of his duties– Auto Liability to protect principals’ Auto Liability to protect principals’

financial solvencyfinancial solvency



• Security Security – Used for:Used for:

•Non-servicing of policiesNon-servicing of policies

•Non-payment of premiumNon-payment of premium

– Accomplished thru:Accomplished thru:•Letter of credit, evergreen in negotiated Letter of credit, evergreen in negotiated

amountamount

•Personal guaranteePersonal guarantee– 1st party1st party– 3rd party3rd party



• Profit Sharing CommissionProfit Sharing Commission– Based on agent experienceBased on agent experience– Actuarial input into designActuarial input into design– Size of commission and commission Size of commission and commission

threshold in formula should motivate PAthreshold in formula should motivate PA– Payment of commission and company Payment of commission and company

goalsgoals



• MGA is defined in statute. MGA is defined in statute. • An MGA is an agent that;An MGA is an agent that;

– Purchases reinsurancePurchases reinsurance– May settle its claimsMay settle its claims– Has binding authorityHas binding authority

• MGA typically represents more than one companyMGA typically represents more than one company• An MGA’s responsibility includes:An MGA’s responsibility includes:

– Periodic reporting of audited financials to statePeriodic reporting of audited financials to state– Posts performance bond with statePosts performance bond with state– Has profit commission terms regulated by stateHas profit commission terms regulated by state

• An MGA may choose this status due to lucrative An MGA may choose this status due to lucrative fees and the power claims handling confers upon fees and the power claims handling confers upon the agentthe agent



• PA contract is not renegotiated PA contract is not renegotiated annually. Only certain appendices annually. Only certain appendices are:are:

• Items attached to standard contract Items attached to standard contract as amended:as amended:– Underwriting guidelinesUnderwriting guidelines– Profit commissionProfit commission



• Claims contract featuresClaims contract features– Handled by the claims areaHandled by the claims area– Since there are few TPAs, the contract issue is simplified.Since there are few TPAs, the contract issue is simplified.– Claims funding, Claims trust accountClaims funding, Claims trust account– Annual contracts with same anniversary date as PA Annual contracts with same anniversary date as PA

contract.contract.– ““Cradle to grave” fee Cradle to grave” fee – Fee determined from schedule that depends on type of Fee determined from schedule that depends on type of

claim.claim.– Fee subject to negotiationFee subject to negotiation– Fee schedule varies by programsFee schedule varies by programs– Fee schedule used to estimate TPA fee for pricingFee schedule used to estimate TPA fee for pricing


Summary of Due DiligenceSummary of Due Diligence

• Initial program conditions are crucial to Initial program conditions are crucial to program successprogram success

• Parameter risk is potentially largeParameter risk is potentially large• Start up expense is meaningful (esp. Start up expense is meaningful (esp.

filing and ITfiling and IT• Need to create common incentivesNeed to create common incentives• Monitor everywhere elseMonitor everywhere else• Contract defines all phases of Contract defines all phases of

relationshiprelationship


Risk-SharingRisk-Sharing

• Types:Types:– Captives / Rent-a-CaptiveCaptives / Rent-a-Captive– Profit Sharing CommissionProfit Sharing Commission– Sliding-Scale CommissionsSliding-Scale Commissions

• How much is appropriate?How much is appropriate?– Review PA’s financialsReview PA’s financials– What would 1 or 2 years of bad results do to the What would 1 or 2 years of bad results do to the

PA?PA?



• Pros: Pros: – Alignment of Interests (“Skin in the Alignment of Interests (“Skin in the

Game”)Game”)

• Cons: Cons: – Collateral RequirementCollateral Requirement– Shrinks the universe of potential Shrinks the universe of potential

business partnersbusiness partners


Risk-Sharing - CaptiveRisk-Sharing - CaptiveInsuranceCompany

PA/MGA/MGU

Retail/WholesaleAgent

Policyholder

ReinsurerThird PartyAdministrator (TPA)

CAPTIVE


Risk-Sharing – CaptiveRisk-Sharing – Captive

• Characteristics:Characteristics:– Can (somewhat) “mimic” the insurance Can (somewhat) “mimic” the insurance

company’s resultscompany’s results– Insurance Company cedes a share of the Insurance Company cedes a share of the

business to the Captivebusiness to the Captive– Insurance Company (or an affiliate) provides Insurance Company (or an affiliate) provides

stop loss protection to limit the PA’s riskstop loss protection to limit the PA’s risk– CollateralCollateral

• Statutory Requirement – Up to the Expected LossesStatutory Requirement – Up to the Expected Losses• Additional Credit Risk – From Expected Losses to Stop Additional Credit Risk – From Expected Losses to Stop

Loss AttachmentLoss Attachment– Captive Manager (another expense)Captive Manager (another expense)


Risk-Sharing – Sliding-ScaleRisk-Sharing – Sliding-Scale

• Characteristics:Characteristics:– Profit Commission that also slides downwardProfit Commission that also slides downward– ““Provisional” (up -front) Commission usually Provisional” (up -front) Commission usually

set in the middle of the slideset in the middle of the slide– Adjustments:Adjustments:

• AnnuallyAnnually• Include IBNR (Contractually defined)Include IBNR (Contractually defined)

– Can be multi-year blocks with profit/loss Can be multi-year blocks with profit/loss carryforwards.carryforwards.

– Difference between the Provisional Commission Difference between the Provisional Commission and the Minimum Commission is credit risk to and the Minimum Commission is credit risk to the company.the company.


Risk-Sharing – Sliding-ScaleRisk-Sharing – Sliding-Scale

• Example:Example:Provisional Commission = 20%Provisional Commission = 20%

Loss RatioLoss Ratio CommissionCommission

40%40% 22% (max)22% (max)

50%50% 20%20%

60%60% 18% (min)18% (min)

• ““Initial” Credit Risk = 2% of Premium (20% - 18%)Initial” Credit Risk = 2% of Premium (20% - 18%)



• Collateral Example:Collateral Example:– $10M Program$10M Program– 2% downward slide2% downward slide– Required Collateral = $200,000 (2% of Required Collateral = $200,000 (2% of

$10M)$10M)

• Issues:Issues:– When is it “safe” to release collateral?When is it “safe” to release collateral?– Collateral Accumulates - How much Collateral Accumulates - How much

collateral is needed after year 2, year 3, collateral is needed after year 2, year 3, etc.?etc.?


Managing a ProgramManaging a Program


Managing a ProgramManaging a Program

• During the Due Diligence Process, an During the Due Diligence Process, an “underwriting box” for the program is “underwriting box” for the program is created:created:– Lines of BusinessLines of Business– ClassesClasses– StatesStates– LimitsLimits– CoveragesCoverages– Etc.Etc.

• So now what?…So now what?…


MONITOR, MONITOR, MONITOR, MONITOR, MONITORMONITOR

““Trust, but verify”Trust, but verify”

- Ronald Reagan- Ronald Reagan


MONITOR, MONITOR, MONITORMONITOR, MONITOR, MONITOR

• Is the PA adhering to the underwriting Is the PA adhering to the underwriting guidelines?guidelines?

• Is the PA selecting the right risks?Is the PA selecting the right risks?– U/W Guideline should include a section describing U/W Guideline should include a section describing

the characteristics of a target risk.the characteristics of a target risk.

• Is the program achieving the desired results?Is the program achieving the desired results?– Target Loss and Combined RatiosTarget Loss and Combined Ratios– Mix of Business (e.g. State, Class and Limits Mix of Business (e.g. State, Class and Limits

Distributions)Distributions)



• Monitoring Methods:Monitoring Methods:1.1. Individual Account ReferralsIndividual Account Referrals

2.2. ReportsReports• Underwriting ResultsUnderwriting Results

• Rate and Price MonitoringRate and Price Monitoring

• State and Limits DistributionsState and Limits Distributions

3.3. AuditsAudits



1.1. Individual Account ReferralsIndividual Account Referrals• Accounts where the PA does not have binding Accounts where the PA does not have binding

authorityauthority

• Criteria defined in the underwriting guidelinesCriteria defined in the underwriting guidelines

• Typical Criteria:Typical Criteria:– Premium/Exposure ThresholdPremium/Exposure Threshold– Higher LimitsHigher Limits– Hazardous ClassHazardous Class– Location (e.g. CAT zone)Location (e.g. CAT zone)– Poor Loss HistoryPoor Loss History



2.2. ReportsReports• Underwriting ResultsUnderwriting Results

• Rate and Price MonitoringRate and Price Monitoring

• Renewal Ratios, New vs. Renewal SplitRenewal Ratios, New vs. Renewal Split

• ProfilesProfiles– State/TerritoryState/Territory– LimitsLimits– ClassesClasses

• Submit/Quote/Bind RatiosSubmit/Quote/Bind Ratios



3.3. AuditsAudits• UnderwritingUnderwriting

– In-depth file review of a “representative sample”In-depth file review of a “representative sample”

• ClaimsClaims

• Financial/SystemsFinancial/Systems


EXIT STRATEGYEXIT STRATEGY

““You can put wings on a pig, but you You can put wings on a pig, but you don’t make it an eagle.”don’t make it an eagle.”

- William Jefferson Clinton- William Jefferson Clinton


EXIT STRATEGYEXIT STRATEGY

• ““Fish or Cut Bait?”Fish or Cut Bait?”

• Considerations:Considerations:– Poor ResultsPoor Results– Underwriting Guideline ViolationsUnderwriting Guideline Violations– Key Person Defections Key Person Defections – Softening MarketSoftening Market– Run-off expenses with no premium Run-off expenses with no premium

incomeincome


USING PA’s: PROS AND USING PA’s: PROS AND CONSCONS

• PROS:PROS:– Allows a company to enter a new Allows a company to enter a new

market segment without significant market segment without significant fixed overhead expense.fixed overhead expense.

– Ease of Entry and WithdrawalEase of Entry and Withdrawal– Special Line/Class ExpertiseSpecial Line/Class Expertise– Geographic TargetingGeographic Targeting– Portfolio DiversificationPortfolio Diversification


USING PAs: PROS AND USING PAs: PROS AND CONSCONS

• CONS:CONS:– Incentive DivergenceIncentive Divergence– Systems MismatchSystems Mismatch– Expensive way to do businessExpensive way to do business– Flight RiskFlight Risk


SUMMARYSUMMARY

KEY TAKE-AWAYSKEY TAKE-AWAYS1.1. Know your Business Partner – Start with a Know your Business Partner – Start with a

thorough due diligencethorough due diligence

2.2. Align your interests – Provide the PA with a Align your interests – Provide the PA with a financial incentive to produce good resultsfinancial incentive to produce good results

3.3. ““Trust, but Verify” – Monitor, Monitor, Trust, but Verify” – Monitor, Monitor, MonitorMonitor

4.4. ““Fish or cut bait?” – Have an exit strategyFish or cut bait?” – Have an exit strategy


Questions??Questions??

This material is not intended to be legal, underwriting, financial, This material is not intended to be legal, underwriting, financial, or any other type of professional advice. or any other type of professional advice. The reader should The reader should consult her/his advisors and attorneys regarding any business or consult her/his advisors and attorneys regarding any business or legal issues arising from any particular circumstances with respect legal issues arising from any particular circumstances with respect to this subject matter. to this subject matter.

com3 mgas: managing for success

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success overviewwhy

success phase

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