The Big Picture
In “Storage Wars,” a popular reality show on the A&E cable channel, bargain-hungry bidders vie for a chance to purchase a potential treasure of abandoned possessions from the auction block after their owner failed to pay the rent on a self-storage facility. But what if the owner hadn’t abandoned the goods after all and the auction was a mistake on the part of the storage facility?
“What if they have that auction of your stuff and you in fact did pay them and they go and sell off your goods?” says John LaCava, president and CEO of Aran Insurance Services Group and subsidiary MiniCo Insurance Agency. “You can show them that you were not in violation of your lease, so the owner would have not only an attempt to recover the cost of those goods but a liability lawsuit against the storage facility.”
A storage facility owner with a standard general liability policy would not be covered in that situation, LaCava says. But what if the facility had program insurance that had sales disposal legal liability coverage? This custom coverage and other enhancements that specifically address the needs of self-storage facilities have helped MiniCo become a leading provider of general liability insurance to this niche market, covering about 15% of the facilities nationwide.
“One key to insurance programs is differentiation of the product,” LaCava says. “You have experience and expertise to develop custom coverage and various policy enhancements to deal with unique exposures to that niche risk class. The average carrier can write and insure a facility but cannot provide the specialization.”
For example, back in 1973, John Cassara, the chairman of Brownstone Agency, had an idea to develop an insurance program that covered just historic brownstones. That idea has grown to a program that now insures 22,000 brownstones in Brooklyn, Manhattan and Queens and 3,000 in the Boston area, generating $95 million in premiums each year, says John Simone, managing director for Brownstone Agency.
“We are very competitive first of all on rates, and our insureds like to be able to lock their rates in for three years,” he says. “We’ve been around for 40 years. We are very comfortable with the business, and we have good service. That is the key. We have a very good policy, one of the best out there, but we also sell our service. They can pick up the phone and get in touch with us.”
Both Brownstone and MiniCo are managing general agents, so they function as program administrators, underwriting and servicing their specialty programs. They bind insurance policies on behalf of Bermuda-based Aspen Insurance Holdings.
The Target Markets Program Administrators Association (TMPAA) estimates that in the past five years 55 carriers have written program business. In 2011, the latest year for which figures are available, 2,000 specialty insurance programs generated an estimated $24.7 billion in premiums nationwide, according to the association. Aspen has been offering program insurance since 2007.
“This segment in the business has been around for a long time,” says Tom Muller, Aspen’s executive vice president for programs. “It represents about 10% of the commercial property market in the United States.”
Finding a program administrator with a solid program offering can be a benefit for carriers, Muller says.
“Program administrators/managing general underwriters have experience and expertise and are more cost-effective than we are,” he says. “They handle all the functions of underwriting—quotes, binding the business, issuing the policy—but it is all on our paper.”
“It’s a two-way street,” says Michael Sillat, president and CEO of WKFC Underwriting Managers, one of the largest program administrators/MGUs in the United States. It places real estate and inland marine business with Aspen.
“We provide all the facets of the business, required to not only underwrite but also administer the business, and we also have the ability to represent paper of highest quality, which Aspen is,” Sillat says. “We would rather offer our clients a Porsche than a Volkswagen. To represent Aspen says a lot about you as a program administrator/MGU.”
A 2012 TMPAA study of program business estimated there were about 950 program administrators in the United States. “Across industries, program administrators reported the largest volume of premiums in government, nonprofit and education, construction, and transportation,” the study said. “The lowest volume, on the other hand, was seen in retail, financial services and leisure.”
The study found the program industry continues to grow in premium volume, but the marketplace over all has been declining in the past few years, even with an average renewal rate of 84% for existing programs.
“Carriers are not looking for start-up programs,” Simone explains. “They want to take on existing programs because they can see the history. It is very tough for this industry today to start up a program, so I would say it is not growing but it still is a large part of insurance.”
Sillat disagrees. Program business “is absolutely growing, no doubt about it,” he says.
“It has gone through cycles when it has been a more or less attractive strategy. And the last five years or so, it has been somewhat less attractive. A lot of insurance companies took the underwriting function for specialty risks in-house, but I believe some have discovered to do so profitably they required expert underwriters, efficient systems and access to data not readily available or accessible.
“I believe many carriers have, as a result, found that these types of programs are better written through a specialized manager with all these attributes and the ability to conduct this business more efficiently and cost effectively,” Sillat continues. “I can tell you just from my own business experience, there is not a week that goes by where WKFC is not approached by a broker or insurance company about starting a program. That tells me the program business is desirable and in a good place.”
For those interested in the business, the TMPAA study noted, “A program administrator’s track record with other programs and longevity in the business are the two most important factors carriers consider when deciding whether or not to partner with them. Three quarters of the insurers polled say the threshold premium amount they look for in a new program is greater than $1 million.”
Building a new program and giving it time to succeed requires a significant investment of time and effort. “This is why carriers are very selective about the program administrators they work with,” the study said. “Three fourths of the carriers polled insure fewer than 30 programs. As would be expected, rate adequacy and premium potential remain on top of insurers’ priorities when considering whether or not to write a new program or accept a rollover program.”
Muller agrees selectivity is key to a solid program operation. “One of the secrets of our success is we don’t write more than a limited number of these programs. We are very focused and specialized, and we only write about nine programs,” Muller says. “We know what pitfalls to look for in handling these programs,” such as sketchy claim information and programs that have switched insurers frequently. “If you fail to do your due diligence in the audit and referral process, you can start having problems real quick.
“We have product knowledge in the class. We have expertise in setting up program administrators, financial reporting, auditing and controls. You are giving them your pen, so you have to have controls in place.”
Program administrators are looking for a partner with a good name, a good reputation, and most importantly, the capital base and financial strength to cover the risk they are taking on.
“We need to know that the carrier is able to pay for losses if and when a catastrophic event occurs,” Sillat says.
“Not being the actual insurance company, you have to have a partner that can provide that support that we need,” LaCava says. “Aspen can provide various types of analytics to us that we need during the underwriting process. But the biggest thing is they provide stability for us because they have the experience and the patience to work with us during the up and down cycles.”
“They’re our partner,” LaCava continues. “That is what you need in a program company—somebody who can be a partner with you in serving that market. We don’t need them to be an absentee landlord or be overbearing and try to micromanage us. You would be surprised. Very few companies have that experience to be a true partner with programs. Some are totally absentee or try to micromanage you and try to run you like a branch office, which we are not. Finding somebody who can be a partner in the industry is a key.”
Aspen, says Simone, has helped him grow the business. “When we would like to add different kinds of coverages or change a rate or expand into new areas,” he says, “they are a true partner that looks to make it happen.”