COM3 MGAs: Managing for Success

1. COM3MGAs: Managing for Success Wayne Keller – Arch Insurance Company Cameron Vogt – Munich Reinsurance America, Inc. 2007 CAS Ratemaking Seminar March 8, 2007 - Atlanta, GA MGA's Managing for Success

2. Agenda • Overview of MGA/Program Business • Due Diligence Process • Managing a Program • Summary MGA's Managing for Success

3. Overview • Program Administrator (PA) • An agency that provides some or all of the following services: • Marketing • Underwriting • Binding • Policy Issuance • Premium Collection • Data Processing • Loss Control • Claims Management MGA's Managing for Success

4. Overview • Program Administrator (PA) • Independent contractor, not a branch of the company • Could be called managing general agent (MGA), managing general underwriter (MGU) or simply general agent (GA) • Aggregator of retail agents and insureds that meet business model for program • Some larger PAs employ an Actuary MGA's Managing for Success

5. Overview Third Party Administrator (TPA) Insurance Company Reinsurer PA/MGA/MGU Retail/Wholesale Agent Policyholder MGA's Managing for Success

6. Overview • Program Business • A well defined and narrow segment of insurance marketplace • Company interfaces with PA only • PA “controls” business • PA assumes some underwriting risk • Specialized coverage • Proprietary rates and rating factors MGA's Managing for Success

7. Overview • Other Attributes of Program Business • Life span of program varies • Premium rolls on and off in large, identifiable blocks • Meaningful expenses at both end points. • Due diligence process at the start • Run-off expense without premium income at end • Expired programs can pile up and strain current resources • The universe of established PAs is limited and known. • More parameter risk than a book of business produced directly through retail agents. MGA's Managing for Success

8. Overview • Why discuss MGA/Program Business? • Significant Market Segment • Past Failures MGA's Managing for Success

9. Overview • Causes of Past Failures • Soft Market • E&S Programs lead the market • Binding Authority granted to agency who’s compensated based on premium volume. • Inadequate Controls • Too Much Binding Authority • Lack of Monitoring • Lack of Understanding regarding all aspects of the deal MGA's Managing for Success

10. Due Diligence Process for New Business MGA's Managing for Success

11. Due Diligence Process consists of two phases: The decision to write the program; and Preparing the program for operation Initial program conditions (e.g. rates, underwriting guidelines, audit schedules, forms and other contractual items) are crucial to program success The due diligence process is interdisciplinary A due diligence process that is arduous has advantages. The programs that succeed in the process know that the company’s program portfolio is of a high quality. A high quality portfolio implies stability and longevity for the company in the program business and stability and longevity for each PA within the company’s program portfolio. Introduction to Due Diligence Process MGA's Managing for Success

12. Phase 1 – Program Selection MGA's Managing for Success

13. Initial Program Guidelines and Selection Criteria • Business model: • aggregator of small risks • niche market • timing play • Premium volume threshold • Successful business plan • Excellent reputation • Strong PA financials MGA's Managing for Success

14. Initial Program Guidelines and Selection Criteria Cont’d • Competent underwriting and program management skills • Existing market presence • Agent participation keyed to profit-sharing return • Agreement on Avoided classes • Program Structure • Fronted or not • Reinsurer participation MGA's Managing for Success

15. Program Submission from Program Administrator • Marketing Plan • Staff experience and background • Historic and expected premium volume • Distribution of premium by line of business • Major competitors • Size of potential market • Program aspects that differentiate it from other programs MGA's Managing for Success

16. Program Submission from Program Administrators Cont’d • Current Program Structure • Existing carrier • Admitted / non-admitted • policy forms • policy limits profiles • current capacity limits • reinsurance structure • commission and other compensation • claims handling • loss control • processing and systems capabilities MGA's Managing for Success

17. Program Submission from Program Administrators Cont’d • Underwriting considerations • Changes to program exposures • Pricing of new versus renewal business • account retention • Submit/Quote/Bind ratios • Producer Profile • Agency history • insurance protection (fidelity, E&O) • licenses • agency financials • Producer profile questionnaire • Submission is reviewed by Program Area Management MGA's Managing for Success

18. Underwriting Review • Review and audit of information contained in submission • In depth discussion of Business Opportunity • Discussion of current program • Fit with company business model • Alignment of interests between company and PA • Reason for PA changing carriers • Discussion of general U/W guidelines with PA • Excluded risks • Premium caps • Referrals MGA's Managing for Success

19. Actuarial Review • Major Objectives include: • Appropriateness of current rate level • Appropriateness of rates and rating factors • Any characteristics of program that might affect profitability e.g., CAT exposure or high severity MGA's Managing for Success

20. Actuarial Review • Much of the process involves: • Collecting data from PA • Validating the data • Selecting industry data to augment PA data as needed MGA's Managing for Success

21. Actuarial Review - Losses • Claims runs evaluated at several evaluation points to facilitate construction of loss and claim development triangles, and for auditing summary loss data • Loss descriptions used to identify underlying exposures • Large loss listing with detailed descriptions • Obtain industry LDFs (as needed) by studying loss data. • CAT losses • TPA history: changes in TPAs with dates. MGA's Managing for Success

22. Actuarial Review - Premium • Policy listing by year • Premium by coverage or LOB • Premium by policy limit • Premium by state: CAT potential • Premium by class: ISO or program specific • Audit summary data MGA's Managing for Success

23. Actuarial Review – Premium Cont’d • Evaluation of rate level change history • Individual policy rating methodology • Rating “grid” • ISO base rates with company LCMs • Individual risk rating • Comparison of same policy from year to year. • Comparison to rating benchmark, e.g.CIAB • Review the rating history for a well selected sample of insureds MGA's Managing for Success

24. Actuarial Review – Premium Cont’d • Identify underlying exposures, classes or coverage, e.g. premises versus products GL or type of truck; light, heavy etc. or type • Evaluate exposure trend • Bureau statistics • BLS statistics • Discuss pricing monitoring with PA • CAT exposure for modeling MGA's Managing for Success

25. Actuarial Review – Other Considerations • Program expenses • Many expense items are contractually defined • State premium taxes, if admitted • TPA fees • compensation formula • evaluation based on type of claim and claim counts • Upfront commission • Expected Profit commission • Loss control fees • Brokers fees MGA's Managing for Success

26. Actuarial Review – Other Considerations • U/W Profit (Reflect parameter risk?) • Investment income • Benefit and cost of reinsurance protections • Review of underlying rates and factors MGA's Managing for Success

27. Accounting Review • Review of Agency financials • Discussion of minimum net worth requirements • Discussion of performance guarantees with PA • Review of agency financial controls • Background check on principals • Review of agency physical plant • Discussion of premium trust and segregation of assets with PA MGA's Managing for Success

28. Accounting Review Cont’d • E&O insurance • Fidelity insurance • Financial audit schedule • Cancellation procedures • Use of collection agencies • If acting as TPA: • approval and timeliness of payments • recovery of subrogation, salvage and deductibles • control and use of loss funds • Advise on state premium tax and assessments MGA's Managing for Success

29. Summary to Program Division Head • Commentary on PA personnel and history • Discussion of Business aspects of submission • The motives of each party • The benefits to each party • Possible areas of conflict • A general description of the program including: • Underlying exposures • Coverage forms • Limits • Deductibles • Geography • Other unique and critical aspects MGA's Managing for Success

30. Summary to Program Division Head Cont’d • Comments on any deficiencies in the submission • Preliminary Program specific U/W guidelines • The Actuarial report with rate level indication and other observations • Required reinsurance with company retentions, proposed reinsurance structure and reinsurance cost MGA's Managing for Success

31. Summary to Program Division Head Cont’d • Pricing targets, estimated premium volume and proposed premium caps • Expected TPA and costs • Type of PA IT system, know deficiencies and possible certification problems • Proposed start up date. • Decision is made on second phase of due diligence MGA's Managing for Success

32. Phase 2 – Program Implementation MGA's Managing for Success

33. Development of Program Underwriting Criteria • Negotiation of deal structure • Underwriting guidelines • Referral criteria • Individual risk eligibility criteria • Underwriting audit schedule • SIR criteria • PA authority by lines of business • Program geography MGA's Managing for Success

34. Development of Program Underwriting Criteria • Prohibitions in general and by line of business • Required reports from PA • Required underwriting information for each retail risk • Rules for Retail underwriting practices • Quote good for 30 days • Application of loss control • Fully completed applications • Premium audit • Retail Underwriting file requirements MGA's Managing for Success

35. Policy Forms review • Manuscripted policy forms unique to the program • Reviewed by Underwriting, Claims and Legal • Must be filed, if admitted MGA's Managing for Success

36. Development of Filings • Applies to Admitted programs only • Creation of countrywide manuals • Actuarial review of underlying rates and factors • Filing strategy • Priority states • DOI regulation by state • Compliance review of filings MGA's Managing for Success

37. Development of Filings Cont’d • Filing regulation • File and use • Use and file • Prior approval • Typically most forms and rates are previously filed bureau products. Only the program specific rates and forms are filed • The filing process is costly and time consuming. • The filing process is one of the “hooks” that ties the PA to the company. MGA's Managing for Success

38. Systems Review • Software • Analyze PA systems and their capabilities • Policy information • Financial reporting • Rating engine • Claims system, if TPA • Outside reporting, NCCI , DMV MGA's Managing for Success

39. Systems Review Cont’d • Software Cont’d • Create interface with company, if necessary • Suggest third party vendor, if necessary • Testing -Various policy issuance scenarios are run with the PA system and the results in the company system are reviewed for accuracy and completeness. MGA's Managing for Success

40. Systems Review Cont’d • Hardware • Ability to interface with company • Ability to handle expected tasks • Print capability • Internet access, e.g. T1 line • Disaster recovery plan • Protocol for ensuring data quality MGA's Managing for Success

41. Claims ReviewInitial Review • Candidates for Claims Handling: • TPA from company approved list • “Outside” TPA that meets program’s unique needs • PA • TPA / PA mixture • Review of claims logistics • Types of claims and effort needed to handle. • geographic spread of claims handling MGA's Managing for Success

42. Claims ReviewInitial Review Cont’d • Description of Program coverage and its impact on claims handling • Discussion of policy forms or endorsements that is unique to the program. • Discussion of special perils, e.g. mold • Size of claims inventory and claims flow MGA's Managing for Success

43. Claims ReviewSelection of TPA • Review of PA candidacy • Review of PA physical plant • History of PA relationships with prior carriers • Organizational structure and resumes of claims personnel • Level of PA claims service • Timeliness of contact with claimant, investigation and settlement • Claimant satisfaction MGA's Managing for Success

44. Claims ReviewSelection of TPA Cont’d • Supervision • Relationship between PA management and claims personnel • Relationship between PA and insurer • Reporting level • Written reports on claims • Overall Documentation • Hard copy files • Claims system MGA's Managing for Success

45. Claims ReviewSelection of TPA Cont’d • Quality of Investigation • Investigation procedure by type of claim • Use of outside vendors, by geography or type of claim • Investigation documentation • Photographs • Recorded statements • Action plans for further investigation • Timely contacts MGA's Managing for Success

46. Claims ReviewImplementation • Claims Authority: • Line of business • $ amount • Special situations • Set up claims audit schedule • Litigation Management Guidelines MGA's Managing for Success

47. Claims ReviewImplementation Cont’d • Licensing requirements by state (licensing for claims handling? Yes, for many states) • Some states reciprocate (i.e. these states will recognize the license of certain other states), but some do not. • Expensive and time consuming. • Some states require a presence in their state to be licensed. • A vendor with in-state presence can be used • State unfair claims practice laws. • Continuing education to retain license • Compliance audits licenses MGA's Managing for Success

48. Claims ReviewImplementation Cont’d • ALAE/Medical Case Management/Independent Adjusters • Independent adjusters • Management of • Level of use • Impact of unique program coverage features on ALAE, e.g. construction defect or pollution claims. Claims that are expensive to handle, if not expensive to settle. MGA's Managing for Success

49. Claims ReviewImplementation Cont’d • Compensation for TPA • Typically a flat fee per claim feature. Varies by LOB • Can be time and expense under certain circumstances • size of claim • specified type of claim • Can be % of premium • Cradle to grave service. Breakdown in relationship could mean moving claims and extra expense. • Discussion of the overall cost to PA of claims operation • Expense of claims system and collection of claims data MGA's Managing for Success

50. Claims ReviewImplementation Cont’d • Reserves • Level of authority • Documented reserving philosophy or best practices. • Negotiations/Settlements/File Closure • Rate of file closure • Documentation for extended claims • Salvage/Subrogation/Deductible Recovery • Meeting statutory reporting requirements for S&S • Pursuit of deductibles • Claim system • Loss Run Review • LOB distribution by loss and claim MGA's Managing for Success