Surplus Lines Insurance vs. Standard Insurance by: Rachel Stark University of Louisiana at Monroe

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1 2010 White Papers Surplus Lines Insurance vs. Standard Insurance by: Rachel Stark University of Louisiana at Monroe Extreme Makeover: Delegated Binding Authority Edition by: Ben Robbins - Appalachian State University

2 2010 AAMGA Education Foundation White Papers In order to provide greater exposure to and interest in the excess and surplus lines insurance industry, the AAMGA Education Foundation invites University and College students from across the country who are concentrating their studies in risk management and insurance to submit White Papers on topics they find of interest. The students conduct research on property and casualty industry-related topics, focused on the issues and opportunities in the Wholesale or Excess and Surplus Lines industry. A group of University Administrative Committee (UAC) members reviewed all submissions and evaluated each on a numeric scale based on the following selection criteria: Soundness of industry knowledge. Usefulness to other members of our industry. Innovation and creativity (as appropriate). Two winning papers are selected annually from the submissions and the authors are awarded $1000 toward their continuing studies at the AAMGA Annual Meeting Business Meeting. The recipients of the 2010 AAMGA Education Foundation White paper awards are: Benjamin Robbins, Appalachian State University Rachel Stark, University of Louisiana at Monroe We trust you will enjoy reading the papers, and meeting the students along with their Professors, who are attending this year s Annual Meeting.

3 Surplus Lines Insurance vs. Standard Insurance by: Rachel Stark University of Louisiana at Monroe The surplus lines insurance market consists of risks that standard market insurers will not assume. The standard market will not take on these risks because of various reasons. One such reason is that the risk is high capacity or needs coverage above and beyond a primary market insurer s appetite. Another reason the standard market does not want these risks is due to the fact that they are distressed or have a bad loss history. Many times an insurer will only take on new risks if they have had no losses. Companies who have previously been hit by a natural disaster or some other claim worthy problem cannot meet this requirement and must find coverage elsewhere. One other reason a risk must be placed with a surplus lines insurer is because it is unique and it is not easily rated or underwritten or there is nothing else like it. The surplus lines portion makes up 7% of the total insurance market premium dollars. This may not seem like a very significant amount but the excess and surplus lines industry serves a valuable purpose. This paper will discuss several different risks the surplus lines market assumes, the differences between standard market regulation and non standard (or excess and surplus) market regulation for five states, and a comparison of federal versus state regulation. Finally, a marketing plan will be created to promote a specific product for one type of risk. This paper should help the reader to better understand the surplus lines industry and how it fits in with the rest of the insurance market. After reading one should be able to differentiate between the surplus lines market and the standard insurance market and why surplus lines insurance is a necessary and efficient part of the industry. Examples of Types of Risks Insured in the Surplus Lines Market Accountants Professional Liability is a risk insured under the Philadelphia Insurance Company domiciled in Pennsylvania. Accountants Professional Liability coverage addresses the need of errors and omissions insurance specifically for accountants. This type of insurance program would be considered a unique risk. This program covers accountants for errors such as not filing a tax return on time and a client incurring tax penalties because of the late return. It also covers losses due to an accountant making a significant error on the financial statements of a company where the company then sustains losses of having to have another accounting firm correct the mistake. Accountants Professional Liability also covers errors of an auditor where creditors rely on the information provided by the auditor. If the representations made by the auditor are false or do not comply with GAAP and the company being audited files bankruptcy, the accounting firm will then file a claim on their professional liability to indemnify the creditors for the auditor s mistake. Also insured under the Philadelphia Insurance Company are hunting preserves. This type of risk would be considered unique and high-capacity because of its distinctive nature and the fact that many of these types of reserves would need high limits of liability and property coverage. This insurance program is tailored to operations of guided or unguided outings. It is made for any type of hunting reserve where upland bird and waterfowl as well as turkey, deer, wild hog and exotic species are being hunted at the facilities. Fishing and shooting facilities can also be covered under this policy. Features of the policy include: liability coverage with the option of excess and special events coverage, property insurance on a blanket basis with business interruption and extra expense coverage, and business auto protection is also available. This policy also has a medical payments provision in case of any accidents on the grounds. Apartment complexes are a high-capacity risk insured by Scottsdale Insurance Company domiciled in Ohio. Apartment complexes are high-capacity because usually the policies have to cover several multi-unit buildings which cause the limits on the policies to be large. This policy would cover the property itself in case of any damage caused by fire or some other covered peril as well as liability on the land the property sits on. The liability portion provides coverage in case a tenant or visitor hurts themselves on the premises due to neglect or lack of precautionary measures by the owner. The property damage coverage can be formed on a blanket basis or on an individual building basis with the blanket basis being the most common. Scottsdale also offers commercial umbrella liability and excess liability for this type of risk. insurance_products/excess_umbrella.jsp The Republic-Vanguard Insurance Company offers an insurance program for public schools with an average daily attendance of 5,000 students or less. The Republic-Vanguard Insurance Company is domiciled in Texas. This type of program is deemed 2010 White Papers 1

4 high-capacity because of the great deal of liability a school undertakes each and every day. Also, depending on the size of the school and all the extra playgrounds and sports facilities, the property damage coverage may also need to be very high. This package offers coverages such as general liability, auto, property, inland marine and crime. com/public/insurance_products/excess_umbrella.jsp Amusement parks are a unique and a high-capacity risk insured by T.H.E Insurance Company domiciled in Louisiana. Amusement parks fall under the category of high-capacity risks because the nature of the park leaves them open to a large amount of liability. All the rides and vendors also need to be insured under the policy which causes an extraordinary need for a large amount of protection. This risk is also unique because there are not many of them and each park is different with its own diverse array of risks. Under this policy, coverages available include general liability, property, business income, inland marine, automobile, crime, liquor liability, and excess liability. State Insurance Regulation Comparison for 5 States All states have different capital and surplus requirements for their domiciliary insurance companies. Insurance companies will be forced to have a certain amount of capital and surplus to begin selling insurance in order to show the state they are solvent and can pay claims. These requirements vary from state to state as well as in different lines of insurance. Louisiana s requirements are listed in the following table for domestic insurers. These minimum requirements must be met within 12 months from the date of the company s charter. The company may not issue policies until these requirements have been satisfied. It states in the Louisiana Insurance Code that, in order to encourage more insurers to write business in the state of Louisiana, the state will grant money to companies that satisfy the capital and surplus requirements and show an adequate reinsurance program. The grant money varies from $2,000,000 to $10,000,000 and cannot be in excess of 20% of an insurer s capital and surplus. The insurer may earn 20% of the grant each year as long as they meet all the requirements laid out by the code so they may get the full grant after five years White Papers 2

5 Alternatively, the minimum capital and surplus requirements for any surplus lines insurer desiring to conduct business in the state of Louisiana is $15,000,000 regardless of lines of business transacted. In order to begin doing business as a foreign surplus lines insurer in Louisiana, the insurer must make a statutory deposit of $100,000 in a bank or other financial institution licensed to do business in the state or procure a $100,000 surety bond. If a company wants to be a foreign surplus lines insurer, the deposit cannot be less than $2,000,000. These deposits must be accompanied by an application to the Louisiana Department of Insurance Commissioner s Office requesting the power to write surplus lines insurance in Louisiana. Surplus lines insurers are required to remit a quarterly surplus lines premium tax of 5% per year. An installment of this tax is due at the end of each quarter on March, June, September, and December 1st. Failure to forward this tax on time results in a 10% increase in the amount of the tax and the insurer could lose their license and ability to write in the state. The Commissioner will do an examination of all admitted insurers at least every five years. The premium tax for admitted insurers in the state is much lower at 2.25%. The Code stipulates that surplus lines brokers are required to obtain three declinations of coverage in the standard market for risks to be placed with a surplus lines insurer. The declinations must be in writing and submitted to the surplus lines broker. The declinations indicate that three separate companies have denied insurance to the insured because they do not meet the company s underwriting guidelines. These declinations are an important element of the surplus lines market because insurance regulators do not want competition between the standard and non-standard markets According to Pennsylvania Insurance Code, the requirements for a risk to be placed with a surplus lines insurer is also to obtain three declinations from standard market carriers. These declinations must be in writing and include: the name and office location of company, name and position of the person contacted, date of contact, and an explanation of why the risk was declined. The risk may also be assumed declined if the producing broker that was contacted does not respond within five business days. In order to function as a surplus lines insurer in Pennsylvania, the bond required is $50,000 for the initial license term. For each subsequent term the bonds are outlined below: Pennsylvania code requires that any company aiming to become an eligible surplus lines insurer must provide evidence that they are already selling the same lines in their domiciliary state. The company must also show that the entity itself or an affiliate has been conducting business in the surplus lines market for three years prior to applying as a surplus lines insurer in the state of Pennsylvania. The foreign surplus lines insurer must also meet a surplus requirement of $7,050,000 whereas an alien insurer is required the same surplus requirement but must also meet an irrevocable trust fund requirement deposited in a national bank White Papers 3

6 Pennsylvania admitted market insurers are subject to a 2% premium tax while surplus lines insurers operating in the state are required to pay 3% on gross premiums. Capital and surplus requirements for admitted market insurers in Pennsylvania are listed in the following table. Each company must have capital of at least $750,000 or the sum of the total required for each line whichever is greater. The capital and surplus requirements are the same for stock and mutual insurance companies Delaware Code specifies that in order to become a surplus lines insurer operating in the state, a company must already be licensed in the state to sell standard insurance policies. The company then should file an application and pay an application fee with the Commissioner s office. Foreign insurers must also post a deposit at a bank in the state of $100,000 before it may begin operating in the state. Admitted insurers must show capital and surplus requirements as laid out in the following table to prove their company solvency. The diligent search requirement for Delaware is that the broker must procure three declinations in order to place the risk in the excess and surplus market. Once these declinations have been obtained the agent may go to a surplus lines broker and have them find a carrier that has an appetite for the risk in question. The applicable tax rate for Delaware insurance companies is 2% for both standard and non-standard carriers. This is a premium tax and based on the total amount of premiums the company receives from policyholders White Papers 4

7 The state of Missouri imposes a 2% tax rate on its domestic and foreign insurers operating in the lines of the standard market. For insurers operating in the surplus lines market the applicable tax rate is 5% based on gross premiums. These premium tax returns and payments are due on March 1st of each year. The state of Missouri currently does not have a diligent search requirement of producers before placing a risk in the surplus lines market. The broker is expected to have sufficient knowledge of the admitted market carriers and know what they will accept and decline. To become a surplus lines insurer in the state, a company must file an application with the Missouri Department of Insurance and meet the surplus requirements set forth by the Code in order to prove company solvency. The company must also submit financial forms and other necessary documents to the office of the Commissioner. Missouri has their own set of capital and surplus requirements for admitted market insurers. These qualifications are laid out in the following table ctivestate=mo&contentlevel1=govaff&contentlevel2=gainsleg&contentlevel3=&activetab=state&startrow= White Papers 5

8 Alabama insurance regulations state that the required surplus lines premium tax is 6% annually. This tax is payable by the broker to the state. The premium tax for standard market insurers is a 3.6% maximum tax. Alabama also does not have a declinations process but an affidavit must be filled out by the broker stating the risk was placed in the surplus lines with knowledge and consent of the insured. In order to conduct business as a surplus lines insurer in Alabama a foreign company must show they have available capital and surplus of $5,000,000 and are already authorized in at least one state before applying to Alabama. An alien insurer wanting to function in Alabama must have a trust fund deposit of $2,500,000 and capital and surplus amounting to $15,000,000. Alabama s capital and surplus requirements for standard market insurers are listed below Federal vs. State Regulation Argument Regarding Insurance Industry An important argument surrounding the insurance industry is the dispute about whether state or federal regulation is better for the supervision of the country s insurance. People who support state regulation are mostly state regulators and companies in the insurance industry. Proponents for state regulation, which is what is currently in place, reason that state insurance departments are more responsive to their residents. When a natural or sudden catastrophe strikes, state departments are able to act on it more quickly than a federal office that has oversight of the entire country s insurance issues. State department personnel would be better equipped to learn about the exposures unique to their state while federal employees would have to learn about all the exposures of all states. This could cause problems with personnel not being familiar with or able to know everything they need to in order to fulfill their job duties. People that advocate for state departments also say that these departments would be more consumer-friendly. It is easier for citizens of that state to access the state department rather than having to call a federal office. Federal offices of this sort could also mean longer hold times, things will not get done in a timely fashion, and it would be harder for people to see someone in person unless they live in the state in which the federal office is located. Advocates for federal regulation usually include consumers and the federal government. Those who support federal regulation claim a federal department of insurance would allow for more uniformity across the nation in the insurance industry. This office would also allow for more efficiency by streamlining all the state departments into one large office to take all complaints and 2010 White Papers 6

9 deal with all serious disasters. Efficiency means that this department would be less expensive than continuing all the other state departments which could alleviate some of the problems with the waste in the insurance industry that gets criticized so often. It is also a safe bet that the personnel of a federal office would be of a higher caliber than the personnel of the state departments because as a general rule the federal government is going to pay better than the state governments. Higher pay causes higher competition for these jobs and will allow more quality people to take these positions. A federal office could also put a halt to some of the corruption that goes on with state departments because of the need to make all consumers happy. If the office does not need to make everyone happy they are less likely to be unethical in their business dealings. The surplus lines industry is much less heavily regulated than the standard market. This allows surplus lines insurers freedom of rate and form requirements that are imposed on other insurers. Freedom of rate and form means that surplus lines insurance carriers do not have to file their policy forms or rates with the state in order to use them. This allows this portion of the industry the flexibility to change rates quickly and easily based on economic conditions, changes in the risk, environmental changes, etc. This also allows these carriers to exclude and include on their policy forms whatever they deem acceptable according to their underwriting guidelines and loss history of the risk. If this country wanted to move to a federally regulated insurance industry, it would probably mean much heavier regulation on the surplus lines industry which would likely involve the abolition of the freedom of rate and form that these carriers currently enjoy. An alternative to the stark contrast between solely federal or solely state regulation would be to continue all state departments and have a federal office with a state liaison for each state. State departments could be downsized because of the amount of work the federal office could take on and the federal office would not have to be as large as it would be if it were the exclusive regulatory body. In my opinion; however, I think the state insurance departments do a good job as they are because they are familiar with the inherent risks of the state and can respond quickly and easily to the needs of its citizens. I don t see a need for a large upheaval in the regulatory processes of each state s insurance department. Since every state has a distinct collection of exposures, state departments are better prepared to deal with sudden tragedies within their borders. Product Marketing Finding new and innovative ways in which to market new and existing products is a major objective for all businesses. This is especially important for insurance companies marketing new financial tools or new insurance products and programs. One such insurance program idea is college graduate job insurance. The purpose of this type of insurance would be to fulfill the need of college graduates who cannot find employment after completion of their degree. The policy would stipulate a waiting period after graduation of 60 days and specify when and how the job search must be conducted. The policy could pay out a maximum of $800 per month or 50% of the average weekly wage of an entry level position in the policyholders chosen field for a period of up to six months. A condition of this insurance would be that the industry that the student receives a degree in must have an unemployment rate 1.5% higher than the national unemployment rate. The student would have to buy the policy within the dates he/she is classified as a junior or first semester senior at an accredited university and any major change would cause the policy to be reevaluated and newly rated. All new insurance product ideas should begin with a rigorous deliberation of underwriting requirements and guidelines. Significant underwriting provisions for this type of program may incorporate changes of major concentration, job search requirements and verification, and determination of industry average unemployment rate. This type of policy should include a provision stating that if the policyholder changes his/her major this either voids the entire policy or can be kept in force with changes. Most often the company should want to keep the insured as a customer so the policy should be reevaluated, rated again based on the new major (industry), and premium changed based on new graduation date if it has changed. All policyholders will have to show a conscientious job search that begins four months preceding graduation and must show ten applications per month for jobs that the insured is reasonably qualified for. Reasonably qualified could be defined as an open position in the insured s chosen field in which the individual meets at least 75% of the qualifications. The verification process for this requirement would be that the carrier or broker receives copies of the submitted applications and calls or s the companies and confirms that the application was actually received by the company, the position applied for, what the qualifications were, and that the job was not turned down by the insured. In order for the company to determine who is eligible for this insurance program, the company must decide how to ascertain the industry unemployment rates. These rates are going to fluctuate fairly regularly so there must be a source available to keep the company up to date on these variations. The policy should state that the industry 2010 White Papers 7

10 unemployment rate should not dip below the 1.5% benchmark more than three times during the policy period for the policy to remain in effect. Rating considerations to take into account while in the forming stage of this insurance program could include many different variables. Current employment and job history should be inspected in order to get an idea of the individual s ability to hold a job. This factor could also be used to evaluate the insured s accessibility of full-time employment with current company upon graduation. A large factor when applying for jobs after graduation is the ability of the person to move in order to obtain a job. If the prospective insured is not able or willing to move for a job, they will receive a higher rate than those individuals willing to move wherever they can find employment. As credit rating is used to determine a rating class for auto and homeowners insurance, GPA can be used to determine the likelihood that a claim will be made because it can help determine the ease in which the covered person can find work within the 60 day waiting period. This may also be an indicator of ambition and work ethic which is vital for college graduates seeking employment straight out of school. Another important rating factor would be current loans outstanding and amount of any future loans anticipated. This element could be verified through supporting loan documentation and a credit check. Average starting industry salaries would also be a factor because it can determine the amount of claims payments that will be necessary on the policy if the claim is filed. Almost all risks in the surplus lines market are reinsured to a certain degree. Sometimes it is hard to determine the amount of reinsurance necessary to be profitable. It may be beneficial to look at past loss history and the maximum possible loss per policy. In this case there is no loss history but a possible source of information would be federal unemployment insurance. It may show patterns in claims and demographics of individuals that file these types of claims. With this information in mind, it would be easier to make a reinsurance decision. To start off probably at least a quarter of the risk should be reinsured if not more. A strategy could also be to just buy as much reinsurance as you can afford without spending more than the company is bringing in in premium but this is probably not the best strategy and may cause the company to overspend on reinsurance. Another consideration the company must think about before getting the product off the ground is its claims process. It would be best for policyholders to file claims directly with the carrier and for the carrier to have an in house claims department in order to keep all claims within the evaluation of the carrier. This way the carrier can have direct contact with the insured and make sure claims are carried out as efficiently and effectively as possible. In order to have all these functions work together the company must have a substantial technology system in place with the capability to grow and change as the product and product lines grow and change. There should be computer software put in place that can quote, bind coverage, and keep up to date on all claims information. Technology for any firm is a significant expenditure and needs to have a lot of thought and expertise put into it before deciding on and implementing a system. An outside technology expert can and most likely would be very beneficial in this situation. Once the firm has determined how to underwrite, rate, and reinsure the product, it can focus on marketing. The first consideration should be: through what channels can this insurance be obtained? The most common way to sell surplus lines insurance is through a broker. The broker could be a national one which would make the distribution of the product easier countrywide. The broker will have the authority to underwrite and bind coverage according to the carrier s guidelines. Next focus is target market. The market for this product is college juniors and seniors and their parents or guardians. The end-user is always going to be the college graduate who will benefit from the claims payments if any are necessary. In order to get this product in front of the target market, an effective marketing tool could be advertising at booths for college orientations, partnering with a student loan company, and having school advisors talk to students about it when they get advised. It would be easiest for the carrier to advertise the product and inform interested parties through what broker they can attain this type of coverage. Representatives for the carrier company would set up at college orientations and tell prospective students about the benefits of the program. This would be beneficial because most students come with their parents and it is more likely that a parent will be looking out for their child and their financial situation at that point. This could also be a hindrance; however, because the policy cannot be purchased until the student is in their third year of college. Because of this fact, it would be valuable to have college advisors speak to their advisees when they are entering their third year or become classified as a junior. It is usually at this point that students begin to really think about their future and what they are going to do following graduation. They may have some doubts about their ability to find employment and be more eager to listen about the product. Another advantageous instrument would be a partnership with a student loan company. If the carrier could find a large student loan company that would allow them to advertise on their website and send out fliers with their interim interest 2010 White Papers 8

11 statements, it would get the product in front of the people who could really benefit from this product. Since the students who are going to be most concerned about finding a job right after college are going to be the ones with student loans, this allows these students to be exposed to this coverage that could greatly benefit them in case they cannot find work. As anyone can see there is more than meets the eye to the surplus lines insurance market. The policies involved can be very complex and the consumer must rely on the insurance professional to work in their best interest and procure the policy they need. The scope of the risks insured is vast and there is always room for growth and new products. As with any financially centered market, and insurance is very much so, the method in which the industry should be regulated is always up for debate. Whether state or federal or some combination of that, everyone has their own perspective on the issue and there are pros and cons to each side. However, state regulation of this industry seems to be working effectively at the current time. Because the surplus lines insurance market is so unique, marketing their products can pose a sizeable challenge. Not only do carriers have to agonize over underwriting and rating but have to find suitable intermediaries in which to market through and find ways in which their products can be seen by people that need them. It is because of this difficulty in marketing that surplus lines insurers would not be able to function as effectively as they do now if they were more heavily regulated. Four goals all insurers strive to achieve are to meet consumer needs, fulfill legal requirements, satisfy social responsibility, and turn a profit. These goals can oftentimes conflict with each other and regulatory requirements can also impede a company from reaching it s goals. Compliance with these requirements ensures the safety of the consumer and the ability for states to have oversight of their domiciliary insurance companies which is what these state departments are designed to do White Papers 9

12 Extreme Makeover: Delegated Binding Authority Edition by: Ben Robbins - Appalachian State University As the E&S and Wholesale industry mourn the inevitable decline of the hard market, Managing General Agents must become proactive rather than reactive when conducting and acquiring delegated binding authority. The innovation and utilization of delegated authority is of paramount importance for continued expansion in the excess and surplus lines industry. Underwriting companies have conducted program business for years, and MGAs today must establish themselves as profitable, credible and capable producers to sustain a healthy relationship with insurers. E&S wholesale brokers must take a practical approach in obtaining program business for specialized markets, and play an active role in developing improved communication between producer and syndicate through advancements in technology and standardized regulation. Managing General Agents with binding authority in several programs have an obligation to provide any information required by the program administer. According to the Lloyd s 2009 Coverholder survey, 86% of AAMGA members have delegated authority with 5 or more insurers. (Ref 7) Transparent financial operations will create a trusting and reliable relationship with the associated carriers. The placement and transfer of money (premiums, return premiums and claims) generated from binding relationships should never co-mingle with operating assets. Lloyd s Coverholder Channel provides any non-fsa regulated MGA with a no-set off letter. This letter will notify the banks that any account in a fiduciary capacity on behalf of its clients is not entitled to, any charge, encumbrance or lien, compensation or retention without the consent of the Program Administer. (Ref 4) Although his is a practice unique to the Lloyd s corporation, all MGAs would benefit from implementing similar systems. Insurers are required to confirm the licensing of the MGAs. If MGAs are ready and willing to provided state licensing information and other contractual relationships with current sub-delegates, potential insurers will be able to process an application much faster than if they were required to conduct the research themselves. This information also helps avoid any future legal conflict disputing the scope of authority given to MGAs. MGAs seeking binding authority should place a strong emphasis on the post approval, with the understanding that each program acquisition is a long term investment. An emphasis on the post approval process enables the program administer and MGA to forecast issues centered on program implementation such as, claims handling and underwriting standards. Solvency II is a recent initiative of the European Union (EU) that applies to the regulation of financial institutions (insurance companies, banks, etc) doing business in the EU. Increased regulation and investigation will continue between the insurers and MGA mandated by Solvency II. The E&S industry must take a proactive stance on this issue and find ways to simplify data exchange and standardize regulatory requirements between international borders. MGAs willing to voice a concern for consistent data requested from syndicates and the ability to pay their balance of premiums received and claims paid in one transaction will experience enduring benefits. Another opportunity to increase efficiency is the installation of ACORD standards. This adaptation would streamline communication, and a single-entry online program that incorporates the data requirements of all syndicates would eliminate any conflicting data submissions. Solvency II will increase the financial stability for all financial institutions associated with the EU, and will force MGAs in the United States to comply with international accounting practices. The required number of financial audits preformed by program administers will increase; the use of specialized software designed for financial analysis would minimize the workload of MGAs. The stringent regulations may appear burdensome for the Managing General Agents, 2010 White Papers 10

13 but if proficient communication is established, regulation will help remove any ambiguity and improve business operations. A significant problem for underwriters in the E&S industry is underwriting risks outside the assigned binding authority. Warden v. Bank of Mingo (1986), illustrates that the abuse of binding authority will result in the MGA assuming liability for the offending risk, in place of the insurer. (Ref 1, 6) Any sub-delegation that occurs within an organization must be responsibly handled, and all conditions and restrictions associated with the delegated authority must be clearly explained and enforced; this process requires cyclical internal communication. MGAs in the E&S industry must be able to differentiate themselves from their competition by providing new and refined specialized coverage. Niche markets can be extremely lucrative, but MGAs must prove they have the underwriting and claims competence to remain profitable. Internal risk management systems are a vital advantage for wholesale brokers in the E&S industry, particularly in relation to the property and casualty market. MGAs should develop programs that expand and shrink according to the ebb and flow of hard and soft markets. The volume of catastrophic risk written by E&S brokers is ever increasing, developed CAT Modeling programs that geo-code all current business will facilitate the elimination or mitigation of risk that hinder a program profitability. CAT Modeling is only one aspect of loss information; MGAs should know the current loss data and have actuarial reports from previous years available for review. (Ref 5) The increased presence of standard insurers in the Excess and Surplus line market is a direct result of the soft market and the large amount of capital available to direct insurers. (Ref 2) MGAs are now faced with the problem of maintaining profitability without sacrificing underwriting discipline. When developing new streams of business, MGAs must be willing to devote time and money to researching niche programs. Wholesale brokers must understand whether a program is short tailed or long tailed and present a flexible risk appetite that appeal to potential insurers. (Ref 3) Sophisticated statistical analysis and unique rating approaches are very attractive and illustrate responsible underwriting. Members of the AAMGA are required to meet stringent financial requirements and must uphold a notable code of ethics. Association with an elite organization such as AAMGA can speak volumes about the integrity of a broker, but the reputation of MGA is still crucial information when acquiring delegated binding authority. Staying current with local insurance laws and regulations will prevent protect any program administrators from regulatory violations, and providing current industry filing forms is an excellent way to demonstrate current knowledge of program specific endorsements and filing requirements. The future of delegated binding authority will have a profound impact on the future of MGAs in the United States. Direct insurers continue to search for access to foreign markets, and program business presents a unique opportunity to provide international 2010 White Papers 11

14 insurance with minimal expense increases. Excess and Surplus lines brokers who desire organizational expansion can gain a distinct advantage over their competition by improving on traditional business procedures. The utilization of technology can improve a program s profitability and simplify communication between MGAs and insurers. Obtaining delegated authority is a calculated business decision, but a professional relationship must be established to ensure the success of a program. Proactive collaboration from all participating parties, program administers and MGAs, will prove to be efficient and mutually beneficial. References 1) Leighton, N., Moore, C., Hoellwarth, L. (2006) Brokers Obligations and Due Diligence : Association of Lloyd s Brokers Quarterly Seminar 2) Guerin, J., Lagos, G, (2009) Through Due Diligence Limits Surprises, Unwanted Outcomes On Program Package: National Underwriter. P & C; 113, 7. 3) Stanley, E., (2008) Binding Authorities: Guide to Reinsurance Law Firms ) Montanaro, P., (2009) Guidance on various Binding Authority Clauses: Lloyd s Market Bulletin. Y4332 5) Hurricane Tracking (2005) Climate Appraisal Services LLC, Retrieved May 29, 2010, from 6) Warden v. Bank of Mingo, 176 W. Va (1986) 7) Lloyd s Coverholder Survey. Lloyd s Corporation London, UK 2010 White Papers 12