Interview: The long-term play

Program Manager talks to John Tatum, head of US programs at Axis, about the carrier’s strategy in a burgeoning sector that goes beyond the short-term churn of a transitioning market.

PM: How does Axis participate in the US program insurance sector?

JT: Axis is a major player in the program space and, as a company, we have a long-term commitment to US programs. Our focus is on underwriting industry group segments through a delegated business model and we work closely with our client PA and MGAs to avoid duplicating efforts. Our program clients provide the underwriting, systems and marketing functions to manage the program under a set of underwriting rules that capture a vast majority of the eligible risks. We have 50-state admitted and non-admitted capabilities, which allows us to make fast, educated decisions on potential opportunities. Our focus and commitment has provided longevity and quality in the relationships we have with our program partners.

PM: How would you characterize the current pricing environment in the program space?

JT: Pricing in the program space varies from class to class and from line to line, though, due to a range of macroeconomic factors such as the low interest rate environment and higher reinsurance costs across the board, there has been a general firming of rates. Overall, rates for small to mid-sized accounts tend to be less volatile than larger accounts or wholesale brokered business. 

Overall, the need for additional rate is being driven by increases in reinsurance costs, especially on catastrophe-driven business, record low return on investments and social inflation for liability lines. 

PM: What impact have you seen from Covid-19 in the marketplace and how will it affect market dynamics going forward?

JT: Covid-19 has impacted certain segments, such as hospitality, more than other industries. Nationwide economic recovery may not be as rapid as initially hoped, and it remains to be seen how many small businesses will regain their financial stability after the immediate crisis passes. However, despite macroeconomic uncertainties, we have seen a large degree of continuity for the majority of our program business. 

PM: What opportunities are you seeing in the current environment, both in new programs and “churn” as deals look for new capacity?

JT: Many carriers are biding their time and focusing on maintaining existing long-term relationships due to the macroeconomic uncertainty and organizational difficulties among some insureds. Overall, pricing has been inadequate for many years and recent catastrophic losses are proving that inadequacy. Our focus at Axis is on profitable, seasoned industry group programs rather than being a simple capacity provider.

However, the firming rating environment is also attracting new MGA start-ups into the market, without the burden of legacy operations and systems, able to home in on hardening rates. They will have to overcome the significant incumbency benefit that established providers have. As some capacity in the market has moved to other, rapidly hardening lines, we are seeing plenty of opportunity in the program space.

This trend is always first visible in the more volatile, open brokerage business, which experiences more significant pricing dislocation than delegated authority (DA) portfolios. DA rates tend to have smaller peaks and troughs and therefore, done well, have a stabilizing effect on your portfolio and the market cycle in general. Currently, more capital is being deployed to the open brokerage segment, but, given the general macroeconomic environment, I would not expect that influx to have a significant softening impact on rates.

PM: How do you evaluate which programs to support and what do you think are the key characteristics that make a program successful for a carrier?

JT: We have an extensive evaluation and due diligence process, which we established over many years. If a piece of business matches our financial and capabilities requirements, we make absolutely certain our interests and that of the program manager or MGA are completely aligned.

We are interested in long-term relationships with our client MGAs and PAs. There will always be a degree of churn with program books, but we set out to build lasting program partnerships. Uprooting distribution channels just isn’t worth the cost. With new partners, we look for ones with long-term, established track records.

PM: What are your main sources of distribution and how are they evolving? What are distribution partners looking for and what impact is consolidation in the MGA/PA space having?

JT: We are steadfastly dedicated to the program space and are happy to underwrite through the existing MGA/PA model. Distribution partners often have relevant expertise that adds value to the entire proposition. Most of the programs we underwrite have some sort of exclusive distribution that shelters the business and provides benefits and certainty to both parties. Our partners look for stability, ease of doing business and commitment to the program space. To have those features, it is becoming ever more critical to have the scale and capacity to guarantee a long-term outlook.

As a program underwriter, to secure market position you need to invest in systems and technology, but also people and product. That requires a certain critical mass. We are therefore expecting further consolidation in the MGA/PA space despite limited organic growth, particularly in light of the macroeconomic climate and the current pandemic.

PM: What role do you see insurtech playing in the space going forward, both as a means of improving efficiencies in the program sector’s existing offerings and in developing new products and distribution channels?

JT: Insurtech businesses are a significant development in the insurance market, but most of the insurtech products so far have been simpler products distributed in the retail and consumer space. In the program space, the main value of insurtech really is on the service side. Data scraping has become a very valuable tool for program carriers and administrators to automate the underwriting process. Most commercial lines still require a more traditional underwriting, decision-making and pricing process.