Chris O’Gwen Discusses Fairco and Conditions in the Program Market

In this podcast Chris O’Gwen, Fairco’s President, discusses conditions in the program market, as well as Fairco’s current priorities and future plans.

Can’t listen now? Read the edited transcript

In the past, the MGA business has been pro-cyclical (grows in soft markets, gets cut in hard markets when you don’t need distribution as much). Is that still true?

I think that is fair historically. Companies have used program business to grow during the soft markets. Programs let carriers write a large block of premium through a single partnership. But fast growth increases the risk of poor performance and the cycle progresses from soft to ‘transitioning’, when carriers review and cut their underperforming business. However, if an organization is focused on profitable underwriting, then it shouldn’t matter whether the business originates from a program or from their own underwriters, and they should not need to make drastic changes of direction.

The relative power shifts during the market cycle – instead of distribution having multiple markets, now the risk carriers have their choice of distributors. They might also go direct, although it is unusual to generate channel conflict when a program is performing well, especially in a world driven largely by growth rate.

Transitioning markets are also a time to acquire programs?

Carriers start as paper for the MGA, but then say ‘we like the distribution (you) and we don’t have our own team. It’s a small line of business, with few other options. Let us buy you out.’ Carriers often acquire program administrators. We’ve done that several times at Fairco with our long term partners, for different reasons (business continuity, exit for the founders, technology etc.). Carriers want to keep good business.

Are we in a new world of acquisitions for programs?

Right now a lot of carriers are looking at the InsureTech space to acquire business and technology. These things are deal to deal. What’s the business? What’s the technology? What are the relationships?

The acquisition space has changed over time because valuations have changed materially. We’ve seen valuations escalate to the point where they are probably at or near their peak (and may come down due to current economic conditions). This is not dissimilar to the retail agency world, which has seen a lot of consolidation over the last 10-15 years as well.

Consolidation/M&A is always there. The biggest carriers now control a bigger market share than they did 30 or 40 years ago. Consolidation and scaling up has been going on for a really long time. We all think it will have to slow down, but then new capital flows into the market.

A lot of the new capital being raised has not been deployed yet, but I expect a lot to fuel further acquisitions.

What is Fairco’s strategy in this environment?

Fairco has evolved over the past 7-8 years. We continue to focus on specialty business. Half the business is underwritten by our partners, half by our own underwriters. We look for opportunities with some special distribution, underwriting approach or product element. It’s hard to say we’re looking for a specific thing, but we know it when we see it and it usually involves a space that is not already overcrowded, where we can deliver healthy returns.

Collectively, the programs have to reach critical mass to make economic sense. Individually they may be niche but each has significant underwriting opportunity, either premium or profit or both. There are huge opportunities to reach large scale with unique products, and that’s what we target. It takes time for those businesses to grow but we’re not being driven to be a specific size. That allows us to get involved with programs that may start small – although most of our programs already have a reasonable scale from the start, or quickly afterwards

What are Fairco’s metrics of success?

Reinsurers tend to look at portfolio underwriting metrics (Loss Ratio and Loss Ratio projections etc.) but other things can cause programs to fail. For instance the operational issues the insurance world has to deal with that the reinsurance world doesn’t and the licenses and filings and compliance in general. We spend a lot of time managing our operations and our partner’s operations to stay on top of these things. That allows the underwriters to focus on the underwriting.

Also, the pace of play in insurance is very different. There is no seasonality – it is all day, every day, all year. Most insurance is bought when somebody buys something (a car, a business or whatever) and those transactions happen all the time. At least insurers get a break at Christmas though.

What is the real success factor for a program administrators?

It’s the spark, or the drive to produce. If you had to choose between a producer and a process perfectionist, then support the producer with the controls. Distribution is key, particularly for startups. A lot of people underestimate what it takes to start up a program administrator. There is a sense an MGA can be formed in a few weeks, and be writing millions of dollars shortly afterwards. That’s just not true. You must be operationally sound and have a solid distribution plan. Operational solidity is an essential prerequisite, but if we’re going to invest time and energy in a project, we must see an ability to access distribution.

In many ways, that’s the same discussion we have with our own underwriters. Whether an underwriter or a program manager, it’s the relationships they bring to the table. Then the next question is: ‘how do you scale that?’ You can add more people. That’s very common in our industry. With new products, there is also the education element, ensuring that your distribution partners have the ability to convey the right message to the right audience. That’s a process too, that can take time.

As an example, we’re in the parametric wind and earthquake business. Parametric products provide coverage that hasn’t really been offered until recently. Educating producers has been a multi-year effort, undertaken by our partner. Now we’re reaching the point where distribution understands the product and now it is being bought. As an industry, we must continue to create and deliver products that meet the needs of customers. That could be something that’s totally new or something that’s existed which needs to be reshaped to become better.

Is there anything new under the sun?

Very, very few things are totally new. Our industry has always been good at modifying existing products but we are starting to see new products happen as society evolves. It may take time for those to materialize into financially viable solutions. Hopefully it won’t take as long as to build relationships, and will be products people need to buy.

Talk about your experience. How long did it take you to build your first book?

Relationships take a long time to build, particularly in a specialty sector. Converting those into business usually goes a little bit faster than actually building the relationship. If the relationship has been built, is solid and is built on mutual respect then the business will naturally come. In my experience, we’ve built several different subclasses of business within different areas. The time taken depends on many factors. If there’s a market need it can be very quick. Sometimes it can take a year or too before it has the scale where you’re comfortable with running it as an individual block of business.

I remember the relationship that led to my first block of business. It was handed down to me as a young underwriter, so it was a brand new relationship, but an existing block of business. It had huge growth potential. It took a solid year of relationship building, learning the business before we were ready to accelerate the book.

Most new technology is focused on standard lines. Are specialty lines different?

The specialty lines do have more relationship-oriented partnerships, with people who control niche books. Those relationships will always matter, but how you segment your business is always an interesting debate. If you ask 100 people to define ‘specialty’ you will get 100 different answers. For me, specialty business tends to be oriented around distribution, product or industry sector. Because of that, you have the ability to customize your product and your distribution, which allows you to target how you approach a particular product or how you approach the distribution of that product. With more mainstream products, you’re casting a very large net.

Specialty business presents very different operational challenges. Your distribution is unique, your product is unique, and you are serving a specialist sector. You can be much more focused in how you approach that business from distribution to underwriting, to the product offering, that ultimately delivers the best possible product at the most appropriate price for the end buyer.

What do you spend most of your time focused on when you launch a new program?

In reality there’s a hundred things that you have to get right, but I think it comes down to your underwriting. That really means risk selection and pricing. Then its your distribution management – do you have the right partners and brokers? Do you have the right product, with all the features a customer needs? If you get those three broad things right, you’re primed for success. But that’s easier said than done. Our daily challenge is to manage each of the dozen things under those three headings. If those three are generally going in the right direction, you’re more often going to be successful than not.

Focus involves prioritization. How do you prioritize between the three elements?

You have to hold all three things in your head all the time. You’re thinking about those things constantly in a successful insurance business. It comes down to having the right team in place. Then your operation piece is wired. That allows you more time to focus on underwriting – that you product and its pricing are right. Then you manage your distribution. It’s not easy, but it is doable, and many organizations get it right. Thing that’s done easily.

Last question. Why should someone partner with Fairco? What’s your identity?

Fairco’s biggest strength is it’s A+ balance sheet. TransRe is in business for the long term. We actively seek to avoid channel conflict with our partners, which is a big issue in the industry today. We’re focused on specialty types of businesses and we are very open minded to new products that meet new market needs. We bring a strong balance sheet and underwriting nimbleness to the table, and we find partners value both. We continue to seek (and find) great new partners and great new businesses, so hopefully we will continue to grow profitably.

As an insurer owned by a reinsurer, we seek businesses that don’t compete with TransRe customers. That means new products those customers may not be offering, or lines where they don’t buy reinsurance anymore. The vast majority of reinsurers are also in the insurance space today, and some have been for a long time. It’s a big market, and everyone can co-exist.

My guest today is Chris O’Gwen. Chris, thank you very much for joining me.


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