Target Markets: US program sector hit $53.8bn of premiums in 2020

US program premium volume grew by 32.8 percent to $53.8bn from 2018 to 2020 with momentum again set to pick up in 2021 after lower growth in premiums administered and a slight decline in renewal rates through the pandemic last year, according to the TMPAA’s latest biennial survey of the sector.

In its “State of Program Business Study 2021”, the Target Markets Program Administrators Association (TMPAA) partnered with Zywave-owned data and analysis firm Advisen to survey a total of 144 program administrators representing 1,041 programs and 51 insurers supporting 1,322 programs.

And its assessment of the size of the sector again demonstrated a faster growth rate in the program space than in the broader commercial insurance market, even as it was “battle-tested” by Covid-19.

The study noted that at 32.8 percent, the increase in premium volume in the US program sector between 2018 and 2020 was around 3.5 times the 9.33 percent increase in direct premiums earned for commercial lines over the period.

Since it began surveying the size of the market, the TMPAA has reported premium volumes that have risen by 207 percent from $17.5bn in 2010.

Pandemic headwinds

Although the growth trajectory of the sector has remained strong, outpacing the broader US commercial insurance industry, MGAs, MGUs and program administrators were not able to fully avoid the headwinds from Covid-19 last year.

The survey said that some administrators and program carriers reported losing customers due to the pandemic – albeit that for most (57 percent and 56 percent, respectively) retention levels remained steady.

It also reported that 39 percent of program administrators had to issue mid-term premium refunds in 2020.

In a year where many segments of the US commercial insurance industry saw accelerated hardening, it is little surprise that a greater percentage of program administrators reported increases for most lines of business in 2020 then the last survey two years previously.

In financial and political risk 100 percent of respondents among program administrators said that rates had increased, with 98 percent in auto, 94 percent in management liability, 92 percent in excess/umbrella, 90 percent in EPLI, 87 percent in medical malpractice and 86 percent in marine and aviation.

There was also an “overwhelming” majority of administrators that said they expect rates to continue increasing over the next two years, while 93 percent of carriers agreed.

Social inflation is set to be a driver of rate increases, with 57 percent of administrators and 54 percent of carriers reporting that the phenomenon is impacting rates either slightly or moderately. A third of administrators said they believe the increased frequency of big losses is impacting rates either a lot or a great deal, compared with 43 percent of carriers.

Positioned for further growth

And after the challenges of the pandemic, 83 percent of administrators polled in the survey said they plan to introduce new programs in the next two years in a sector positioned for further growth.

There was particularly strong interest in launching new programs in liability, as well as package, professional liability, property and management liability.

“All carriers surveyed anticipate increasing the amount of premium written in the next three years,” the report said, with 100 percent of carriers planning to expand by partnering with either existing or new administrators.

In commentary accompanying the survey findings, the TMPAA said that the program business had demonstrated its resilience and maintained its growth mindset.

“Despite reporting a slowdown in the growth of premium administered and a decline in renewal rates, program administrators remained optimistic,” it commented.

“’We remain bullish and optimistic on program business overall and are excited to get our production and revenue back on pre-2020 footing and growth moving forward,’ is a comment echoed by many administrator and carrier respondents in the commentary section,” the TMPAA report continued.

It said that administrators and carriers “powered through the pandemic” with an easy shift to a work-from-home set-up, as some even improved productivity.

“The global lockdown did not deter program business from delivering clients’ needs virtually. This performance is seen as one of the major reasons why customer retention levels remained steady amid the challenging environment,” said the report.

Another source of growth is likely to come from the cyber market, where the survey found that administrators are seeing a notable increase in take-up rates from insureds.

Future-proofing the sector

For all the bullishness of the survey – including an expectation of heightened activity as a result of the interest the program sector continues to attract from private equity investors – there was a recognition that participants must not be complacent and should continue to evolve.

The surge in activity in the insurtech space is leading to change in the program sector as administrators consider transitioning their distribution. But the survey noted a disconnect between views of program administrators and carriers on the usage of artificial intelligence.

A total of 53 percent of administrators reported that they do not use AI, but only 39 percent of carriers said that their PAs do not utilize AI.

Among the issues highlighted by respondents that need to be addressed to future-proof the sector were the pursuit of greater specialization, investing in technology and data analytics, strengthening partnerships, and tackling the challenge of an ageing workforce.

Fronting and Lloyd’s capacity

A key development of the last few years often reported on by this publication has been the rise of hybrid fronting carriers (20+ and counting) as well as shifts in the availability of capacity as appetite has changed from some traditional supporters of program business, including Lloyd’s.

In its survey, the TMPAA found that the percentage of program administrators using a Lloyd’s syndicate dropped from 58 percent to 45 percent between 2018 and 2020 – a period that coincided with significant underwriting actions in the market as the Corporation sought to turnaround performance.

But the survey found that administrators still choose to work with Lloyd’s syndicates because of “capacity, stability, financial soundness, longstanding relationships, and flexibility”.

Some administrators also highlighted growing use of fronting, participatory fronting or alternative capital markets for their program business.

“Respondents of this survey, however, were split in their views of the fronting approach. Those who use it either occasionally or frequently (31 percent) say fronting provides them more flexibility and allows them to use their dedicated reinsurance facility to assume risk.

“Some who rarely use fronting (31 percent) only utilize it as needed. The rest (30 percent) prefer the traditional markets,” the report said.