IN MANY ways, life is pretty good if you're a programadministrator–at least if you are an experienced administrator withproven programs. If you have an idea for a new program that'srelated to an existing one, you'll probably draw interest from anyprogram insurer you approach. In fact, the insurers very well mightcontact you first.

On the other hand, if you're trying to get into programbusiness, the going could be tough. Despite the softening market,insurers still are cautious and want to work primarily withunderwriters who already have successful track records. Evenestablished program administrators aren't finding it easy to sellinsurers on a startup program that lies outside their current areasof expertise.

To get an idea of what life is like in today's market, wecontacted several program administrators. They shared theirthoughts about the opportunities they see, as well as thechallenges and concerns they still face. Following are theircomments.

Arthur Seifert, CPCU, CIC, RPLU
U.S. Risk/The Lighthouse Companies
New programs are back in demand, according to Art Seifert–at leastthose aggregated from existing business. Seifert said that was oneof the messages he took away from April's midyear meeting of theTarget Markets Program Administrators Association, of which heserves as president.

Late last year, Seifert sold his program-administrationbusiness, The Lighthouse Companies, to U.S. Risk Insurance Group.(Lighthouse continues to do business under that name as a fullyowned subsidiary of U.S. Risk.) Since then, he said, he has beenbusy looking for program opportunities in his capacity as presidentof U.S. Risk's underwriting division. “For instance, betweenLighthouse and U.S. Risk, we write about $6.5 million to $7 millionof D&O business,” he said. “We write $100 million ofprofessional liability. There already are some programs in thosenumbers, but there are lots of opportunities to create new programsaround business that we already have on the books.”

Like most sectors of the insurance industry, theprogram-business market is being adversely affected by softeningrates, Seifert said. “It's class-of-business driven,” he said.“Nursing home rates are down 30% to 40%–and there's tons ofcompetition.”

Seifert said he also has seen a broadening of coverage. Forexample, the liability coverage for Lighthouse's skilled-nursingfacility program during the hard market was claim-sensitive,Seifert said. “Now we can get incident-sensitive coverage.”

In this softer market, “you look for what I call 'bolt-on'opportunities,” Seifert said, where program administrators canleverage their current expertise and resources by developingprograms that are “tangential” to existing ones. Such initiativescan enable program administrators to obtain more revenue withoutgreatly increasing cost. For instance, Lighthouse Underwriters,which has programs for skilled nursing facilities and assistedliving facilities, last year added a professional liability programfor individual health-care administrators. More recently it rolledout a professional liability program for individual medicaldirectors and announced programs for hospices, adult daycarefacilities, home health-care facilities and developmentallydisabled residential facilities.

Despite the softening market, Seifert said program insurers arenot relaxing their requirements for program proposals and continueto require voluminous data. “That's the one thing that I don'tthink is going to change,” he said. “The days of being able to geta program done because you have a good idea and can talk well aregone.”

Sometimes program administrators are unable to provide all thedata insurers would like to see, Seifert said. In such cases,however, it may at least be possible to reach an agreement withcarriers, he said.

“We were just involved in a large program opportunity thathasn't quite come to fruition,” Seifert said, “but we knew upfrontthat there were going to be gaps in our information, and we werejust frank about it.” Seifert suggested to the carrier that theactuaries for both sides jointly review the data. “By getting themtogether, we shortcut the process of having assumptions go back andforth between disputing actuaries,” he said. “Put then in a room,lock the door and tell them they can't come out until they come toa reasonable compromise.”

As the market continues to soften, Seifert said he expects tosee more consolidations like the one that brought The LighthouseCompanies to U.S. Risk. “You go into a soft market, and all of asudden you can go from having $100 million (in premium) to $60million, without really having changed your operations. Sostability gets to be an issue.” For buyers, he added, a soft marketis a good time to make acquisitions, because they don't have to paytop-of-the-market prices.

Seifert said he is in the market himself. For instance, he saida $5 million program serving the entertainment industry, offered inan asset sale, could be an attractive opportunity, since it couldbe added to an existing Lighthouse program. “I don't have to payfor expertise, because I already have it. I already have thesystems and underwriters in place. I'm picking up a new market andadding $5 million in premium to an existing program. My profitmargins are pretty good on those kinds of acquisitions.”

Seifert said a key to success for program administrators thisyear will be to run back-office operations as efficiently aspossible, which will require tight controls and wise use oftechnology. “How do you actually process the business, once youhave it in the door?” he asked. “It's going to be more and more ofan issue, because the margins are thinner.”

Glenn Clark, CPCU
Rockwood Programs
For Glenn Clark, president of Rockwood Programs, today'smarketplace offers program administrators opportunities to addvalue to their programs and differentiate themselves fromcompetitors. For example, Rockwood recently announced that it addedlegal expense coverage for wage and hour claims, subject to asublimit, to its EPLI program.

“We've launched a couple of new things this year, like theability to do a 10- to 15-person employee group (for EPLI) for$500, Clark said. “We also can add EPLI to a book of MGA businessnow. We call that 'Write Your Own.'”

Rockwood offers several EPLI programs, as well as a D&Oprogram for nonprofit organizations. It has other programsproviding E&O insurance to different groups, includinglife/health agents, P&C agents, and podiatrists. Rockwood alsomanages the Target Markets Program Administrators Association'sE&O Program with its partner, DarwinPro.

Broader coverage is not the only change in today's market. A fewyears ago, most insurers required program administrators to have“skin in the game,” by agreeing to absorb part of a program'slosses. Clark said he sees less of that in today's market.

“My personal observation is that insurers are looking to putpremium on the books, so that whole risk-share thing … is notpushed as much, though there are some carriers that still have thatproclivity,” he said. New carriers entering the program-businessmarket are not stressing it at all, he added.

Clark said program insurers also seem to be ceding less businessto reinsurers, betting they can boost their bottom line as aresult. “They are feeling more and more comfortable with lots ofsmall accounts with a maximum limit of $1 million,” he said.

In today's environment, some program administrators are placingadditional emphasis on marketing themselves to retail agents, butClark said Rockwood always has been marketing-oriented and is notparticularly doing anything different now.

“Our best customer is a previous customer,” Clark said. Afterwriting EPLI for an agent, he said, Rockwood might try to interestthe agent in the nonprofit D&O program. “And the next thing wesay is: 'Well, you're doing business with us now. How about lettingus look at your E&O?'”

Clark said he is concerned that in today's soft market the linemay be blurring between programs and less specialized insuranceproducts.

“There was a time when everyone called something a program,”Clark said, adding, “the opportunity for the same mistakes arethere again.”

“To have a program, you should be differentiated in riskmanagement service, policy form, delivery vehicle or price,” hesaid. “You've got to bring value to the marketplace.”

Mike Oliver
BISYS Specialty Programs
While insurance markets in general may be getting softer, programinsurers are not getting careless when it comes to pickingopportunities, according to Mike Oliver, senior vice president ofBISYS Specialty Programs.

“The companies that are doing well are very disciplined in theselection process,” he said, “I think that's going tocontinue.”

BISYS Specialty Programs operates roughly a dozen programs,Oliver said. For the most part, he said, the programs are in thetransportation, professional and workers compensation markets.

“While program insurers in the soft market are looking at abroad range of opportunities,” Oliver said, “they also are chargedby their companies and their stockholders, or whomever they reportto, to make sure that whatever they take on is exactly what'srepresented.”

Consequently, Oliver said, carriers are bringing more resourcesto bear on the evaluation of program opportunities. “For example,they're bringing in the IT staff, the actuaries, operationalpeople–just so they have an idea of the full scope of the programin all the functional areas.”

“While carriers may have a stronger appetite for programs today,they are looking for highly defined market segments in an effort toenhance product differentiation and avoid competing on price,”Oliver said. A simple package or workers compensation program wouldbe too “cookie cutter,” he explains. Carriers would rather workwith emerging associations or other specific risks, he said.

Like Art Seifert at U.S. Risk/Lighthouse Insurance Cos., Oliversaid BISYS Specialty Programs has had the greatest success workingwith carriers with which it already has relationships on programsnot too dissimilar from those it currently offers. For instance, hesaid, BISYS started a program for tow-truck operators in the pastyear with Universal Casualty Insurance Co., a Chicago-based carrierowned by Canadian insurer Kingsway Financial Services, with whichBISYS already had a relationship.

“So they were comfortable with our ability to do theadministrative work, and with our underwriting skill,” Oliver said.After BISYS brought in a person with prior experience in that nicheto operate the program, the carrier gave the green light, Oliversaid.

If a program administrator can't find a way to expand itscurrent program base into related products, its best bet for growthis probably to buy other programs, Oliver said. “We do have thebacking of our parent to look for things,” he added. “We're veryinterested, because that (an acquisition) brings you both newprograms and possibly new market relationships.”

Oliver said he hasn't seen carriers significantly reduce theminimum size of programs they'll consider. “It takes as much tostart up a $3 million program as it does a $10 million program, sowhy not take the $10 million?” he asked, adding that much depends,however, on program profitability and growth potential.

In the year ahead, Oliver said program administrators' chiefconcerns probably will center on softening rates. “Ourtransportation business is fairly stable, but there still is alittle pressure on rates there,” he said. “You get into some of themore Main Street things, it's tough.”

Rob Roberts
Casualty & Surety Inc. (CSI)
For CSI, a program administrator that specializes in mining,transportation and assisted living, the softer market means anopportunity to revive a previously shut-down program.

Rob Roberts, executive vice president, said CSI lost a carrierfor one of its programs in 2003 and was unable to find areplacement, which was not such an unusual occurrence backthen–even for profitable programs. To keep its business, CSIswitched gears and placed the accounts as a surplus-lines broker.Now, as insurers show renewed interest in program business, CSI isin negotiations with a carrier to restart its program, Robertssaid.

CSI's situation appears to be a variation on a theme sounded byother program administrators contacted for this special report. Fewprograms seem to be formed from scratch these days. Rather, the newprograms are aggregations of business for which the programadministrator has a track record.

“It's not like it was back in the late '90s, where if you had anidea, all of a sudden you had a program,” Roberts said. “They(insurers) still want to see the data. Even if it's olderdata”–like for CSI's suspended program.

“We had to update the proposal,” Roberts said, “and pull datafrom a couple years to make current-year loss runs available.”

If CSI succeeds in reviving its program, it expects to writeabout $10 million for it by the end of its first year, Robertssaid. He added, however, that carriers seem willing to entertainprograms as small as $3 million to $5 million, “as long as it'strue niche business.”

Roberts said insurers also are more open to coverageenhancements these days. “All four of our carrier partners arewilling to listen to our suggestions,” he said. “We talk to them atleast monthly.” A few years ago, a carrier added flood andearthquake exclusions to the contractors equipment coverage of oneof CSI's mining programs. Now, Roberts said, they can again offerflood and earthquake coverage. “Not on every account, but on moreand more,” he said, “especially on large-account renewals.”

Like many program administrators, Roberts said it has beendifficult to maintain rates in the softening market, although themining programs have been fairly stable. “It's hard to get anincrease, but we certainly aren't offering many decreases,” hesaid. “In the transportation sector, though, we are seeing anywherefrom 10% to 15% rate decreases on profitable accounts.”

Looking ahead, Roberts said his chief concern was that theindustry might see a repeat of 1999-2000, “where anybody andeverybody who wanted a program could get a program, and that reallydrove the rates down.” Back then, there were even“commodity-driven” programs, Robert said, meaning that one couldhave a program “to write casualty business, which could be anythingfrom a manufacturer to an office building, rather than specializedprograms.”

Michael J. Hill, CPCU, CIC
Freberg Environmental
Michael Hill, president of Freberg Environmental, said whileprogram insurers are more open to business than they were a coupleof years ago, they're still acting prudently. Freberg Environmentaloperates four pollution-oriented programs. Recently, it started anadd-on program that provides excess liability insurance for anexisting truckers environmental program.

“As we went out to the market, we got a pretty good reception,”Hill said. He added that he wound up securing a new market, GothamInsurance Co., for the program.

Today, insurers are giving much more actuarial scrutiny than inthe past to proposed programs, Hill said, and more frequentlyauditing the underwriting of those programs they accept. The lastdecade witnessed a number of high-profile liquidations of programinsurers, Hill said, which is prompting today's program insurers tooperate conservatively, to satisfy rating services like A.M. Bestand to reassure their stockholders.

“When carriers give out the pen, that's a pretty big step,” Hillsaid, and during the last soft market, “a lot of them didn't havethe proper oversight and the ability to audit and manage theprogram managers.” As a result, he said, several programs tankedand program business got a bad reputation.

While some programs' coverage has broadened in today's softeningmarketplace, Hill said that hasn't been the case in theenvironmental niche. He said insurers have expressed concern aboutsoftening rates, however, particularly in casualty lines. “Thecarriers are very interested in seeing us hold those rates as muchas we can,” he said.

With rates softening, technology becomes an important factor inprogram profitability. There's no uniformity, however, in howinsurers and program managers divide up the associated costs, Hillsaid. For one market, he said, Freberg had to agree to acquire anew system that would be compatible with the carrier's. On theother hand, another carrier pretty much furnished Freberg witheverything it needed to do business with it, he said.

Technology “is something you have to consider when you'relooking to start a relationship with a carrier,” Hill said,“because some of these investments can be pretty healthy.”

Like other program administrators contacted for this specialreport, Hill said start-up programs are not much easier to launchnow than they were in the hard market.

“So much of what (insurers) do anymore is actuarially driven,”Hill said. “So, if you're not able to produce premium and loss datathat is credible to them, it makes it really difficult to start aprogram–and start-ups, of course, don't come with a lot ofdata.”

Riley Binford
Tangram Program Managers
Not long ago, program administrators practically had to beg to geta carrier to consider a proposal. But Riley Binford, senior vicepresident of Tangram Program Managers, in Peta-luma, Calif., saidthings are different now.

“For the first time in a long time, we're starting to seecarriers approach us on doing a program for them,” he said. “We'retalking to a carrier right now about an auto liability program fornonprofits. They knew of us because of our (predominantlyCalifornia) workers comp program for nonprofits, and they knew wehad a dis- tribution network of brokers who bring us nonprofitbusiness.” Thus the carrier saw that offering its auto liabilityproduct would be a natural fit with what Tangram already wasdoing.

Similarly, a London syndicate has proposed working with Tangramon a truckers physical damage and motor truck cargo program,Binford said. “That wasn't happening just two or three yearsago.”

Like other program administrators contacted for this article,Binford said carriers are mainly interested in working with programadministrators on programs related to their existing ones and thatstarting something “from scratch” remains difficult.

All told, Tangram has about 10 programs currently operating orin the works. They include a real-estate E&O and a lawyersprofessional liability program with London syndicates, acontractors program and a property owners package geared to moredifficult risks, like buildings housing both apartments and retailestablishments.

Binford said volume requirements seem to be dropping in today'smarket. He said $5 million used to be “the magical figure,”although some carriers required as much as $20 million. “That $5million is coming down into the $3 million range,” he said, “andsome carriers are willing to go out there with a $1 millioncommitment.”

Binford said he has yet to see carriers greatly expand coverage,but many seem willing to consider risks they formerly would reject.For example, he said, the syndicate working with Tangram on thereal estate E&O program now will entertain start-ups.

Binford said all of Tangram's programs, with the exception ofthe one for property owners, are facing softening marketconditions, but nothing severe–except for one.

“Our workers comp program is predominantly in California, andwe're seeing a huge–on average, 30%–drop in rates,” he said. Everyday it seems to be getting a bit more competitive.”

To a degree, the rates have dropped because of workers compreform legislation passed in the Golden State, but additionalcapacity brought in by new players is an even bigger factor, saidBinford, who calls the California workers comp market “supersoft.”

Overall, however, Binford said Tangram sees great opportunity inexpanding product lines around existing programs and in enteringnew territories, including the Midwest. As a result, it hasincreased direct-mail solicitations and other forms of marketing toboth wholesale and retail producers.

“Traditionally our programs have been closed to a fairly tightnetwork of retail brokers,” he said. “But in the past eight months,we've decided to really open that up.”