AA&B: I understand you got the idea for starting your business from one of your consulting assignments. Could you elaborate?

Seifert: I was hired by the International Communications Industry Association to review a dividend-paying CGL program they had. I discovered there were some coverage gaps in their program, so they hired me to interview some of their members to determine where the program was weak. After doing so, I drafted a new inland marine form that would pick up the missing exposures. When I brought it to the board, they said, "Why don't you do the program for us?" At the time, I had a consulting company with three employees, so I had to write a business plan to start a program management company for that first program.

AA&B: Today you have six programs?

Seifert: Yes, we just launched a couple of new ones this year.

AA&B: Are these state or national or regional in scope?

Seifert: All our programs are national, and all were started from scratch.

AA&B: Do you operate strictly as a program administrator?

Seifert: Yes, although we have one small exception to our wholesale approach to business. In Washington, D.C., which is home to numerous associations, we write nonprofit D&O on a retail basis. This probably accounts for less than 5% of our total book. Everything else we do is wholesale.

AA&B: What risks are best suited for programs?

Seifert: We look for dislocations in the marketplace, instances in which the insurance industry doesn't seem to fully understand an industry group. For instance, we wrote the first CGL-professional liability combined form for the staffing industry. We saw that if a firm offered both permanent and temporary staffing services and it wanted general liability, professional liability and fidelity insurance, it needed six policies and had to complete six applications. We thought that was ridiculous, so we combined them all into one form.

For an insurance agents E&O program we recently launched, we saw a great deal of dislocation in that marketplace. Nobody was making a market for large, regional agencies with $3 million to $15 million in annual revenue. We've partnered with Gold Seal, a company that has 98% of the market for independent agents in Australia, where they are domiciled. Together, we created a product that combines insurance plus a "best practices" risk management product provided by Gold Seal. To get into the program, an agency must buy the carrier's risk-management product and undergo a risk-management assessment. In every program we write, there is a risk-management component.

AA&B: What in-house resources did you need before you realistically could entertain the idea of becoming a program administrator?

Seifert: You really need some connections to an industry group and connections within the insurance industry, because it can be tough to find markets. You need to be able to put together a really good story backed by whatever data you can get your hands on.

AA&B: What sort of preliminary research do you conduct when determining the feasibility of a program for a certain niche?

Seifert: The Internet has made the job much easier. We're planning to launch a couple of new programs in 2005, and we've been able to do a lot of the research online. We recently launched a professional liability product for health-care administrators. It came about as a result of an e-mail blast we conducted to about 8,000 trade associations in Washington, D.C. Essentially, we asked whether their members were going bare and needed a product. The president of the American College of Health Care Administrators responded, "We've been trying to get this done for years." We interviewed her and 10 or 15 members of the organization to get a feel for what their issues were. Then we talked to some insurers and started putting together the forms for the program. After we prepared a draft policy, we met with the association and some of its key members, obtained their input, developed a final draft and had everybody sign off on it. Then we launched the product.

AA&B: What elements go into creating a good proposal to present to a potential insurer?

Seifert: Ideally you'd like to have five years of loss data. It's a good idea to hire an actuary to develop the loss data before it goes to the company, so it's in a language it understands. That also demonstrates to the carrier that you understand the nature of the risk you want it to cover.

You also need to prepare underwriting guidelines that address the exposures and the industry itself. Is it growing? Is it dying? What are the key exposures? Where do you typically see losses? How are you going to use risk management to mitigate losses? In regard to your in-house capabilities, do you have a compliance department? Do you have a marketing department? Do you have someone who really understands program-business finances?

Then you want to talk about your connection to the industry. Do you have a national trade association's endorsement? Are you a retail agent who has developed a $5 million book of this business and now wants to take it national? What is your broker base? For instance, in our case we have about 2,200 agents under contract. You also should attach a copy of your brokerage agreement. You'll need to talk about distribution. Do you already work with agents who understand the class of business you're moving into?

You need to provide some data concerning the size of the class of business. And I always include a section on estimates, showing how we think the program will play out. We break it down into the number of anticipated submissions, hit ratios, average account size, annualized premium, renewal retention, etc. Our aim is to plot out three to five years of production for an insurer, so it gets a feel for the program's potential.

AA&B: Do insurers require evidence to back up the projections?

Seifert: They want to see your arithmetic. In our case, we also show them that we average 15 submissions a day for all our programs. We can show them our historical data. The other key persuader is a marketing plan. They want to see how you intend to generate those submissions. Are you going to use e-mail blasts? Direct mail? Call centers? Association trade shows?

AA&B: Do you need to provide information about proposed policy forms, endorsements, etc.?

Seifert: Yes. And anything you can do in terms of customization, especially if you're going to go after a middle-market niche, is important. That's going to require filings with state insurance departments, however, so insurers are going to want to know about this upfront.

AA&B:

Seifert: Every program we write has a proprietary aspect, a proprietary form. I'd emphasize to anyone thinking of getting into program business that unless you have some sort of proprietary market or proprietary form, it's going to be tough. Retail agents and brokers will go where they believe they can get something to benefit their clients. If they can access it directly, why would they bother to go through you? We had a $50 million book of business with one carrier that decided to no longer protect its wholesalers and allowed retail agents to access them directly. That had a huge impact on us and sent us looking for another way to address that marketplace, with markets that would give us a proprietary form or an exclusive. Unless you have exclusivity, either through the form itself or in terms of access, you're going to have trouble.

AA&B: Are rates part of your projection?

Seifert: Yes. They're included in the underwriting guidelines. We usually come up with a range of rates that we will use for a particular class of business and then adjust those based on individual risk characteristics.

AA&B: How long does it typically take to create a program, from the time you come up with an idea to the time you can start taking submissions?

Seifert: A couple of years. It's a long process.

AA&B: Why so long?

Seifert: Part of the problem is that in the last few years, companies like Reliance and Kemper pulled out of the market. The business they had written flowed to anybody that was still open for program business. So essentially you were trying to compete against existing books of business that needed to find a home quickly. There just wasn't any capacity on the company side to look at new deals. Market conditions aside, it takes about six to eight months to gather data and prepare proposals-even before you approach the insurers. Each carrier you contact digests the data and comes back to you with questions. You go back and forth for four or five months. If the carriers need to file forms with state insurance departments, it could be another year before everything is approved in all the states. Also, companies are more cautious these days; they don't want to make a big mistake because they've seen what can happen if they do.

AA&B: Do you write your programs exclusively with admitted carriers, or do you also use non-admitted paper?

Seifert: All but one of our programs is on admitted paper.

AA&B: What are the advantages and disadvantages of both approaches? Is there a particular reason you tend to go with admitted paper?

Seifert: Basically because it's easier for retail agents to sell. Admitted products also tend to be more stable. The disadvantage is that when you get into a hard market like the one we've been in, using admitted paper makes it harder for a carrier to adjust pricing as much as it might like. It also can take a long time to get regulators in the various states to approve any customized admitted forms.

AA&B: In your typical program, who is responsible for what? Obviously marketing is your responsibility as well as underwriting, right?

Seifert: In some cases, we do full underwriting. In other cases, we do more of the field underwriting. It varies by program.

We have two full-time people working in marketing, including an in-house graphic artist. They prepare the marketing material we use to launch a program or keep its momentum going. As applications are generated, they are handled by a support team that's cross-trained on our various programs. They prepare the submissions and send them to the appropriate program director. (Everything that comes into our office is digitized so we're not spreading paper around.) Each program has a director who is the key point person between the market and the retail broker. He or she is supported by a new-business underwriter, a renewal underwriter and usually a couple of service people. They do the initial quoting, booking and binding. In some cases we issue policies too.

AA&B: Who arranges reinsurance for your programs?

Seifert: For most of our programs, the insurance companies do not buy reinsurance specifically for them. For one program in which we've taken risk under a captive arrangement, reinsurance is arranged by Norwich Group, which is sort of a facilitator for program management companies.

AA&B: Who handles claims?

Seifert: Usually the carrier.

AA&B: For programs that you underwrite, what sort of oversight do insurers provide?

Seifert: Usually quarterly audits. They'll send a couple of people in. They have specific instructions concerning how the files should be constructed. They spend a day looking at 10 to 15 files. The next day we all review their findings. We've received an "A" or better on every audit we've had.

AA&B: When you create a program, I take it you wind up with a contract between you and the insurer in which everything is nailed down.

Seifert: That's usually the case.

AA&B: What sorts of things are spelled out in the contract?

Seifert: Program management agreements are usually lengthy documents. Among the key issues they address are ownership (we own the program in every case) and performance standards. For instance, we might be required to issue policies within 30 days. If you are taking risk in a program, the agreement will spell out the parameters. There should be something about how much notice you are required to give the carrier if you want to move the program-and how much the carrier should give you if it no longer wants to be in that class of business. We'd want at least six months. The agreement will spell out compensation arrangements. If the administrator takes on risk via a rent-a-captive or other means, the agreement will spell out how much collateral the administrator must post, the form it can take, and the date on which it's due.

AA&B: How often do you assume risk in your programs?

Seifert: We take risk in probably 30% of our total book of business. Ideally, if you can avoid taking risk and still build some form of profit sharing into your contract, that's the best. But for certain classes of business, that's just not going to be an option. If you believe in your underwriting and you want an opportunity to profit from it, then you're going to have to take some risk.

AA&B: Does that always take the form of participating in a captive or rent-a-captive?

Seifert: Many companies also will offer some sort of sliding scale arrangement, in which the program administrator receives additional commission if losses are lower than expected-but may have to share in the losses if they are higher.

AA&B: In regard to marketing, do you prefer to work with associations?

Seifert: Yes. That was essential when we started the company, because we didn't have a track record. As you grow a company and develop a national brand, it becomes less important to have an association's endorsement, but that's been our business model all along, so we stick with it. We haven't abandoned any of our associations after our programs reached a certain size and their endorsements no longer were crucial. We've just done the right thing and have continued to include them.

AA&B: What does it take to get an association's endorsement?

Seifert: We try to lower expectations. We tell associations that a program isn't about non-dues income for them, but rather about creating a better product for their members, which is going to have a positive effect on the industry the association represents. In addition, we point out that we'll support the association through the payment of a royalty fee if we use its logo. We'll also speak at their meetings and provide information for their publications. I write probably 10 articles a year for association magazines, addressing risk-management issues for specific industry groups. We try to be good citizens for associations. I sit on the boards of several of them.

AA&B: For how long is an endorsement granted?

Seifert: . We usually sign a three-year agreement, renewable as long as everyone involved wants to renew it. We have several that have been in place for nine years.

AA&B: Do you have to offer coverage to all comers?

Seifert: Everybody is eligible to submit an application for review, but not everybody qualifies.

AA&B: Do you typically shoot for some degree of penetration within an association?

Seifert: We look for a degree of penetration within an industry class itself. To get into any of our programs, you don't have to be a member of its association. That would limit it too much. But if we write an account and determine that it's not a member of the association, we'll notify it so its membership committee can contact the insured.

AA&B: As the market softens, what is the outlook for program business?

Seifert: I think it will be a little easier to get deals done. A lot of companies are slightly behind in their new-business forecasting, so there's capacity out there that we haven't seen in the past. When there was capacity 10 years ago, you could get things done with a good story and a limited amount of information. Today you need a good story and a lot of data, because the carriers that are still in the program-business market are data-driven. If you can't come up with the data, you're not going to get too far.

I tried to launch a couple of programs in the middle of the hard market and just got nowhere, so we decided to grow market share in our existing programs. But we got two deals done in 2004. The main thing now is that carriers will listen to why you want to create a new program. In the past, it was tough even to get an audience.

AA&B: I've heard that some reinsurers are once again interested in "reverse-flow" business, where they essentially bypass the insurers and work directly with the program administrators. Have you seen this?

Seifert: It wouldn't surprise me, but I haven't seen it.