Indeed, Delos is going to target programs with $20 million in annual premiums and higher–a figure that is much larger than is typical for other participants in the program market. According to Mr. Steiner, Delos will also break stride from Sirius and others by accepting workers' compensation programs and declining single-state programs.

But even as other market participants move toward programs with annual premiums more typically in the $10-to-$15 million range, growth is anticipated throughout the market, according to a Guy Carpenter survey released in September.

Sixty-five percent of issuing carriers responding to the reinsurance broker's second annual survey expect the program market to grow in 2006. Only 38 percent anticipated growth a year earlier.

Carl Bach, leader of the Program Manager Solutions Specialty practice of New York-based Guy Carpenter, said, “We have seen companies beginning to drop their thresholds in gross volume minimums,” adding that the result probably goes hand-in-hand with another finding–that carriers now prefer regional to national programs. (See “Getting To Yes,” for details.)

He said the most popular minimum premium requirement is $10 million. “You can get a $5 [million deal] done, [but] those that were requiring $20, $25, $30 million a year ago, I think have become more realistic.”

Highlighting other significant changes in the survey results, he noted that when asked about their biggest challenge, last year respondents said it was “maintaining rate level,” while this year they cited “new business production.”

He also said he noticed a “kind of a flexibility developing in certain areas of practice–more openness in using third-party administrators, a more flexible attitude toward using MGA systems,” as opposed to requiring use of the carrier's own system.

“We have seen a number of companies that had admitted paper now looking for nonadmitted,” he said. Some “still believe there is some strength in rate in certain classes–maybe even redundancy,” he added, explaining that “to take advantage of this and not have to wait to…file programs, they can do them on nonadmitted paper.”

He said professional liability, commercial umbrella and environmental are among areas where rates are seen as strong.

Mr. Bach said “getting to the market size is like throwing darts.” While Guy Carpenter's report says 65 percent responded that the market segment is between $20- and $40 billion, “that's a big range,” he noted, adding that within the range, the segments $20-to-25 billion, $25-to-30 billion, and $30-to-40 billion each garnered about 22 percent of the respondents.

The wide range reveals varying definitions of programs, he said, with some including business written by wholesalers that have binding authority, and others limiting the definition to the business of full program administrators.

Putting his own guess at $25-to-$30 billion, Mr. Bach said that more than 50 carriers took part in the survey. New carriers in the market include Rockhill, XL E&S, Wellington and Aspen, which write more wholesaler binding authority business, while Delos and Praetorian Financial are the newest entrants among companies giving out full underwriting authority, he noted.

Both Delos and Praetorian are “the reconstitution of other firms,” he said, referring to Sirius America for Delos and Clarendon for Praetorian. (For more on Praetorian, see NU, June 5, 2006, page 14.

At Delos, Mr. Steiner, who was formerly the CEO of Clarendon, still adheres to a model he put in place there–one of doing MGA program business exclusively, and outsourcing underwriting, policy issuance and claims handling functions to MGAs.

After finding investors to back the concept, Mr. Steiner said the investors suggested buying an existing company. That company, Sirius America, “didn't make any mistakes, but didn't do much of anything.”

He said that restructuring is now in progress. Among significant changes, he said, is the creation of an information technology department. “They were still working accounts by hand. That's fine when you have nine programs, but not when you're thinking about 20 or 30,” he said.

“We reorganized the underwriting,” he said, noting that with what he terms an outsourcing model, the insurer does not underwrite policies. “We are underwriting MGA businesses,” he said. Beyond profitability and policy wordings, Delos follows in-depth procedures to analyze the MGA's operations, including IT and legal structure. “Every department head has to sign off before we say yes to an MGA.”

So far, Delos has publicly announced one program management agreement with FirstComp Underwriters Group in Omaha–a $75 million multistate program of workers' comp risks for small and midsized businesses in rural and suburban areas.

“There aren't any types” or lines that Delos is looking to write, he said. “We are looking for professional MGAs that know what they're doing,” and whose IT systems can communicate with that of Delos.

Another newcomer of sorts to the program business market is CastlePoint Management, an operating company for CastlePoint Holdings, a Bermuda-based holding company sponsored by TowerGroup, a New York-based insurer.

Mark Dale, the president of CastlePoint Management, and secretary Rick Weidman said that Tower Insurance Company is a standard lines regional firm that has also written what it terms “traditional programs.”

Mr. Dale (who ran the program division of Great American for six years before joining CastlePoint) and Mr. Weidman (who was an executive at Clarendon for more than seven years), say they plan to continue writing that business–and to expand into “specialty program” classes.

Included in Tower's traditional programs, Mr. Dale said, are grocery stores, restaurants, bars and taverns–”traditional types of risks that it doesn't take a real specialty filing, specialty endorsements or specialty pricing to do.” While the business can be placed through MGAs that have niches in those areas, “they tend to be traditional in their scope.”

In contrast, specialty programs involve coverages that most regional retail companies avoid, he said, giving the example of participant legal liability coverage for youth sports events–Pop Warner Football and CYO Baseball.

As for CastlePoint's business to date, he said, “We're in a unique position because we're participating as a reinsurer on a lot of Tower's traditional programs, and [over time] we will take over management of those. So we get the luxury of getting into the business with a seasoned book that has predictable results,” he noted, adding that two new specialty deals have been done out of a “long laundry list” waiting to be considered.

Mr. Weidman said CastlePoint essentially is looking for entities that have “really recognized expertise within a certain segment,” noting that they could be retail operations or MGAs. Mr. Dale added that the company has a bias against very long-tailed lines such as professional liability, favoring general liability, property, inland marine, workers' comp, auto and umbrella.

The company also requires five years of hard-copy loss runs, and the bare minimum premium is $10 million, Mr. Dale said–citing a preference for $15 million and above.

“When we drop down to $10 million, our participation is largely a function of…how much potential growth we see for the MGA,” Mr. Weidman said. “What are their plans, and how can we get to $15 million in a way that's methodical and profitable?”

Beyond providing Tower paper, (which will switch to CastlePoint Insurance Company paper once the holding company acquires a shell), the executives said CastlePoint is ready to make strategic investments in individuals with program ideas that want to form MGAs.

If someone “came to us with a lot of experience and a whole book of business [and] we believed it was a sound strategy” to evolve into an MGA, “we would basically become a partner,” Mr. Dale said. CastlePoint, he added, would help from “top to bottom”–to develop the “template to build that MGA from an underwriting, a claims, or a management standpoint.”

“We like to define that as unbundling our organization,” Mr. Weidman said, noting the management company can also provide capabilities with respect to systems–”whatever we feel and they feel together that they need to move them to the next level, as long as they've got a focus and an expertise within a segment.”

Contrasting CastlePoint, American International Group's Lexington Insurance Company–with over 100 programs–is one of the oldest names in the program world.

A broad appetite that even encompasses start-ups sets Lexington apart from competitors, said David Jordan, senior vice president of the Boston-based company.

He said AIG has been involved in program business since the 1960s, and media reports putting Lexington's program premiums between $1 billion and $1.7 billion are accurate, declining to give a more precise figure.

“We have one dating back to 1963, which we believe [is] the longest-running insurer-program administrator relationship,” he said, referring to a relationship with Willis Programs to underwrite U.S. and Canadian ski resorts (known as the MoutainGuard program).

“Seven programs have been with us for more than a quarter of a century,” he noted.

“If we've responded with appropriate coverage and service, including claims and risk management, that sets the stage for a long-tenured relationship….And if they're doing their jobs–exercising underwriting authority and providing high-quality services to retail brokers–then you've got a solid foundation that stands the test of time.”

Mr. Jordan said programs include those in sports/recreation, professional liability, construction, social services, high-valued homes and commercial auto. Among the more unique is a firearms industry program that includes gun retailers, wholesalers, distributors, clubs, shooting ranges, instructor liability and a collector program.

“We really don't have minimum premium requirements,” Mr. Jordan said. “We will look at smaller opportunities where the broker has a good idea but needs help developing it into a true program opportunity.”

In addition to programs it writes through program administrator relationships, Lexington also deals directly with retail brokers. “We want to make sure we access the market from as many distribution channels as possible, [and] there are certain segments that lend themselves to a more direct approach,” he said–explaining that AI Risk Specialists, an affiliate, functions as the underwriting manager to market and underwrite middle-market programs.

Noting that audits are a critical part of Lexington's approach to broker-administered programs–with well over 200 conducted this year–they are “intended to be educational, not punitive,” he stressed.

High on Mr. Jordan's list of activities to educate administrators about is quality customer service. “In our contracts, we mandate that all policies be issued in 30 days, and we monitor and test that. And we help review operations to make sure they're maximizing staff productivity, appropriately using technology to support the issuance process, and they stay on top of it–that it's not something they get right this month and lags next month.”

“AIG is an organization that believes in customer service,” he said. “In our view, the program administrators, even though they're independent businesses, are an extension of the AIG companies.”

At Glencoe, the program business arm of Bermuda-based RenaissanceRe, extending resources to program managers has taken on seemingly deeper meaning.

“We actually have one of our employees on site for every single casualty program we do,” said Bill Ashley, president and CEO of Glencoe Group Holdings Ltd. “We're basically funding a resource inside of each one of these programs to be our chief operating officer of that program.” Glencoe employees are there “to understand the market, make on-the-spot decisions about referrals, and help with day-to-day operational issues of running the business,” he noted.

Glencoe also “surrounds each program manager” with resources in a variety of areas provided by a staff of 65 people devoted to the segment in its Dallas office. Giving one example, he said that a very experienced human resources director for Glencoe is available to help with typical HR issues, such as benefit and 401(k) plans. “A program manager cannot afford that level of talent. They face the same issues we would face,” he said.

Given the level of resources that Glencoe devotes to each program, the group doesn't have plans for adding too many. With about eight programs currently, “we want to do no more than probably 10-to-15,” Mr. Ashley said. “We believe you just can't apply the resources we're applying, or stay focused with numbers that get larger than that.”

Glencoe Group, which has participated in the program business segment since 2002 and wrote over $600 million in gross premiums in 2005, does not have any minimum premium thresholds, but does target annual expected profits between $2.5 million and $5 million, Mr. Ashley said. This requirement tends to mean that the programs are fairly significant in size–typically $25 million, $50 million and up.

Turning to line-of-business targets, he said, “it's easier to talk about what we won't do, identifying those as lines where Glencoe would just be a capital provider, without the ability to be a value add.” Private passenger nonstandard auto is one such area that Glencoe hasn't done.

“We just don't think we have a lot of value to add,” he said, also noting that on the casualty side, very long-tailed business, such as directors and officers liability, falls outside Glencoe's appetite.

Mr. Steiner advocates a less hands-on approach. “Our plan is to have 40-to-45 people controlling more that $700 million in premiums,” he said. “We outsource almost everything to MGAs and TPAs, keeping only a few functions,” he noted–listing cash collection, policy issuance, binding, underwriting and claims handling among outsourced functions. Dealing with insurance departments and rating agencies, managing capital and buying reinsurance are functions Delos does not outsource.

“I do not understand why in the insurance industry outsourcing has not been successful. Every other industry does it,” he said. “Chrysler is not developing the car from scratch. They are assembling the car.”

He continued: “Why do you outsource? To have contracted specialists give better quality at a lower price.”

He said that Delos controls the outsourcing with audits and other mechanisms. “On average, the MGA will have different audits five times a year. We send our experts out. It's like engineers who develop the concept of a brake. They give a contract to a brake manufacturer, but they control the quality of the brakes.”

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