As the market continues to soften, program business is drawing increasing attention from insurers, who value program administrators' ability to use niche-specific knowledge to underwrite coverage profitably. If a program administrator can also handle other functions competently, that's often a plus.

One such “all around” program administrator is the Glatfelter Insurance Group, in York, Pa. For the programs it manages, it literally takes on the insurer's role in everything from marketing its products to adjusting claims.
Recently, we spoke with Anthony P. Campisi, Glatfelter's president and chief executive officer, about how his business operates. He stressed the importance of staying focused on program stability in a soft market, explained what he looks for in a potential niche and discussed numerous other aspects of program business. Following is an edited transcript of our conversation.
AA&B: Could you give me an overview of the Glatfelter Insurance Group's operations?
Campisi: We have retail agency operations in York, Pa., and Joplin, Mo., both of which largely operate within 50 miles of their offices. We also have a nationwide wholesale/specialty–or program–operation, which accounts for more than 80% of our business.
AA&B: Has Glatfelter been involved in program business since its inception?
Campisi: No. Our agency was founded in 1951 by Art Glatfelter, a World War II Marine Corps veteran. In the late 1960s, he was asked to quote the accident and sickness coverage for a volunteer fire department. He quickly realized there was a huge gap between what was available and what the department needed. He also saw an opportunity in an underserved market.
He started studying the needs of volunteer fire services in Pennsylvania, operating his agency during the day and driving to volunteer fire department meetings in the evenings. He learned the exposures the departments faced and what they needed in an insurance program. Eventually, he put together an unmatched accident and sickness program for volunteer fire departments in the early 1970s and began to market it at fire department meetings. After it succeeded, he began offering it through other retail agents throughout the state. That's how VFIS, our program for emergency service organizations, was started. Art later expanded it to include customized property-casualty coverages. Today, it covers more than 15,000 organizations in the U.S. and Canada.
AA&B: How many programs does Glatfelter have?
Campisi: Four that we market on a wholesale specialty basis throughout the country: VFIS; Rural Special Districts Insurance Services, a program for water, sewer, irrigation, conservation and various other districts; Public Risk Insurance Made Easy (PRIME), a program for municipalities with fewer than 25,000 residents; and Hospice and Community Care Insurance Services, a program for hospices, home health-care agencies and related risks.
AA&B: Are there plans for any new programs?
Campisi: We may expand the eligibility criteria for our hospice and community-care program to include other social-service providers. We look for opportunities within our existing niches, because we know them so well. Anything that we can “bolt on” to an existing program would be our first priority.
AA&B: How receptive are insurers to ideas for new programs?
Campisi: In the soft market, their appetite has changed dramatically. A few years ago, many program carriers were interested in new programs only if they could produce $10 million to $20 million in volume–and in some cases more. They also wanted three to five years of loss data and program administrators with strong track records. Everything had to be perfect, which essentially meant that they were not really interested in startups. Today, that has changed. If you have a proven track record and a solid business plan, insurers are more willing to talk.
AA&B: How large does a new program have to be to be feasible?
Campisi: We're currently talking to a program carrier that is willing to work with us on a program that's less than $2 million in size. It would be an expansion of something we're already doing, but it gives you some sense for how far insurers have moved.
AA&B: What do you look for when considering new programs?
Campisi: An unmet need for which we can tailor a response. Insurance availability is not always the issue. A market may be poorly served because it's highly fragmented. Maybe no one has really focused on trying to build long-term relationships by providing a high level of service to that particular market segment.
We look at how the niche's members make their risk-transfer decisions. Are they guaranteed-cost buyers, as most are, or do they like to share in some of their own risk? We can serve either type within our programs. Is the industry growing? Where are risks located? One thing that helps keep a program stable is an excellent geographic spread of risk. Do members of the industry value stability in their insurance programs, or do they buy insurance purely on price? If it's the latter, then we would not have much interest.
Indeed, the whole idea behind program business is to provide not only tailored coverages and services but also stability–in terms of market, coverage, service and, of course, pricing. If you've properly underwritten a program, the only major premium change that an insured should see will be based on exposure. You're not constantly adjusting your rate in accordance with the market cycle, as the general commercial marketplace does. As clients come to know you, they associate value, quality and dependability with your particular brand. That's what makes the difference–and sustains you through soft markets.
We also look for program acquisition opportunities. We believe that with the platform we've developed, we are in an excellent position to assist program managers who are having difficulty getting to the next level. We have our own claims-adjusting operation and in-house risk control programs. We also have our own actuaries, who annually review our rates on a state-by-state basis within each program. They also evaluate the adequacy of loss reserves and project accident-year loss ratios. Their work puts us on a par with our carriers in terms of understanding the rate adequacy and underwriting results of our business.
AA&B: What is the outlook for consolidation among program administrators?
Campisi: Conventional wisdom would suggest that we're likely to see an uptick in M&A activity. As the market gets softer, it's going to be harder for program managers–or retail agencies–to grow their top line and increase their profitability. Also, more program administrators than we'd like to admit do not have solid perpetuation plans. We can offer them an alternative.
AA&B: What goes into a good proposal for a program?
Campisi: First, when we look into a new program, we more than likely have had some experience with the niche on the retail side of our business. That enables us to understand a couple things: the nature of the market, and the challenges the average retail agent has in placing and servicing that particular class. As we identify the challenges, we ask ourselves whether we have an opportunity to differentiate ourselves in the marketplace by tailoring some coverage and services that would be unique to that particular market.
We try to customize coverages and provide them in a fully integrated product. That's an important point, because we want to provide a one-stop shop for local agents. That makes their lives easier, more efficient and more productive.
AA&B: What information do you need to provide about underwriting guidelines and marketing plans in a program proposal?
Campisi: You start with the definition of the market segment you intend to serve, then address numerous issues, including the following: How many potential insureds are in it? What risks do they face? How do they handle risk management? What insurers currently serve the market? What's the perceived level of rate adequacy in that market? What is the segment's potential profitability?
We also include our marketing plan, which explains how we intend to reach prospects and how much business we believe we can capture. We provide one-, three- and five-year growth forecasts.
Our proposal also spells out the duties and responsibilities we will assume. This is an important issue, because in most cases the carrier wants to offload as much of the transactional work as possible to the program administrator–while being assured that it will get the information it needs to monitor the program. In some cases, an insurer may expect to get daily electronic feeds about a program.
In regard to underwriting, most insurers audit a program on a quarterly basis–at least in the beginning–to monitor whether you are in compliance with the program agreement, that the business you're writing constitutes eligible business, that you're using approved rating plans, that you're complying with various state rules and regulations, and that you're operating the program consistent with your program proposal.
AA&B: What sort of growth projections do insurers desire?
Campisi: Times have changed. Not long ago, carriers were looking to start out with a minimum of $5 million, $10 million and up. Today, I think they're looking for evidence that you will be able to grow the program to those levels–or maybe even beyond. To put together a multistate program with a carrier, there are certain minimum expenses that you and the insurer are going to incur. So you want to be able to project, with reasonable assurance, that at some point you will reach a sufficient volume of business to run the program profitably.
AA&B: Do insurance companies expect a program administrator to share in the underwriting risk?
Campisi: It is not a prerequisite for most program carriers. Most are content to have you operate under a profit-sharing arrangement or sliding-scale commission arrangement. So at a minimum, program managers are “incentivized” to underwrite profitability. But while they can share in the “upside,” they usually aren't required to put their own capital at risk to cover any losses. Now, many carriers openly admit that they like to see program managers share “downside” risk, because that aligns their interests with the carriers'. It gives an insurer some assurance that the program manager has a long-term perspective.
AA&B: Does Glatfelter have such a stake in its programs?
Campisi: Certainly. We share in the underwriting risk on each of our programs. Just what form the participation takes varies by program, but we always assume a meaningful amount of risk.
AA&B: Your Web site shows that you have an agency captive. Do you use it to assume underwriting risk?
Campisi: Yes. We set it up in the 1990s because we realized that to obtain more control over our program business in regard to underwriting, pricing, claims administration and risk control–in other words, to run the program as though we were the carrier-we really had to “buy a seat at the table.” It's unrealistic to expect an insurer to give you significant control and not share in the risk.
American Alternative Insurance Corp., an admitted subsidiary of Munich Re America, is the property-casualty insurer for most of our programs. In other words, it is the fronting carrier for our agency captive, and we have a quota-share arrangement with it.
We have more underwriting authority than most program administrators. There are few underwriting decisions we have to refer to insurers, which enables us to be more responsive to local brokers. We don't have to wait a week for someone at an insurer to make a decision; we can make it within a day. That's a huge advantage for us.
To get such authority, we had to let the carrier know, by our actions, that we weren't focused just on sales and marketing, but that for our own financial health we were committed to the program's long-term profitability. And that was our sole reason for creating the agency captive. It's the mechanism by which we retain a part of the underwriting risk for every program we have.
AA&B: How long does it take to create a program?
Campisi: There's no one answer for that question. It depends on the nature of the market in which you're interested. Also, a program administrator using E&S carriers can move a lot faster than one that uses admitted insurers, in which case forms and rates must be filed in all the states the program serves. Even among program administrators who use admitted paper–as we do exclusively–there are differences in how fast you can get a program to market. Those operating only in “file and use” states may be able to start writing business relatively quickly. Those who have to file in states like New York and California, on the other hand, may face a process lasting six months or longer.
This is one reason that few, if any, admitted programs roll out in all 50 states. What typically happens is that in your proposal to a carrier, you specify where you think the greatest opportunities are. So you pick maybe five or 10 states and go from there. For most programs, starting out in sparsely populated places like the Dakotas or Montana cannot be justified, given the required upfront investment.
AA&B: How much can it cost to set up a program?
Campisi: As with any new business initiative, you're going to put a lot of dollars in before you get any dollars out. You have to invest in a production force if you're selling direct. Even if you're writing on a wholesale basis, you must have a field presence that is out there selling and promoting what you've built to retail producers. That takes money. If you're trying to market in multiple states, you're going to have people traveling, which is expensive. It's going to take time to find out where the business is. We may know a state has 1,000 widget manufacturers, but who's writing them? We need to find out if there are any brokers who have a large book of business in the targeted class, because those are the people we want to get to first. This is all part of the R&D of a startup, and there's still a lot more, particularly for multistate programs. We had more than $500,000 invested in our hospice-community care program by the end of its first year.
AA&B: What are some of the major issues that program administrators should address in their contracts with insurers?
Campisi: First, I'd say that the contract, while important, is really secondary to your knowledge of, and trust in, the company with which you're doing business. Once you sign a contract, you hope you never have to pull it out again. That can be the case if you've had a meeting of minds with the carrier and you trust each other. Then the contract is just there to be a backstop.
Having said that, we want to define the market segment in the contract: Who is the customer? What territory am I going to cover? Then you get into the program manager's and insurer's respective authorities and obligations. Those responsibilities need to be spelled out in detail. You also want to outline the manner and level of your compensation, which should be based on the scope of your duties and responsibilities.
Ownership of the program's intellectual property rights, if you will, also needs to be made clear in the contract. Then, if there is a parting of the ways, both parties know what belongs to whom. The expirations and the intellectual property should remain with the program administrator–even if the carrier has done the filings in its name. Your property needs to be defined in the contract, so you don't find that the carrier continues to compete with you, using the same products and your confidential information, if you have to move the program for some reason. In the contract, we also identify what information is confidential to us, as another means of protecting our property.
Mutual exclusivity, or restricted dealing, is another important issue. At a minimum, a program manager must be certain that the carrier cannot use the program's forms and rating plan with any other agents.
Of course, the termination provisions are another big issue. In our contracts, we have termination provisions that are “for cause” and “not for cause.” On the “not for cause” side, we tend to ask each other for 180 days' notice, as a courtesy.
In regard to “for cause” termination, notice could be immediate to 60 days, depending on the nature of the contract breach that led to termination. The contract should contain a “cure” provision applicable to some instances of contract default that gives the defaulting party a reasonable amount of time to correct the default.
The simple truth is that a program administrator writing a large volume of business on a multistate basis is frankly going to need time to move a program. Unless you've had a “Plan B” all along, you're not likely to have another carrier to which you can roll this business within 60 days, as well as deal with any filing issues.
AA&B: What kind of things might force a program administrator to move a program?
Campisi: The most obvious would be a rating change. If an insurer was required to maintain an A- or better A.M. Best rating, falling below that would trigger the program administrator's right to move the program. So might a change of ownership. If the insurer was acquired by another carrier, a program administrator could be forced to deal with a new set of unfamiliar people. So a contract provision might state that if certain members of management leave the insurer, the program administrator has the right to terminate the agreement. The carrier no doubt would want to have the same right. After all, an agreement covering a program is essentially a personal-services contract. We're selling the insurer the expertise and services of our people. So if the people who for years were instrumental to the program's success are suddenly gone, the carrier understandably wants to be able to reassess whether it will continue the agreement.
AA&B: Who takes care of reinsurance on these books of business?
Campisi: For the most part, our fronting carrier obtains it from its parent, a reinsurance company. When it comes to the property catastrophe exposure, however, we work with domestic markets as well as those in Bermuda and London to place specific property CAT coverage on our program business. Essentially, we sit at the table with our carrier partner, negotiating and building relationships with property CAT reinsurers. I think we've spread that coverage through about 15 different markets. While we prepare the reinsurance submissions and negotiate with the reinsurers, the coverage actually is issued for our fronting company, not for our agency captive.
AA&B: What is the extent of your involvement in claims handling?
Campisi: We adjust first-party and third-party claims and take care of salvage and subrogation. We're among a minority of program administrators that do so. We went that route, rather than contract with a third-party adjuster, because we think claims adjustment is the most important thing we sell. It enables us to be responsive to the policyholder at the time of loss. It's the reason any insurance entity exists in the first place. It's not to sell policies; it's to help your client at the time of a loss.
AA&B: What kind of safeguards do insurance companies expect you to implement, if you're going to adjust claims?
Campisi: First and foremost, if you're risk-sharing, then the carrier knows that you're making decisions diligently and conscientiously, that you're staying within the four corners of the policy. They know that if you do need to exercise discretion in a gray area of a particular claim, you're going to do so responsibly. They also want to make sure that you're fully aware of all the laws applicable to claims hand-ling in each state.
Insurers also want to make sure you adjust claims only within the limits of your authority. We call a lot of what we do “counsel and concurrence.” If a claim hits a certain threshold we counsel and concur with our carrier partner. They just want to know what we're doing with such a claim, not take it over. And that works very well.
AA&B: What's the outlook for programs in the year ahead?
Campisi: The soft market is going to continue well through 2008, barring some mega-catastrophe that pulls a lot of capacity out of the market. Thanks to another mild hurricane season, it looks like the stars are lining up for the industry to have another record-breaking year.
Some people argue that the soft market is not going to be as severe or as long as the last one, because of such factors as the industry's enhanced reporting capabilities, greater oversight on the part of rating agencies and regulators, continued demands for a satisfactory return on equity and Sarbanes-Oxley. But at the end of the day, there is a fundamental question of supply and demand–and right now supply is building much faster than demand.
AA&B: Do you expect more insurance companies to get into program business?
Campisi: I do, because the word is out that program business is underwritten profitability. Program administrators and MGAs tend to have disciplined operations, and they connect with the marketplace in a way that carriers can't. So carriers are keenly interested in growing their program business and having more relationships with program managers and MGAs. I hear that over and over. We're contacted by insurers all the time.
AA&B: How do you vet them?
Campisi: First, we make it clear upfront that we're not looking for anything right now. If we do meet, it's really to learn more about each other's operations, just for the value of that knowledge, not to pursue some immediate opportunity.
We assess the carrier's capacity, product capability and resources. Are they really willing to provide broad underwriting and claims handling authority? Many of them, quite frankly, are not all that wild about having you handle the claims.
AA&B: Is there anything else that's important to your success in program business?
Campisi: This is a service business. And whether you're operating as a program manager or as a retail agent, it comes down to providing service to the client. The simple things are important, like ensuring that when someone calls us, a human being answers the phone. Getting out policies, endorsements and quotes–accurately and timely–is important too.