Superior size helps, but doesn't guarantee knockout to win over buyers

With producers of all sizes challenged to make up for lost revenue in a rapidly changing marketplace, the battle for middle-market business–however one defines such a target–is becoming something of a free-for-all, industry observers warn.

Indeed, with prices (and thus commissions) falling in a softening market, and with the major brokerages giving up lucrative contingency fee revenue to lighten the fallout from bid-rigging and steering revelations, middle-market accounts are becoming prime targets for big and small producers alike, these observers contend.

However, not everyone can compete effectively for middle-market accounts, and size is no guarantee of being able to deliver any knockout blows, agents and consultants agree.

One problem is in defining the so-called “middle market.” What types of accounts are producers fighting over?

In part, the middle market is defined as where others can't or simply don't want to play. Large brokers may shy away from accounts that are not large enough for them to make a profit on, while small producers are not players where they lack the agency volume, staff, market leverage and expertise to handle more complicated risks.

“Small agents do not play beyond $25,000 in premium volume,” according to William “Twig” Branch, a former agent and leader of a multi-agency cluster, who is now an industry consultant.

“There is not an agent on Earth who would not want to play in the middle market, but it becomes too complicated [for small agencies] to handle, and the accounts attract serious competition. They do not have the resources to handle the accounts.”

On the other hand, the biggest brokers–such as Marsh, Aon and Willis–are often hard put to score a knockout in the middle-market arena despite their superior size and resources. Indeed, their size might even work against them in soliciting such accounts, according to Mark Nimmo, senior vice president of SullivanCurtisMonroe Insurance Brokers in Irvine, Calif., who noted middle-market clients look for a relationship with an individual and are turned off by the corporate approach.

“The Fortune 500 [companies] have a knowledgeable insurance person on staff,” namely, the risk manager, Mr. Nimmo pointed out. “They look for a big team to make insurance offers, while the middle-market customer wants a personal relationship with someone he can call everyday.”

“The middle market is anywhere over $2,500-to-$50,000 in commission–typically $5,000-to-$25,000 commission is the bread and butter for middle-market agencies,” said Paul Vredenburg, senior vice president at Concord, Ohio-based Marsh-Berry, an agency consulting firm. “Below [$2,500], figure it is not profitable, and above [$50,000] it becomes more risk management specific.”

However, even these broad definitions vary from agency to agency.

For the Watson Insurance Agency Inc. in Gastonia, N.C.–an agency with four locations and 78 employees–the middle market can go from as high as $1 million in premium to a low of $50,000, according to Robert Penn Watson, its vice president. But generally, the business will hover between $50,000 and $400,000, “which is good solid business for us.”

Robert G. Phelan, chairman and chief executive officer of Litchfield Insurance Group in Torrington, Conn., preferred to define middle-market clients in terms of employees, which can number between 50 and 2,000.

For his firm–a 25-person agency with about $4.5 million in revenue–such accounts, headquartered throughout Connecticut, primarily involve the construction business but also include manufacturing, technology and municipalities.

“I do not see a general definition,” said Mr. Phelan. “Everybody uses a different definition. No one is clear on what it means.”

Jerry Boles, president of Grona Boles & Martin Insurance & Financial Services in San Antonio, Texas, and chairman of Combined Agents of America–a Texas-based managing general agency cluster group–had yet another view.

“We don't define the middle market, we just work within it,” noted Mr. Boles, whose agency numbers 15 people with annual premium volume between $12- and $15 million. “The underwriters establish the guidelines for the middle market.”

His observation was that the change in the marketplace, with some softening, has translated into increased competition among carriers for middle-market business. “They are out to write new business and protect renewals,” he said. “Companies are calling to see what new business you are working on, which is refreshing.”

Carriers are hungry for middle-market business because there is enough premium in such accounts for them to make a profit, he added, while the risks are generally well-run businesses with good loss ratios.

Other brokers, however, size up the competition differently.

In Connecticut, Mr. Phelan said he sees his competitors coming from three different sources–large regional agencies, middle-market brokerage firms (such as Brown & Brown, Hilb, Rogal & Hobbs, and USI Holdings) and bank-owned agencies–which, he observed, are “becoming more and more formidable.”

For Mr. Watson, his competitors range from the two-man shop to the mega-brokers. His strongest competitor in his section of North Carolina is Palmer & Cay, which was recently acquired by financial services giant Wachovia.

In California, Mr. Nimmo–whose agency is no pipsqueak, boasting more than 200 people on staff–said his competition is his peers and the bigger brokers.

Mr. Boles noted that the competition among agents in San Antonio is “not the dog-eat-dog competitive type,” adding, “It's all based on relationships.”

Establishing a strong, personal relationship with middle-market buyers, all the agents observed, is the most effective defense against competitors, no matter what their size. However, they warned, a strong relationship means providing the services the customer does not have to look for elsewhere.

“The strength of our relationship with the client is the bottom line,” declared Mr. Boles.

“We always try to broaden our services for our clients,” added Mr. Watson. “If you keep the client happy, then all else falls into place. Success breeds success.”

“If the agency is not selling a service model or a service delivery vehicle, then it can only sell price,” Mr. Phelan observed. “That kind of agency can only survive in the soft market. When the market gets very soft, or there is open price competition, the agent that gets assigned to the stupidest underwriter wins, and that is [the carrier] who is desperate or doesn't understand the exposure.”

He went on to say that this latest softening market is different than past down cycles because there are fewer carriers to bid for business and they are dictating better underwriting for tougher classes.

“Insurers want smart brokers who do not work exclusively on price,” he noted. “That thinking will make this a healthier industry, which translates to better, long-term progress for brokers and companies alike.”

One factor that Mr. Phelan, Mr. Nimmo and Mr. Watson have in common is their membership in RiskProNet–a brokerage network where members lend account assistance to one another. RiskProNet members also belong to the International Brokers Association, which opens access to brokers globally.

The international nature of business today means all agents and brokers need a “long reach” to help their clients, Mr. Watson pointed out.

“With our size, we could not open an international office,” he said. “Now we have an operation that allows us to go all over the place. Without it, we would probably not have some of the accounts we have. It has been very helpful to us.”

In the end, the contest to win the middle market is a question of perseverance.

“It is going to be a challenge for [middle-market producers] to sustain growth,” observed Mr. Vredenburg of Marsh-Berry. Producers will have to find new accounts just to make up for the income lost from declining premiums and commissions. Having greater market knowledge, he added, will be the key to growth.

“It's a survival thing, when you think about it,” said Mr. Phelan. “It is a very competitive world out there.”

Caption for Fight Picture:

Producers of all sizes are fighting over middle-market accounts, with competition sparked by softening prices and the loss of contingency fees at the biggest brokerages.

“There is not an agent on Earth who would not want to play in the middle market…but it becomes too complicated for small agencies to handle”

William “Twig” Branch, Consultant

“Insurers want smart brokers who do not work exclusively on price. That thinking will make this a healthier industry, which translates to better, long-term progress for brokers and companies alike.”

Robert G. Phelan

Litchfield Insurance Group

Special Reports /

Producers In Slugfest Over Middle-Market Accounts

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