Among big and small insurance brokers alike, the battle rages for the "middle market," an amorphous, but lucrative, part of the brokerage business.
On one side sits the largest, national brokerage firms such as Aon, Marsh, Willis and Arthur J. Gallagher. Next are the smaller national firms, aggressive and out to cement their historic hold on midmarket clients. These brokers include firms like Lockton, Wells Fargo, Wachovia, and Hilb Rogal & Hobbs.
On the other side are some smaller but fast-growing firms like Beecher Carlson and Integro who have pursued a strategy of invading the turf of the biggest brokers--the largest 200 global corporate accounts--but are equally focused on increasing business from the higher end of the middle market.
But the vast bulk of the market is controlled by small, local firms that often have a decades-old, personal relationship with the owners and top financial people at their middle-market clients.
For the bigger national firms, the middle market offers the best potential for revenue growth. "The market is huge," says Bill Bruno, senior vice president of Greenwich Associates, the Connecticut-based financial-services market-research firm. No individual broker holds more than 5 percent of the middle market.
Indeed, smaller brokers and agents own more than 77 percent of the middle market, leaving the 10 largest brokers with just more than 10 percent of the market to split among themselves. This potential isn't lost of the big brokers--almost all have brought on new, high-powered executives to lead the effort to penetrate deeper into the middle market.
Greenwich defines the market as companies with sales of between $10 million and $500 million a year. Most of the insurance carriers and the brokers look at the market in terms of annual premium volume. Under that definition, the market includes companies that have between $100,000 and $2.5 million in annual premium volume.
Estimates of the size of the market vary tremendously, but most calculations roughly place the size of the commercial property/casualty insurance middle market at between $12 billion and $20 billion in annual brokerage revenues.
"We look at the middle market primarily as first-dollar clients," explains David Lockton, chairman of the privately owned Kansas City, Mo.-based Lockton Cos. He says that most of Lockton's clients have less than a billion dollars in annual revenue, and he adds that the "largest brokers have ignored these markets for years."
Frank Beard, national director, property/casualty, of Glen Allen, Va.-based Hilb Rogal & Hobbs, says HRH's middle-market clients are typically looking for "risk transfer and are not focused on the cost of risk." The buyers are owners and entrepreneurs or chief financial officers. "These folks are, by nature, risk-takers in their businesses, but they may not be risk-takers when it comes to insurance," says Beard.
OPPORTUNITY FOR BIGGEST BROKERS
Bruno reports that in any given year, at least 20 percent of the middle-market accounts are looking to change their brokers. And, he says, many clients are not satisfied with the current level of service from their brokers. Greenwich interviewed 1,330 middle-market companies and found that less than half of the clients would characterize the service they receive from the broker as "excellent."
"Today the biggest brokers are in a far better position to increase their market share," Bruno says. These clients have needs increasingly similar to those of the largest global clients. They want product and advisory services, Bruno says.
This is a market that has been built upon long-term relationships between brokers and the CFOs or owners of these companies. It's a lucrative market because most clients opt to use insurance to transfer risk. But, the market is changing.
As business has become more complex and global, more middle-market companies and their customers need to confront supply-chain and business-interruption risks, ranging from natural catastrophes to cyberattacks, that can cripple, if not destroy, a growing company's operations.
Most of these middle-market firms don't have risk managers or a risk management department. The broker often is the sole source of any risk management services that the firm needs. Beard says that most buyers don't have the time to work closely with their broker. "They want their broker to get things done, so that they don't have to worry about them."
William Mooney, who manages the middle-market sector for Beecher Carlson, says these customers look to "buy peace of mind" and consider four factors most important: the relationship with the broker; the coverage of their risks; the service the account receives; and, "lastly, the price that's charged." He explains that, while service is important with these clients, it's "bad service that gets you fired. These buyers don't tolerate bad service."
Mooney, an executive vice president and the property/casualty manager with 27 years of experience working with middle-market clients, notes, however, that these clients are "becoming increasingly sophisticated buyers."
Adds Bruno, "The buyers in this market are people who don't have a lot of time. They are concerned with profit and loss and cash flow and capital, and are not supersensitized to the costs of insurance."
FULL-COURT PRESS BY THE BIG PLAYERS
Marsh CEO Brian Storms has identified the middle market as the key part of his strategy to transform the firm. He brought on former banker Mark Feuer, who headed Merrill Lynch's middle-market efforts. Feuer's an enthusiastic proponent of the value of the middle market.
"I love a fragmented market. Fragmented markets are where the opportunities exist," Feuer says.
Marsh's middle-market strategy hinges around an investment in a new technology platform for middle-market products, investment in new leadership from a group of key financial-services executives experienced in the middle market, and investment in a new sales and service organization of more than 1,500 Marsh brokers and associates.
Marsh's plans include launching an array of special products, available almost entirely to the firm's big clients, but now reconfigured and priced for the middle market. Marsh estimates that it earns about $750 million a year in revenue from the middle market, leaving it plenty of room to grow.
Historically, the large national firms bought their way into the middle market by acquiring strong local and regional brokerage firms. In recent years Aon has probably been the most successful at that strategy by assembling brokers with exceptional strength in important middle-market industries including entertainment, construction, environment and technology.
In July, for example, Aon hired away the two key technology executives from Arthur J. Gallagher, the national broker that has staked its growth in particularly strong middle-market industry segments.
Six months ago, Aon brought in William Choate from Wachovia Insurance Services to head up its middle-market effort. Choate, who is also in charge of Aon's Southeast U.S. operations, defines the middle market as those firms that lack a risk manager or a risk management department. An executive with the former Palmer & Cay, where he was managing director and senior vice president, as well as with Marsh, Choate says Aon gets about $3 billion in revenue from the middle market.
His goal is to see that revenue grow by about 10 percent to 12 percent a year. Aon already has the biggest share of the middle market, but that increase would make Aon clearly the largest broker in the middle market.
"The challenge for a middle-market broker at a firm like Aon," Choate says, "is to be able to identify all the client's risks and be able to match them up with our resources. You need a really agile team in order to do that."
Chaote's arrival is no accident. Aon CEO Greg Case has made the recruitment of top talent with strong reputations and records in important industry sectors key to his growth strategy, and there's no doubt that Aon has been quick to move when it sees talent it wants, especially in industry practice groups with focus on the middle market.
For Arthur J. Gallagher, the middle market is nothing new. About seven years ago, Gallagher opted for a strategy of building expertise in a dozen industry practice groups. It has built out its middle-market strategy based on those relationships.
DELIVER SERVICE OR GO BUST
Bruno acknowledged that understanding a client's industry and business is essential in the middle market. Ask anyone involved in the middle market, and they all say that service is the most important factor in acquiring and keeping middle-market clients.
Among the large, national firms, Greenwich rated Willis, Wells Fargo Insurance, Arthur J. Gallagher, Wachovia Insurance Services and Brown & Brown as having the most distinguished service records of the national brokers.
Willis, known for its aggressive focus on sales, hired Eric Joost, former Aon executive and former Allianz global risks executive vice president, to direct its efforts at the middle market.
Joost brought with him past aggressive efforts to improve service levels at Allianz, along with experience in developing programs to solve complicated risk issues. Combine that with Willis' notorious expense control, and you have a formula for middle-market growth. Willis has been surprising industry analysts with its organic revenue growth recently.
"We have no actors on our team. Those who sell you, service you," says David Lockton, head of another national firm rated well by the Greenwich study. Lockton argues that the middle market has intense service requirements that require a big investment in people.
"We're willing to make significantly smaller margins to grow our business over time," he says. The results show up in the form of stellar retention levels. "We run a 96 percent retention rate, and we match that with double-digit growth," he says.
For many middle-market clients, the broker relationship is first tested when it comes time to file a claim.
"The typical middle-market client says, 'What am I paying my premiums for this insurance if the claim isn't covered?' " says Bruno.
And, unfortunately for the broker, the client looks to the broker first and perceives them as the face of the carrier. Probably more than anything else, bad experiences with claims can quickly torpedo the relationship between the broker and the client.
"Every one of our client teams includes a claims person, and we're involved in all first-party claims," Lockton says. "And we don't charge for our loss-control services."
The brokerage business faces ongoing pressure because a broker's basic source of revenue--commissions--is under increasing pressure. There remains some overhang from the contingent-commission controversy of three years ago.
"Midsized clients might not know the difference between an agent and a broker," Bruno explains. "The assumption is that they are both working on the client's behalf." Thus, midmarket clients were confused during the compensation controversy. That raised questions about trust and service with all brokers, large and small. It has taken a few years for that issue to subside.
Commissions are under pressure from two other fronts. First, the soft market has seen premium revenue on existing accounts decline as insurance pricing has declined. For example, commercial insurance renewal revenues during the first quarter of 2007 declined by 11.3 percent, according to the Council of Insurance Agents and Brokers.
The second front is the nature of the middle-market brokerage environment, according to Greenwich. "Clients today are facing a different set of challenges, especially risk exposures with important financial exposures," Greenwich's Bruno says, adding that brokers typically don't bring a tremendous amount of financial expertise to the relationship.
"These kinds of relationships are under pressure and too often not responding to these kinds of financial challenges. These relationships can deteriorate," he says, as clients demand more and more in the form of risk management advisory services.
"The insurance relationship is basically a transaction-based relationship in the middle market," Bruno says. That gives the larger national firms an opportunity to offer new clients new services that meet their changing risk needs. "In this market, Aon isn't competing with Marsh. It's competing with regional players with subpar products who can't identify or meet the unfulfilled needs of these clients."
Marsh CEO Brian Storms argues that for many clients the competition isn't another insurance broker, but from the accounting or management consulting firms. Marsh wants its clients to see the broker as inhabiting that space, says Storms.
"Most risks are not insurable," Storms says. Future growth for Marsh will, more and more, come from solving those kinds of risk problems for clients, particularly those in the middle market.
JACK ROBERTS is editor in chief of Risk & Insurance®.
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August 1, 2007
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