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By CYRIL TUOHY, managing editor of Risk & Insurance®

Brokerage commission rates in the small business lines marketplace reach as high as 17 percent or 18 percent--and those rates are there for the taking, according to a recent study.

The analysts, who've rated Willis HRH stock as an "outperform" in 2009, have set a target price of $32 per share, with a 2009 earnings estimate of $2.65 per share compared with the consensus of $2.53 per share.

That's good news for Willis HRH and its CEO Joseph Plumeri, an incessant if self-proclaimed client advocate. Yet, for all the talk in the past about penetrating the small business market, it remains tough to crack for big brokers.

Small business accounts require lots of attention relative to premium size. Premium volumes are generally much smaller than those of large accounts. Nor do small business owners tend to care to move their accounts to large brokers.

Still, "there seems to be a huge opportunity for large brokers to undercut small agents in the small business arena," wrote Todd Bault, senior research analyst with Sanford C. Bernstein & Co., co-author of the report titled "Non-Life Insurance Brokers: Inverting the Controversy--Why Buy Brokers Over Carriers?"

Commission rates in specialty lines have come down from the 18 percent or 20 percent levels before 1985 to about 10 percent in 2008, which is where standard lines rates have remained for more than 20 years.

Small business lines, however, have held their rates at about 15 percent or more over the same period and those rates are expected to remain into 2012 at least, according to the report.

Because Willis HRH had higher 2007 pre-tax margins--28 percent--than did Aon (with 18 percent) or Marsh (with 9 percent), Willis HRH is in the best position to cut prices and steal market share from its larger rivals.

A commission war could present Willis HRH with a huge opportunity, the Bernstein analysts noted and Willis has only helped itself with last year's purchase of midsize broker Hilb Rogal & Hobbs.

"The target should be the overly fat commissions of small business, where it already has a foothold territorially," wrote Bault, noting the war could last 10 years or more. Bault co-authored the report with research associates Timothy C. Connor and Samir Khare.

HRH, with a number of important midsize clients and a presence in U.S. cities, was considered by analysts and Willis executives alike to be a good complement to the global reach of London-based Willis.

"We see bigger opportunities with HRH in that market," said Grahame J. Millwater, Willis' London-based group president, in an interview with Risk & Insurance® last year. Previously, in 2007, Willis bought InsuranceNoodle, an "e-broker" platform for small business owners.

The Bernstein analysts believe there are plenty of opportunities for Marsh to also capture small business commissions.

To do so, Marsh will have to cut its expenses as it can no longer rely on contingent commissions in a post-Eliot Spitzer world.

"Expense cutting seems unavoidable, whether in conjunction with an acquisition or by itself (the former may be more palatable)," the analysts wrote.

A Marsh spokesman confirmed the company's plan to aggressively pursue the small business market place.

On May 28, Marsh announced the appointment of William Corrigan as chief financial officer of Marsh & McLennan Agency LLC, a business unit created last fall to serve the small and middle market.

In January, Marsh announced the appointment of David L. Eslick as chairman of Marsh & McLennan Agency.

Aon, according to the Bernstein analysts, is finally under CEO Greg Case beginning to bear the fruits of more than a decade of "lumbering conglomeration of nonconsolidated acquisitions," wrote Bault.

For now, the Chicago-based broker's future growth opportunities lie with capitalizing on the turnaround and there is "less talk so far on small commercial or comparable expansion."

Tom Fitzgerald, senior managing director of Aon Brokerage Group and Aon Preferred, said two initiatives at Aon are targeting the small business market. One plan consists of setting up "Aon Preferred Desks" in offices located in the nation's largest markets: New York, Chicago and Los Angeles, for example.

Earlier this year, Aon also appointed senior executives to organize Aon's commercial risk offices in smaller cities like Cleveland, Indianapolis and Charlotte to bring focus to a more local operating model, Fitzgerald said.

July 1, 2009

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