Canadian Underwriter
Feature

In Search of Smaller Fish


April 1, 2008   by Craig Harris


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Competitive pressures in the commercial market mean insurance brokers are looking everywhere these days for good accounts. For many larger brokers, their target sights are increasingly focused on the vague but profitable “middle market” — traditionally, the domain of regional and local intermediaries. As the multinational brokers single out mid-market accounts for organic growth the question becomes: can the regional players hang on?

Long referred to as the “sweet spot” for brokers, the middle market is an elusive customer base. The definition seems to shift constantly depending on vantage point — is it the privately-held manufacturing company with 25 employees paying premium of $10,000 or the biotech firm launching an IPO for dual listing on the TSE and NYSE? Both definitions can fit, contingent on the broker’s resources, appetite and expertise.

“Every brokerage, depending on its size and status, will have a different definition of the middle market, ” notes Rick Hynes, president and CEO of Willis Canada Inc. “I think you will find that a large global broker like Willis will have a different spin on what we define as the middle market, compared to a Tier 2 broker.”

“The areas we have grown most in the last five years are the larger accounts, which for us are anywhere from $10,000 to $100,000 in premium,” notes Robin Durrant, president of Kelowna, B. C.- based Capri Insurance. “These are what the larger houses would probably classify as mid-market accounts.”

“Our mid-size accounts range from $5,000 to $500,000 in premium,” says Christina Wilson, vice president of commercial lines for Toronto brokerage KRG Group. “This is non-complex, non-risk managed business that could be $5,000 basic coverage for a small manufacturing firm or a $500,000 property schedule.”

Industry Canada shows that out of the more than 1 million employer businesses registered in Canada, 97.5% have fewer than 100 employees, 2.2% have 100-499 employees and only 0.3% has more than 500 employees. Firms with fewer than 50 employees contribute about 22% to Canada’s GDP.

LOOKING FOR A CHANGE

A recent study by Greenwich Associates, a Connecticut-based research firm, found at least 20% of middle-market accounts in the United States were looking to change brokers in 2007. The consultancy interviewed more than 1,300 American middle-market companies and found less than half of the clients characterized their brokers’ service as “excellent.” Greenwich also noted about one in three mid-and small-market customers changed insurers in the past two years, saving a median of $25,000 in premium.

While no such research exists in Canada, one thing is for certain: competition for the middle market is heating up here as well. This is partly a reflection of persistently soft conditions in the marketplace; partly it is a reflection of insurance carriers seeking creative ways to drive revenue. But the main reason for heightened competition is the visible strategy amongst large, multinational brokerages such as Aon, Marsh and Willis to concentrate on this key element of the Canadian economy.

“Once you get through the Top 100 companies, Canada is really a middlewww.

market, small-commercial country,” says Neil Mitchell, managing director at Marsh Canada and a practice leader for middle markets in the company’s central region. “If you are interested in growing organically, you do it by focusing on (this) segment. In Canada, following the J&H and Sedgwick acquisitions, Marsh became more focused and interested in the middle market segment. Our external marketing efforts have been very prevalent over the last five to seven years.”

Certainly as the insurance market has become more competitive in recent years, Willis is also finding the middle market “a major opportunity,” Hynes adds. “What tends to happen is the Tier 2 brokers don’t really want to give into the soft market and deliver that 15-18 point rate reduction, as this is mostly commission business. So often the opportunity comes for us when you have an incumbent broker that hasn’t fully educated his or her client on exactly what the market is doing.”

Several large, mid-sized brokers say they have seen an increased presence of the “alpha houses” in the mid-market. But they ascribe other reasons for the relatively new strategy.

“I don’t think there is any question the (larger brokers) have made a concerted effort to come downstream,” notes Mark Terrill, president of Toronto-based Jones Brown Inc. “The reason is, they are not meeting their sales objectives at the risk managed-level. They are getting the daylights kicked out of them by the risk-managed accounts that are negotiating their fees down.”

“I have been bumping up against the larger brokers in the last year much more than in the past, ” says Wilson. She adds insurance companies not known for their small-to mid-market focus are also showing interest. “Companies like Chubb or Ace, five years ago, you wouldn’t send them a $15,000 account because it was too small; now they are looking at those accounts. That could be because of the market conditions.”

Jim Aston, president of Toronto-based Sinclair Cockburn Financial Group, observes the competition “is getting pretty cutthroat. I know that a lot of brokers are cutting commission, scrambling to get that account and hoping that the rates are going to rebound so they can hang on to it. What I find interesting is that the markets are dragged into these bidding wars. We are sometimes saying: ‘Where did that broker and that market come from (to compete) on this account?'”

As a broker consolidator, Hub International’s strategy has been to focus on the middle market “sweet spot,” says Kirk James, president of Hub’s central region. “It is a large part of what we do, but we also have an increasingly broad range of risk management professionals who deal with larger accounts.”

MIDDLE-MARKET DIVERSITY

Part of the challenge of defining the mid-market for Hub is the diversity of its brokerages within the network, according to James. “We have 22 Hub brokerages throughout North America and they all define the middle market a bit differently,” he says, noting the recent acquisition of Toronto-based HKMB. “We tend to look at the buyers of insurance. If clients have dedicated risk managers, we look at that as a larger account. The true middle market account would be those clients where the president, CFO or COO handles the insurance. That approach works well because in a company like ours, a mid-market account may look a lot different from interior B. C. than the middle of Manhattan.”

Several brokers concur with this assessment. The advice-driven nature of the business and the reliance of these clients on brokers to guide them through risk management and loss prevention can spring some big opportunities in this market space.

“I would define the middle market in Canada by the needs of the buyer and how they view insurance services, versus assigning an actual sales threshold or premium amount,” notes Mitchell. “The middle market, then, are commercial insurance buyers who look to a broker to be their ‘outsourced’ risk advisor and procurer of insurance solutions. Marsh’s differentiation for the middle market comes in the form of its expansive knowledge, experience and the intellectual capital we have built up from the risk management side of our business.”

SEPARATING THE TOP FROM THE MIDDLE

Hynes says he sees similar opportunities for Willis in the high end of the middle market through “wedge” products. “Many clients are now thinking of expanding their business into the U. S. and overseas, and they are looking at new ideas and new products,” he notes. “These could be trade credit on overseas products, D&O liability, E&O. These are products we hone in on because they provide us with an entry point into that kind of business — a wedge. We developed specialties and practice groups that deal only in those products to cre
ate opportunities.”

Indeed, knowledge of industry “verticals,” whether in areas such as health care, construction or aviation, coupled with practice specialties such as executive risk, have the potential to differentiate larger brokers from their smaller counterparts. And there is some acknowledgement from Canada’s Tier 2 and regional brokers that the complexity and global exposures of some mid-to-large accounts are best handled by larger brokers.

“We have the expertise, the access to markets and we provide a superior level of service,” says Durrant. “That is how we differentiate ourselves. However, if we are out of depth in terms of knowledge or ability to service an account, we will absolutely walk away. For example, some of the accounts we deal with may have an aviation aspect. We have no expertise in that area and we are happy to refer that to an international brokerage we have a good comfort level with.”

Likewise, Terrill says his firm is “a relationship firm, and I don’t apologize for that. It has taken us this far and it will take us the next leg of the journey. We make the decision based on whether or not we can meet the prospective client’s expectations. If a client has deliverables that we haven’t evolved to meet properly, we will respect that. There is no point in fighting a battle you can’t win.”

Yet when it comes to their core business, Tier 2 brokers show little concern about a mass customer exodus or attrition. Several brokers point out that although mid-market accounts may be “looking” to move their business, the customer retention rates don’t show heavy switching. With retention rates above 92%,Aston says his brokerage is looking at doubling its account size over the next three years and leveraging the success it has had with program/affinity business.

“It is a lofty goal, but we will be definitely targeting more mid-market business,” says Aston. “We realize we need to populate that area more heavily.”

James says an important aspect of Hub International strategy’s moving forward will be to more closely measure profit margins and service levels in key customer segments.

“We are trying to be a little more scientific about segmenting our lines of business and the kinds of activity we do on certain accounts,” says James. “You can have an account that might generate $10,000 of revenue for us, but our margin is considerably less than another similar account.”

This segmentation and an emphasis on continued consolidation will keep Hub a strong player in the mid-market space, according to James. “The way the insurance brokerage world works is that everyone goes after every piece of business at first glance to see if they can place the business.

The smaller brokerages, I think, will have more difficulty competing in a complex world on some accounts, because they don’t have expertise or market access. That is why consolidation will continue, and there might be fewer entities competing for the same business -and that includes mid-market accounts.”

For others, the relationship-driven nature of the regional broker will continue to offer value to the middle market client. “I think the mid-market sector may look at the larger brokers and feel they would rather stay with the local, mid-size brokerage because of the relationships and more personalized service,” says Wilson. “We know our clients very well. We don’t see them just at renewal.”

Wilson adds the mid-market broker could also feel the same way about the newfound interest of some carriers. “As a broker, you tend to stay with the markets that are familiar with your client and offer the right products. I certainly don’t want to put [clients] with larger companies and suddenly next year [the larger companies] kick [the business] out because they have changed their market focus.”

Indeed, Terrill says he has the same uncertainty about the long-term commitment of larger brokers to the mid-market. “Frankly, I don’t believe they are set up to handle this business because their cost structure is too high,” he notes. “I think when the market hardens, as it inevitably will, you will see them gravitate almost instantly back to their comfort zone. I have seen this movie before.”

The multinational brokers say they are committed to serving the needs of a growing and vibrant sector of the Canadian economy for the long haul. “I think there is a lot of room for growth in the mid-market in Canada,” notes Hynes. “I think you will find the Canadian economy is very much a mid-market economy, especially around manufacturing. There is tons of room for us to share market space with other people.”

COMPETING WITH THE BIG PLAYERS

“What you learn as you spend more time in this space is how deep and broad the opportunities are for growth,” concludes Mitchell. “There are a surprisingly large number of great middle market businesses out there that you find unknowingly. It could be a business tucked away in North Bay, Markham or wherever that is just a great middle-market operation. And they have been traditionally well-served to a certain point by a local broker. Once a broker like Marsh starts to focus on it and find out what is out there, the opportunities are significant.”

As the Tier 2 brokers reach for larger accounts, stepping up the rungs of the ladder, they will be increasingly entering into direct competition with larger brokers in the expansive mid-market space. It should prove to be fertile grounds for competition as the soft market continues its steady pace in the months ahead.