Batting the Big Fish.

Regional brokers are banding together to fend off megabrokers invading their turf.

Northeastern Massachusetts is a hotbed for biotechnology firms and other high-tech businesses, and The McCarthy Cos., a regional broker in the Boston suburb of Wilmington, counts many of them among its clients. In the past, competition for business was fierce, but it usually came from other locally owned, independent brokers.

Now that's changing. McCarthy's high-tech clients are fielding calls from megabrokers promising an army of experts in directors-and-officers liability, mergers and acquisitions, and global insurance programs when the small and midsize firms are ready to launch their initial public offerings, buy competitors or expand internationally.

"The nationals are now coming down to the garage level," said Charlie Brophy, executive vice president of The McCarthy Cos. "At the same time, many of our middle-market clients are growing, and we have to convince them that we have the ability to grow with them so they don't feel the need to go to the big brokers."

As large brokers eye small accounts and midsize brokers try to, write larger risks, the "middle-market squeeze" is intensifying, said Conning & Co. Vice President Nancy Carini. The very large brokers are reaching down for one simple reason: growth.

"The entire marketplace recognizes the great growth opportunities there," said Don Holmes, national middle-market practice leader for Marsh Inc. "It's one of our key areas. We're looking for double-digit growth."

The megabrokers' traditional accounts-businesses with more than 1,000 employees and insurance premiums typically over $1 million-are drying up and squeezing them on fees. As large accounts consolidate, there are fewer of them, and they're buying less insurance.

"By virtue of the market being so soft, the megabrokers have had no choice but to dip down lower than they otherwise would, and that has driven them into the regional brokers' territory," said George Anderson, executive vice president of Polk & Sullivan Group, a Nashville, Tenn.-based broker with 76 employees and $10.5 million in revenue.

The middle market stretches from less than $75,000 in premium to $750,000. Most of the competition between the megabrokers and the large and midsize regionals is for the segment of the middle market that includes insurance buyers with between 200 and 1,000 employees that spend an average $300,000 in premium and generate $20,000 in fees and commissions.

"The larger firms have determined they can make more revenue per transaction by working in the upper middle market, where they can be compensated on a commission rather than a negotiated fee for service," said Rob Ekern, president of C.R. Ekern, a Phoenix-based consultancy that works with regional brokers.

Brokers such as The McCarthy Cos. and Polk & Sullivan have been building up defenses against the national brokers threatening their turf, but not all of their moves are defensive. Recognizing organizational turmoil following the massive mergers in the top ranks, the midsize brokers are opportunistically reaching upward for larger accounts.

A company with $800 million in revenue went looking for a new broker after Marsh & McLennan Cos. bought Johnson & Higgins. McCarthy put three of its top people on the account and beat out national brokers and other regionals. Polk & Sullivan recently signed up a large metal manufacturer and a road contractor, both of whom had long relationships with megabrokers, Anderson said. "Both were displeased with the service they were getting," he said.

Joining Forces

As they seek larger accounts and as their U.S.-based middle-market clients go global, midsize brokers are banding together in affiliation groups and beefing up the services they provide. "We always provided loss control and claims review, but now we're starting to expand so we can function as an extension of their risk-management department," Anderson said.

Once focused narrowly on placing property/casualty insurance, these brokers offer a wider range of services--from employee benefits to payroll administration and employee leasing.

Many regional brokers have merged to compete more effectively--Polk & Sullivan has bought five agencies in the past two years--and broker networks formed for educational purposes now provide a storehouse of ammunition to help members go head to head against the Goliaths.

"National brokers will continue their assault on our marketplace," said Thomas W. Harvey, chief executive officer of Assurex International, a Columbus, Ohio-based confederation of regional brokers that bills itself as the largest privately held commercial insurance brokerage group. "Some of them are good in the middle market, so we need to continue to look at ways we can deliver additional services to our clients that insulate them from the onslaught of competitors."

Ric Miller, president and CEO of Willis of Tennessee, said his firm, based in Nashville, has always gone after middle-market business and start-ups supported by some of its larger clients.

"We have nurtured several handfuls of health-care companies, and you are betting on their dream that while it may be a $5,000 account today, tomorrow it could be 30 times that amount," he said.

At the same time, Willis is aggressively seeking large national accounts. "Willis is growing the efforts toward the risk-management business because we believe people want more than two choices," Miller said.

Broader Horizons

Over the last decade, CFG Insurance Services, Minnetonka, Minn., has expanded its services to gain a better hold on its existing clients and to be able to go after larger accounts. CFG, which has 130 employees, developed partnerships with companies that develop safety-compliance and training programs and audit workers' compensation claims. It set up a financial-services division to handle retirement plans and is a third-party administrator for COBRA and Section 125, or so-called "cafeteria" benefits plans. Four years ago, it developed a specialty in international benefits, and a year ago, it began offering Internet-based employee-benefit surveys.

"We are evolving into a human-resources consultant," said CFG Vice President Jon Heidorn. "We're big into employee-assessment tools."

Beyond expanding its own services, CFG signed up with organizations that help middle-market brokers compete against the giants and gain leverage with insurance companies.

It's a member of two agent networks, Group 500 and RiskProNet International. Group 500, which formed in 1993, is a consortium of large, independent commercial brokerages. A division of Insurance Marketing & Management Services, it offers proprietary insurance products and programs.

RiskProNet International, which started in 1997, is a confederation of 26 U.S. and Canadian insurance brokers. Members communicate through RiskProNet Online, an Internet-based system that allows them to search a member database for experts in any area of insurance.

"That has shown some real promise and real help when we step up and slug it out with the national brokers," Heidorn said.

CFG Insurance also has a contract with Globex International, Mountain Lakes, N.J., which works side-by-side with midsize brokers to develop comprehensive risk-management programs for multinational clients.

"Our mission is to teach the local broker how to handle it on their own, so the result in two or five or 10 years will be the globalization of regional brokers," said President Douglas Fay, who ran the New York-based international operations for Alexander & Alexander Services Inc., before it was bought by Aon.

A CFG producer worked with Globex when a Minneapolis-based company that sells and services mobile radio units needed benefits and liability coverage for five employees who were going to work at a U.S. Air Force base in Kuwait. The arrangement with Globex did more than build the client's confidence that CFG could handle the account; it gave the broker leverage with the insurer.

"Without that clout, the carrier wouldn't have been convinced to write the account," Heidorn said. "With firms like these, we have ways of getting personalized loss control or onsite visits and access to information in a way that's similar to how the big boys have typically done it."

Buyers' Expectations

Middle-market companies today have more sophisticated needs than in the past. A four-person technology start-up may be ready to ramp up nationally and globally right out of the box. If it's planning an initial public offering, the client expects the broker to provide due diligence, to act as a risk-management adviser, to place directors-and-officers liability coverage and to provide a seamless global insurance program.

"The megabrokerage firms create a certain perception by introducing a client to some of their internal sophisticated resources," Ekern said. "In order to compete with them, a regional brokerage firm must also have access to sophisticated resources."

The affiliation groups help them do that. In addition to Assurex, RiskProNet and Group 500, other networks include Intersure and InsGroup.

"The affiliation groups have really found favor in the last five years as regional and independent firms are striving to increase their capabilities," Ekern said. "Quite frankly, there are not enough good ones available for the number of firms that will need to be part of these."

Assurex International, based in Columbus, Ohio, was created in the 1950s as a way for regional brokers to exchange views. And while that continues to be its primary mission, things have changed. "It's only in the last few years that Assurex has become an alternative to the Aons and Marshes" said Assurex CEO Thomas W. Harvey.

Expanding Globally

In 1992, the network included brokers in seven countries, and that grew to 30 in 1998. A year ago, Harvey hired a person exclusively focused on building the international network, and now its reach extends to 50 countries.

Assurex helps the member brokers design and present insurance programs for clients with multinational exposures. The lead agency might be in Cincinnati, for example, but a member agency in Paris might provide service to the client's facility in France.

Carrier Support

Many of the largest property/casualty insurers support the affiliation groups with either cash contributions, advertising and specialized marketing or additional compensation to the network when certain production goals are met. This commitment by carriers is not new. Twenty years ago, a half dozen insurance companies funded an investment banking facility owned by Assurex that provides loans to help younger members of a brokerage buy the business when the owner wants to retire.

"Many carriers have accepted the fact that it's in their best interest to have several distribution systems alive and well into the next millennium," Ekern said. "They perceive the affiliation groups as an alternative distribution system to the megabrokerage firms."

To further support regional agents, Chubb Insurance Group created a centralized Multinational Resource Group three years ago. It consists of in-house international underwriters and a network of Chubb agents around the world. Chubb agents in the United States can tap the network to place business for their multinational clients.

"The regionals' staff skills, product delivery and their geographic reach is becoming very similar to the global broker with the help of the carriers," said Terry Cavanaugh, worldwide marketing officer, Chubb & Son, Warren, N.J.

Where the global brokers have the edge with the largest accounts, the regionals have advantages in the middle market, Cavanaugh said. And much of it has to do with relationships.

"It's entrepreneur to entrepreneur," he said. In addition, while the global brokers may be better able to bring auxiliary resources, like actuarial and benefits consulting, "the consistency in the delivery of service and the consistency of contacts is not always there," because of the turnover that occurs in any large organization.

With the availability of outsourced services and businesses like Globex, the size of the broker is less relevant than service. "There's an ever-growing lack of tolerance for poor service," Cavanaugh said. "Whoever can satisfy the customer will win out, whether they are global, regional or a step down from that. Size does not necessarily determine competency."

One area where the megabrokers believe they have a great advantage is in helping companies that are planning an initial public offering or that are involved in mergers and acquisitions.

"That's an area where we feel we have a specific and focused expertise," Holmes said, especially in developing programs for directors-and-officers liability, errors and omissions, representations and warranties, and debt securitizations For these businesses, Marsh tries to get in on the "infancy of the organization through its growth cycle," Holmes said.

DeWayne Derksen, who specializes in executive risk for CFG Insurance Services, bumps up against the megabrokers, both in start-ups that are considering an IPO and, in some cases, Fortune 100 companies.

"It's a beauty contest related to intellect and who is going to deliver the best, quickest and most responsive intellectual set of materials," Derksen said. CFG works with outside firms for some of the specialty actuarial services, for example, but Derksen said that's no disadvantage when the client realizes the large brokers have their specialty resources in New York. "If all things are equal and it comes down to cost, I've got leverage if I'm dealing in my back yard," he said.

Increasing Pressure

In mid-February, there was a strong signal that Marsh would turn up the middle-market heat even further. The annual national conference for Marsh's middle-market practice typically attracts speakers from the top ranks of the risk and insurance services unit.

But this year, the firepower was multiplied. Six weeks into his job as CEO of Marsh & McLennan Cos.--the parent company that also owns Putnam Investments and Mercer Consulting--Jeffrey W. Greenberg spent parts of two days at the middle-market conference.

"He said specifically that he sees this as one of the key business practices within the organization that has tremendous upside growth potential," said Holmes, the national middle-market practice leader.

Holmes, who has been involved with middle-market operations for 23 years, sees the beginning of a cultural shift in Marsh.

Large accounts always will be a priority for Marsh, but Holmes expects the middle-market practice to rival the mainstay risk-management side of the business in size and prestige. "The result of that meeting and that visit was enormous," he said. "Culturally, we're seeing a real transformation in this organization."

In the first two months of the year, Marsh's middle-market business was beating projections for 8% growth on the property/casualty side and about 13% on the benefits side, Holmes said.

Much of Marsh's growth in the middle market in the past three years came from its acquisitions of Johnson & Higgins and Sedgwick, which both were strong in the high end of that market as well as in national accounts. Holmes came from Johnson & Higgins.

Marsh has more than 50 offices in the United States, most of which came from the legacy companies. "They are out there for a reason. We need to be local and close to our clients" and have people involved in the communities in which their clients are located, Holmes said.

One of the challenges in that market is the broad band, from $10 million in sales to close to $1 billion. Different segments want different types of service, very transactional on the low end to very consultative on the high end.

"The middle-market segment is such a rapidly growing area that we have to be prepared and have service strategies to provide support to all segments," he said.

Holmes said Marsh would excel in the middle market when the industry succeeds in reducing the administrative inefficiencies in how business is transacted and how information is conveyed to carriers. "Then we can focus our staff on raising the bar and providing a high level of consulting services," Holmes said.

But Ekern believes that as long as the regional brokers can combine local service with an arsenal of consulting services, the megabrokers will continue to have trouble penetrating the middle market. That's especially true as the megabrokers, in an effort to work efficiently, send accounts to regional marketing and service centers in large cities.

"The biggest problem they've had is that the culture of the middle-market buyer doesn't necessarily lend itself to the megafirm business model," Ekern said. "While this approach does lend itself to better operational efficiency, it doesn't necessarily translate into better client service."

                            Commercial Premium
                              By Account Size
                      National accounts made up just
                     10.5% of the $112.9 billion
                   commercial insurance market in 1998.
                              ($ in millions)
National         $11,909
Middle Market    $50,369
Small Commercial $50,670
Source: Conning MarketStance
                      Commercial Accounts by Segment
                                                      Average Annual
                           Number of     Average Growth in Number of
                            Accounts Premium per            Accounts
Segment                      in 1998     Account             1993-98
Small Commercial
  1 to 4 employees         3,843,867     $ 2,000                0.0%
  5 to 9 employees         1,379,832       8,000                1.3%
  10 to 19 employees         867,128      15,000                1.3%
  20 to 49 employees         579,369      34,000                1.4%
Total                      6,670,196      $8,000                0.5%
Middle Market
  50 to 99 employees         201,276     $73,000                1.4%
  100 to 249 employees       116,656     151,000                1.3%
  250 to 499 employees        30,564     344,000                1.1%
  500 to 999 em lo ees        11,777     640,000                0.9%
Total                        360,273    $140,000                1.3%
National Accounts
  1,000 to 1,499 employees     3,526    $912,000                0.7%
  1,500 to 2,499 employees     2,270   1,369,000                0.7%
  2,500 to 4,999 employees     1,095   2,650,000                0.5%
  5,000+ employees               384   6,992,000                0.6%
Total                          7,275  $1,637,000                0.6%
Segment                    1998-2003
Small Commercial
  1 to 4 employees              1.5%
  5 to 9 employees              1.0%
  10 to 19 employees            0.7%
  20 to 49 employees            0.6%
Total                           1.2%
Middle Market
  50 to 99 employees            0.4%
  100 to 249 employees          0.2%
  250 to 499 employees          0.0%
  500 to 999 em lo ees          0.0%
Total                           0.3%
National Accounts
  1,000 to 1,499 employees      0.0%
  1,500 to 2,499 employees      0.0%
  2,500 to 4,999 employees      0.0%
  5,000+ employees              0.0%
Total                           0.0%
Source: Conning MarketStance
                                Top Brokers
                               ($ Millions)
                                    1998 U.S.
                                    Brokerage
Rank Company                         Revenues
 1   Marsh & McLennan Cos.          $3,350.46
 2   Aon Group                       2,286.44
 3   Willis Corroon Group              630.55
 4   Arthur J. Gallagher & Co.         471.99
 5   USI Insurance Services            327.00
 6   Acordia Inc.                      306.87
 7   Hilb, Rogal & Hamilton            172.16
 8   Norwest Insurance                 161.09
 9   Brown & Brown                     150.44
 10  Jardine Lloyd Thompson            146.15
 11  Lockton Cos.                      117.29
 12  BB&T Insurance Services            80.73
 13  American Phoenix Corp.             71.25
 14  Near North Ins. Brokerage          70.79
 15  McGriff, Seibels & Williams        60.49
 16  Meadowbrook Ins. Group             60.15
 17  Talbot Financial                   56.97
 18  ABD Insurance & Fin. Services      55.17
 19  Frank Crystal & Co.                55.04
 20  Lambert Fenchurch Group            52.97
 21  Palmer & Cay (Assurex partner)     52.37
 22  Keenan & Associates                50.40
 23  NIA Group (Assurex partner)        47.73
 24  Hobbs Group                        47.73
 25  Summit Global Partners             47.41
Source: Hales Report, August 1999

Big Appetite for Small-Business Accounts

Although the number of middle-market commercial accounts--business with 50 to 999 employees--grew the fastest between 1993 and 1998, the number of small accounts is expected to grow fastest through 2003, according to a 1999 Conning & Co. study on commercial insurance brokers.

That trend is driving the largest brokers to look for profitable ways to write small-business accounts. Marsh Inc. set up a placement facility in Tampa, Fla., that is designed to efficiently process transactions for the low end of the middle-market segment--accounts that generate less than $15 million in sales, said Don Holmes, national middle-market practice leader for Marsh. The Tampa facility is in its first year of operations.

Tow years ago, Aon Corp. created a new business unit called Aon Enterprise, which is designed to handle small-business accounts with less than $50,000 in insurance premium for all property/casualty lines. The first goal was to take the time-consuming and labor-intensive small-business accounts away from brokers in the regional offices and the second was to become a major player in small-business distribution.

"It's a great customer," said Teresa Pahl, executive vice president of Aon Corp. and chairwoman of Aon Enterprise. "If you service them well, they are loyal. You are dealing with the decision market."

The key to Aon Enterprise's success, however, will be its ability to carve costs out of the process. The goal is a 30% reduction in costs to get the expense ration into the low 20s. "We're not there yet," Pahl said. "What we've squeezed out so far is the acquisition costs."

The next big step, she said, has to be in the legacy technology--the insurer's back-end systems.

Technology is a key part of Aon Enterprise through its state-of-the-art call center and account-management system that captures detailed policy information for 27 lines of insurance. The company provides online access to insurance programs, claims forms and other documents.

Aon Enterprise works with Chubb Group, Kemper Insurance Cos., CGU Insurance Cos., St. Paul Cos. And CNA Insurance Cos. Each company has three to 15 people working on site in Lisle, Ill., and their systems are embedded with Aon's. "With them on site, we have much faster access to underwriting," Pahl said.

In some cases, the companies share risk through a quota-share pool. For all lines except workers' compensation, Chubb is the fronting company, and on workers' comp, Kemper is the fronting company. But they both share in the risks. "It increases their appetite," she said. "We're becoming a preferred distribution source for these carriers because it's helping their bottom line."

Aon Enterprise now has relationships with American Express' small-business service, Administaff, one of the largest employee-leasing organizations, and Inc.com, a Web site for entrepreneurs.

American Express small-business customers can fax or mail a one-page application, get a quote within 24 hours and charge the premium to their card.

Aon Enterprise won't write all small businesses. Retail, service and small manufacturing are straightforward and can be handled through the streamlined underwriting approach. Pahl said Aon Enterprise doesn't write trucking businesses or general contractors because they require more sophisticated underwriting. "We don't do agriculture because it's a highly competitive regional market, and we don't do oil and gas for the same reason," she said. "We focus on businesses that we can do well, and we don't engage in market segments where the model won't respond."

Those classes of business are referred to other Aon offices, "because they require a more local approach."

For the future, Aon Enterprise is currently building self-service components that would better enable customers to get claims information, insurance certificates, information, insurance certificates, information about their policies and automobile identification cards over the Internet.

"What has been harder is just trying to figure out how customers will buy in the future and how we need to adjust the model for that as people become more an more comfortable with online environments." Pahl said.