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Movement in the Middle Market.

Alternative risk financing provides a great opportunity for agents to gain a competitive advantage.

It happened with commercial national accounts. It happened with group life and health business, Now it is happening in the middle commercial property/casualty insurance market. "It" is the migration of accounts to alternative-risk programs, which feature risk-financing techniques other than the traditional "complete transfer of risk" via fully insured programs.

This transition provides one of the greatest opportunities in the past decade for independent agents to offer valued differentiation to their accounts. Agents who offer alternative risk-financing solutions to their clients will establish an important competitive advantage and improve their position in a market of great potential.

In a study released earlier this year, Conning & Co., Hartford, Conn., found that despite limited profits but with expectations of prices eventually firming, middle-market insurance companies have made a rational economic decision to remain in the business. The study by the insurance industry research firm also made these points:

* the middle market, defined as groups with 50 to 999 members, generates 44% of both the total liability and workers compensation premium and 39% of the total commercial auto premium;

* workers' comp and liability insurance each represent about one-third of the middle market; and

* nearly 60% of middle-market expansion is concentrated in three industries: manufacturing, services and transportation.

The inevitable migration to alternative risk-financing strategies began almost a year ago in the middle market. And the trend will accelerate as the soft market of the past 10 years hardens.

Here's why: Traditionally, middle-market companies have purchased fully insured programs, paying premiums for coverage and transferring all insurance risks to insurers. During the past year, however, as the cost of insurance has begun to rise, accounts have begun to explore risk-financing options that minimize their insurance costs and provide adequate coverage. A range of alternative risk-financing options exists, enabling companies to reduce or even eliminate insurance premiums and to pay claims as they are incurred. As a result, companies can improve their cash flow and invest money that would have been paid out in premiums in fully insured programs. In the middle market, the trend will develop into accounts retaining frequency loss layers and insuring their severity exposures.

This increasing movement to alternative risk financing is an agent's opportunity to offer valued differentiation--assuming that the agent is willing to change his or her role, from salesperson to consultant.

Agents who make this transition will be positioned to compete more effectively in the middle market--in particular, in the middle of the middle market, where companies employ 100 to 499 employees and generate 55% of middle-market premium. This middle of the middle market has been largely underserved in recent years, as many carriers have focused on the small commercial market, and the largest brokers have pursued large national accounts and the upper end of the middle market.

Agents best positioned to succeed are those who are open to change, have a long-term vision and can develop a sizable book of middle-market accounts.

To compete in the alternative risk-financing business, an agent must develop specialized skills within his or her agency and/or form a strategic relationship with an insurer committed to the agency system and this emerging market. For all but the largest agents, the latter is often the most efficient and effective approach. Agents also must provide a wide range of product and service options, as well as high-quality, cost-effective claim administration services.

Alternative risk-financing strategies take many forms. The most popular include self-insurance programs, with claim administration, loss prevention and specific and aggregate stop-loss protection; large deductible programs, in which an employer assumes risks of $100,000 or more; midrange-deductible programs, in which an employer assumes the insurance risk below specified deductible levels of $25,000 to $100,000 and retains insurance protection for larger losses; self-insurance for homogeneous groups, often for workers' comp coverage; and rent-a-captive programs, in which a captive company insures loss exposures and provides specialized coverage.

Rising prices and the desire among middle-market companies to better manage the costs of their insurance programs have created opportunities for agents and others. The winners will be those who are willing to provide the consulting, knowledge-based solutions that middle-market clients will demand.

David M Patterson, a Best's Review columnist, is vice president, specialty markets, with Allmerica Property & Casualty Cos., Worcester, Mass.
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Author:Patterson, David M.
Publication:Best's Review
Date:May 1, 2000
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