Serving The Middle Market Can Be Challenging The need is there, but the bucks may not be

By Warren S. Hersch

For advisors keen to get onto the fast track to career success and a comfortable retirement, catering to middle income consumers may not seem like an obvious strategy. But what the middle marketbroadly defined as households with earnings ranging from $40,000 to $80,000 per yeardoesnt provide in fat commissions or fees, it can deliver in high-volume sales.

Consider: State Farm sold more than 750,000 insurance policies this year to middle market customers.

National Association of Insurance and Financial Advisors President C. Robert Brown, speaking at LIMRA Internationals Advanced Sales Forum in Chicago, urgently called on the insurance community to better serve the middle market. The reason: The professions increasing focus on the upper income brackets, if left unchecked, could prompt Congress and the states to nullify the tax-free treatment of death benefit proceeds.

How underserved are these folks? Pete Jacques, an associate scientist at LIMRA International, Windsor, Conn., says approximately half of all mid-market consumers are without life insurance coverage or dont have enough.

“Consumers have plenty of opportunities to buy through direct channels: the Internet, TV and print ads, etc.,” he says. “But they lack the education they need to be well-informed buyers. So consumers procrastinate or, if they do buy, frequently purchase inappropriate amounts or types of coverage.”

Brown, among others, attributes the problem in large measure to a consolidation in recent decades of sales channels and a decline in the number of careers agents, especially new recruits, who tend to start out in the profession targeting mid-market customers.

A 2004 report from LIMRA supports this view. The study noted that 32 insurance firms surveyed by LIMRA recruited 30,000 full-time career agents in 2003, a 3% decline from 2002. The top 10 recruiting companies accounted for at least 70% of total recruits in the last 5 years. And the report pegs the number of active career agents in the U.S. at 178,000, down from 195,000 in 1998.

Independent advisors who stay in the business tend to navigate to the more lucrative marketshigh-net-worth individuals and business owners and not necessarily because of a strategic decision to do so. As they build successful practices, new referrals naturally tend toward prospects in the upper income brackets.

“I go to where the referrals take me,” says Steve Spiro, president of Spiro Risk Management, Valley Stream, N.Y., and past president of the Independent Insurance Agents and Brokers of N.Y. “Forgive me if I sound harsh, but my time is too valuable and expensive to run after the $1,000 or $2,000 sale.”

Spiros comment hints at other factors that make middle income customers less desirable prospects than their more wealthy counterparts: the predominance of term insurance purchases in the middle market, often necessitated by clients budgetary constraints, and the increasingly thin margins on product sales.

“It takes 2 to 3 times as much volume in sales today on a gross basis to maintain the income stream that you used to get years ago,” says Joseph Maczuga, president of CPSI Group, Troy, Mich. “What we have is a more competitive situation, brought about in part when the professional disciplines broke through the lines of demarcation. Now, insurance agents, brokers, bankers and CPAs are doing everything.”

To compensate for the diminishing returns, he adds, more advisors are charging fees for services. So, the attraction in catering to business owners and high-net-worth individuals is two-fold: higher commissions on larger sales, and the ability to charge fees, which frequently requires investable assets beyond what many middle income people possess.

To be sure, some advisors are attaining success in the middle market. Among the top producers are advisors who enjoy high-volume sales serving the worksite market. NAIFAs Bob Brown, who is also president of The UCL Financial Group, Memphis, Tenn., says his firm typically will write multiple policies for employees during a single worksite visit, enabling UCL to operate efficiently.

Taking economies of scale to a greater order of magnitude are industry behemoths that specialize in serving middle income customers, such as State Farm.

The Bloomingdale, Ill.-based insurance provider averages 80,000 policy sales per month, most to mid-market term buyers. Of the 28 million households the firm now serves, about one in six, or 4,667,000-plus, has a life policy.

What distinguishes the provider? State Farm Vice President of Risk Management Nancy Behrens says the multiline company is able to tap the large base of existing clients for the firms other products: including auto, homeowners, health and disability insurance, as well as annuities.

“Our [captive] agents often set the stage at the time of the first purchase of an auto or home policy, then do the life policy during a subsequent conversation,” says Behrens. “They enhance the value of the relationship by filling in the holes in the clients overall financial plan.”

Luis Ramirez, an advisor for Savage & Associates, Toledo, Ohio, says many of his mid-market clients are blue-collar workers employed in Toledos manufacturing sector.

“I enjoy working in this space, and Ive become pretty good at it,” he says. “The middle income workers understanding of financial concepts isnt as deep as that of the high-net-worth individual.

“You have to dumb-down the presentation a bit,” he adds. “I can speak at their level very well.”

Savage & Associates corporate philosophy”serve the masses, eat with the classes”doesnt keep the firm from doing business with the asset-rich. Ramirez estimates that high income individuals and business owners make up about 10% of his clients. But to stay focused on his mid-market specialty, Ramirez generally refers wealthier individuals to a partner within the firm, who reciprocates for Ramirez.

Spiro Risk Managements Steve Spiro also subscribes to the team approach, outsourcing small sales to partnering advisors at MetLife and Guardian Life, while taking a cut on the commission. Spiro doesnt refer out all mid-market prospects. Those interested in more comprehensive financial planning, including long term care insurance, frequently work with Spiro directly.

The ability to deliver comprehensive financial planning services, say experts, ultimately is the key to profitability in the middle market. To that end, developing a strong relationship with the client is crucial.

Says State Farms Behrens: “Independent [producers] need to deepen their relationship with the customer to sell other products. But building a relationship of trust is difficult.”

Reproduced from National Underwriter Edition, November 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.