Some P/C Agencies See Potential in Dynamic Health, Benefits Market

The South Central region of the country, particularly Texas, has been a hotbed of activity when it comes to mergers and acquisitions of smaller health and benefit agencies. The reason, according to agencies in the region, is because of the investment in new resources necessary to remain relevant in the sector.

John Neumaier, executive vice president of Gallagher Benefit Services, manages its South Central Region — which includes Arkansas, Louisiana, Oklahoma and Texas. His firm has seen an increased interest from benefits agencies looking to align themselves with a larger broker, he said.

“We have had more mergers on the benefits side so far this year than all of last year,” he said. “Small, medium and large size firms are joining us. It comes down to them figuring out if they want to make a long term investment in building resources, or do they want to align themselves with a platform that instantly gives them these resources.”

In the first half of 2012, Gallagher acquired two benefit and insurance service agencies in Louisiana, two in Texas and one in Oklahoma. Neumaier said when considering an acquisition, they look for growing agencies that need to work with a larger broker in order to continue to grow.

“Smaller agents and brokers, because of their capabilities and resources, usually have a ceiling of how big a client they can work with,” he said.

Michael Parks, managing director of the Financial Services Division for Higginbotham Insurance Group in Fort Worth, Texas, said even if healthcare reform doesn’t pass, employers are expecting more from their broker.

Clients in the benefits area have begun to seek resources like payroll/human resource services, wealth management and executive benefits, employee wellness programs, retirement services and voluntary benefits.

“Everything is being dictated by the market,” Parks said. “Employers are looking at their current broker and saying ‘we want all these different services and if you can’t provide all of that, I need to find someone who can.’ If a smaller agency doesn’t hold hands with a larger agency, they run the risk of losing the account.”

Higginbotham, which has 17 offices throughout Texas, has also been busy with acquisitions, its most recent being BenefitSpecialists, an employee benefits broker in Houston. Parks said it seems health insurance carriers are trying to deal with fewer agencies and carriers either want smaller agencies to go away or join up with larger agencies.

“It is a lot more efficient for [carriers] to deal with us than the guy down the street who only has a few accounts,” he said.

Louisiana’s Eustis Insurance & Benefits is planning to acquire agencies in its home state this year and has been investing in offering additional services like payroll and benefit consulting for the past 18 months. Executive Vice President Mike Mann said in addition to demand from clients for these services, the agency also recognized the need for expansion.

“We are more aggressive in expanding in these particular areas because of healthcare reform and because of the potential loss of earnings,” Mann said. “We need to be able to supplement our earnings and keep growth up if indeed the small medical market dissolved.”

Shrinking Health Commissions

Another major worry for health and benefits agencies is that many carriers are reducing commission percentages, a trend that has been going on for several years.

Part of the reason for the reduced commissions — though not the only one — is a stipulation in the healthcare reform law that is meant to control medical loss ratios by requiring health insurers to spend the majority of every premium dollar (85 cents for large group and 80 cents for individual and small group markets) on benefits.

The remaining percentages can go to administration costs, including agent commissions. If carriers go over those percentages they have to pay penalties.

“What has happened is the companies have to control their expenses with this medical loss ratio or they’re fined, and they are using our commissions because they are a part of the medical loss ratio, which we believe they should not be,” said Bob Bramlett, president and CEO of The Bramlett Agency in Ardmore, Okla., and chairman-elect of the Independent Insurance Agents and Brokers of America.

Ed Massey, owner of brokerage general agency Affiliated Marketing Group in Stafford, Texas, said carriers are preparing to go the way of a standard commission or flat fee for accounts, regardless of healthcare reform.

“I don’t see anyone betting the farm long term that they are going to do group commissions or group business in a way that is going to be as profitable to [agents] as it has been in the past,” Massey said.

Higginbotham’s Parks said healthcare costs in Texas are some of the highest in the nation, and employers are reaching out to companies that can help them control these costs, while also getting them the most for their money. That, coupled with the commission factor, is motivation for agents to offer more value.

“We are all going to make less off of each group that is out there so we have to provide all these services and be more efficient than what we’ve been in the past, and larger agencies have that ability,” Parks said.

Time to Expand?

With so so much more expected of agents, it may be difficult for property/casualty agents to enter the health and benefits area, but the under-50-employees market may offer some potential.

Larger companies with more than 50 employees will need the help of larger benefit agencies, Neumaier said. However, in Texas there are plenty of small companies with fewer than 50 employees, according to Massey. Still, property/casualty agents who are not already in the benefit space need to make sure they can do the work required to succeed, particularly because of the declining commissions, he said.

Listen to the complete podcast with Misty Baker, “Health/ Benefits Sector Offers Potential Growth for P/C Agents,” on IJTV.