Tue. Oct 19th, 2021

“We work in an oligopoly that not everyone understands.”

The remark, published in the legal complaint of the US government against the proposed $ 30 billion blockade between Aon and Willis Towers Watson, could not have been blaster.

This confirms the fears of the insurance industry about the power of the largest brokerage firms – groups that help other companies find cover. “[We] has more leverage than we think we do and will have even more when [the] Willis transaction has been closed, ”the anonymous senior broker at Aon also quoted as colleagues.

But the U.S. Department of Justice did understand. His intervention in June, which argued that the large size of the combined company would mean worse insurance conditions for businesses and individuals, sucked life out of a deal that would create the largest insurance broker in the world.

When the merger subsequently collapsed, the White House saw the episode as a reflection of the stricter approach to antitrust under President Joe Biden’s administration.

Sector consolidation has been the name of the game for years. The biggest deals include Marsh’s acquisition of Jardine Lloyd Thompson for £ 4.3bn in 2018, while Willis joined Towers Watson in a $ 18bn deal in 2015. It helped swallow their lead: Marsh has past year reported $ 17 billion in revenue, while Aon reported $ 11 billion bn and Willis recorded $ 9 billion.

For some in the industry, the actions of the DoJ drew a line during the consolidation years, with further M&A below the top level now considered highly unlikely.

“The top four are not going to come together,” said Gallagher CEO Patrick Gallagher, the fourth-largest revenue player. “You can argue whether they should or should not, but they go.”

Marsh McLennan, Aon, Willis and Gallagher have been the four highest-earning groups for the past ten years, according to the rankings compiled by the rating agency AM Best.

Chart with large transactions that increase revenue

For insurers who were nervous about their growing influence, the actions of the DoJ were sharp relief, especially as the competition authorities in Europe approved the band.

“Commission rates would have risen, and you could argue that if it came back to the customer, it’s right, but I do not think it would have done so,” said a chief executive in the London specialist insurance market. ‘I think it would have stuck with the man in the middle. This position of dominance means that the cost of insurance would rise overall. ”

Rates have risen over the past few years

Insurers have long been concerned about brokerage power. Four years ago, Evan Greenberg, CEO of Chubb, one of the largest US insurers by market value, spoke out “Offensive behavior”, including what he said were excessive commissions. It brought to mind a 2004 collapse in the US over price manipulation and setbacks.

The intermediary’s cut has crept in in recent years. Data from AM Best shows that the net commission and brokerage fees as a part of the premiums increased from 10.3 percent in 2011 to 11.5 percent in 2020.

Evan Greenberg, CEO of Chubb

Chubb CEO Evan Greenberg says brokerage commissions are excessive © Patrick T Fallon / Bloomberg

Brokers argue that if insurers pay them more, it is because of the services they have added to manage new risks such as climate change.

After years of consolidation, the largest groups around the world – Marsh, Aon and Willis are each active in more than 100 countries – and have significant operations in related areas, such as retirement advice and brokerage health. Their services also range from data analysis to arranging insured finances on everything from aircraft to intellectual property.

‘ n Big Two does not become.

Underwriters privately argue that brokers can use their scale, not only to push up commissions, but to pressure underwriters to accept certain risks or pay certain claims.

‘Do I think brokers throw their weight around? Yes, they do. Size matters to brokers, ”says John Ludlow, former CEO of Airmic, a trading body that represents insurance buyers and risk managers in companies. One of the biggest fears for the industry is the ‘choking’ the mega-brokers have, he added.

Brokers dispute such a proposal, saying they are obligated to strongly advocate for their clients.

“What happened to the oligopoly?”

Brokers also push back against the idea that their size is problematic, highlighting the low barriers to setting up insurance brokers and citing fast-growing challengers such as the London-based McGill and Partners.

Aon’s CEO Greg Case rejected the portrayal of the industry as a ‘zero-sum game’ between insurers and brokers, saying the focus should be on offering new ways to help businesses manage emerging risks.

Gallagher points to rising commercial insurance prices as proof that insurers are not losing their strongest intermediaries.

“As [the concerns over growing broker power] were true, we would never have a tough market, ‘he said, using an industry name for the current upswing. ‘Our most important task is to convey risks and to help clients manage their risks, and the most important role in this [insurer], and if we had the power, we would never give them a raise. And they are all currently getting significant increases. What happened to the oligopoly? ”

Market value / income line chart (x) showing Willis' valuation suffered as its competitors progressed

General managers at three commercial insurers said they feared the growing power of brokers would emerge when the insurance prices market weakened and their bargaining power diminished.

They are concerned about an increase in the use of so-called real estate facilities, where insurers essentially agree to cover certain types of risks in advance, giving brokers the opportunity to include companies that fit the account into the structure without the insurers signing off separately.

One insurer said it could be a ‘gun to our head’, where the underwriter, for example, takes a number of risks in a particular region or runs the risk of losing access to the brokerage business there.

The British regulator of the United Kingdom investigated this two years ago in a market study. The Financial Conduct Authority could not conclude that such “pay-to-play” structures exist on a large scale, but acknowledged that “neither the quantitative nor qualitative analysis can necessarily determine that there is no pay-to-play”. not”.

The senior underwriter said brokers who put together the pool ‘make an underwriting decision on the mixed outcome of a portfolio’, adding: ‘It could hurt the market. . . they may be eating our breakfast. ”

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