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Collapse of Aon-Willis deal validates insurers’ fears about broker power

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“We operate in an oligopoly which not everyone understands.”

The remark, published in the US government’s legal complaint against the proposed $30bn blockbuster tie-up between Aon and Willis Towers Watson, could not have been blunter.

It validated the insurance industry’s fears about the power being accrued by the biggest brokerage companies — groups that help other companies find cover. “[We] have more leverage than we think we do and will have even more when [the] Willis deal is closed,” the unnamed senior broker at Aon was also quoted as telling colleagues.

But the US Department of Justice did understand. Its intervention in June, which argued that the sheer size of the combined company would mean worse insurance terms for businesses and individuals, sucked the life out of a deal that was poised to create the world’s biggest insurance broker.

When the merger subsequently collapsed, the White House hailed the episode as reflecting the tougher approach to antitrust under the administration of President Joe Biden.

Sector consolidation had been the name of the game for years. The biggest deals included Marsh’s acquisition of Jardine Lloyd Thompson for £4.3bn in 2018 while Willis combined with Towers Watson in an $18bn deal in 2015. This helped swell their top lines: Marsh reported $17bn in revenue last year, while Aon reported $11bn and Willis recorded $9bn.

For some in the industry, the DoJ’s action has drawn a line under the years of consolidation, with further M&A among the top tier now viewed as highly unlikely.

“The top four aren’t going to get together,” said Patrick Gallagher, chief executive at Gallagher, the fourth-largest player by revenue. “You can argue whether they should or shouldn’t, but they’re not going to.”

Marsh McLennan, Aon, Willis and Gallagher have been the four highest-revenue broking groups over the past decade, according to rankings compiled by rating agency AM Best.

Chart showing big deals bulking up revenues

For insurers nervous about their growing clout, the DoJ’s action came as sharp relief, especially as Europe’s competition authorities approved the tie-up.

“Commission rates would’ve gone up, and you might argue if that feeds back to the customer, that’s OK — but I don’t think in reality it would have done,” said one chief executive operating in London’s specialist insurance market. “I think it would have stuck with the man in the middle. That position of dominance means that the cost of transacting insurance in aggregate would have gone up.”

Fees have been rising in recent years

Insurers have long been worried about broker power. Four years ago, Evan Greenberg, chief executive of Chubb, one of the largest US insurers by market value, spoke out against “abusive behaviour”, including what he said were excessive commissions. That brought memories of a 2004 crackdown in the US on price manipulation and kickbacks.

The middleman’s cut has crept up in recent years. Data from AM Best show that net commission and brokerage fees as a proportion of premiums rose from 10.3 per cent in 2011 to 11.5 per cent in 2020.

Chubb’s chief executive Evan Greenberg
Chubb’s chief executive Evan Greenberg has said that broker commissions are excessive © Patrick T Fallon/Bloomberg

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

After years of consolidation, the biggest groups span the globe — Marsh, Aon and Willis each operate in more than 100 countries — and have substantial operations in related areas such as retirement consultancy and health benefits broking. Their services also span data analytics to arranging insured finance on everything from planes to intellectual property.

But in the DoJ’s reading, that depth and breadth was exactly the problem: it meant that large companies with complex, global needs had little option beyond what it dubbed the Big Three, and consequently why it could not allow this to become a Big Two.

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

“Do I think brokers throw their weight around? Yeah, they do. Size matters in broking,” said John Ludlow, former chief executive of Airmic, a trade body that represents insurance buyers and risk managers within companies. One of the big fears for the industry is the “chokehold” that the megabrokers have, he added.

Brokers dispute any such suggestion, saying they are duty-bound to advocate strongly for their clients.

‘What happened to the oligopoly?’

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

Aon’s chief executive Greg Case rejected the depiction of the industry as a “zero-sum game” between insurers and brokers, saying its focus should be on providing new ways of helping companies manage emerging risks.

Gallagher points to rising commercial insurance prices as evidence that insurers are not losing out to ever-stronger intermediaries.

“If [the concerns over growing broker power] were true, we’d never have a hard market,” he said, using an industry term for the current upswing. “Our number one job is to transfer risk and to help clients manage their risk and the key player in that is the [insurer], and if we had the power, we would never give them a raise. And they are all getting raises substantially right now. What happened to the oligopoly?”

Line chart of Market value/revenues (x) showing Willis's valuation has suffered as its rivals pushed on

Chief executives at three commercial insurers said they feared that the growing power of brokerages would show up when the market for insurance prices weakens and their negotiating power is reduced.

They worry about a rise in the use of so-called broker facilities, where insurers essentially agree to cover certain types of risks in advance, giving brokers the opportunity to plug companies that fit the bill into the structure without insurers’ individual sign-off.

One insurer said these can be a “gun to our head”, where for example the underwriter either signs up to a pool of risks in a particular region or risks losing access to the broker’s business there.

The UK’s financial regulator explored this in a market study two years ago. The Financial Conduct Authority was unable to conclude that such “pay-to-play” structures exist at scale but admitted that “neither the quantitative nor qualitative analysis can necessarily determine that there is no pay-to-play”.

The senior underwriter said brokers putting together the pool “are starting to make an underwriting decision about the blended outcome of a portfolio”, adding: “That could damage the market . . . they could be eating our breakfast.”

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