The collapse of the Aon Willis transaction confirms insurers’ concerns about broker’s power

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“We operate as an oligopoly, not everyone can understand.”

The statement was published in a US government complaint against the proposed law 30 billion US dollars of blockbuster cooperation The relationship between Aon and Willis Towers Watson cannot be straightforward.

It confirms the insurance industry’s concerns about the power accumulated by the largest brokerage companies-groups that help other companies find insurance. “[We] Have more influence than we thought, and in [the] The Willis transaction has been completed,” Aon’s senior broker who asked not to be named was also quoted to tell colleagues.

But the US Department of Justice does understand.its put one’s oar in In June, the company argued that the sheer size of the combined company meant that corporate and individual insurance provisions would be worse, which killed a deal that was preparing to create the world’s largest insurance broker.

When merging Subsequently collapsedThe White House praised this incident as a reflection of President Joe Biden’s tougher antitrust approach during his administration.

Over the years, industry consolidation has been the name of the game. The largest transactions include Marsh’s acquisition of Jardine Lloyd Thompson for £4.3 billion in 2018, and Willis’s merger with Towers Watson for $18 billion in 2015. This helps expand their revenue: Marsh’s revenue last year was $17 billion, while Aon’s revenue was $11 billion and Willis recorded $9 billion.

For some in the industry, the actions of the U.S. Department of Justice have drew a clear line after years of integration, and further mergers and acquisitions among top companies are now considered extremely unlikely.

“The top four will not come together,” said Patrick Gallagher, CEO of Gallagher, the fourth-largest company by revenue. “You can argue about whether they should or shouldn’t, but they won’t.”

According to the ranking compiled by the rating agency AM Best, Marsh McLennan, Aon, Willis and Gallagher are the four brokerage groups with the highest income in the past decade.

For insurance companies that are nervous about their growing influence, the actions of the US Department of Justice have brought great relief, especially when the European competition authority approved the cooperation.

“The commission rate will go up, and you might argue that if this can be fed back to the customer, that’s okay-but I don’t think it will actually be done,” said a chief executive who operates in the professional insurance market in London. “I think it will get stuck on the person in the middle. This dominance means that the total cost of transaction insurance will rise.”

Fees have been rising in recent years

Insurance companies have long worried about the power of brokers.Four years ago, Evan Greenberg, CEO of Chubb, one of America’s largest insurance companies by market capitalization, publicly opposed “Abusive Behavior”, Including what he said the commission is too high. This reminds me of the US crackdown on price manipulation and rebates in 2004.

In recent years, the interests of middlemen have gradually increased. AM Best’s data shows that the proportion of net commissions and brokerage fees to premiums has increased from 10.3% in 2011 to 11.5% in 2020.

Evan Greenberg, CEO of Chubb

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

The broker argued that if the insurance company paid them more, it was because they added management services New risks such as climate change.

After years of integration, the largest groups spread all over the world—— swamp, Aon, and Willis each have operations in more than 100 countries/regions, and have a large number of businesses in related fields such as retirement consulting and health benefits brokerage. Their services also cover insurance financing in all areas from data analysis to arranging from aircraft to intellectual property.

But in the interpretation of the US Department of Justice, depth and breadth are the problem: this means that large companies with complex global needs have no choice but the so-called Big Three, so why can’t it allow them to become the Big Two.

The underwriters privately argue that brokers can not only use their size to push up commissions, but they can also put pressure on the underwriters to take certain risks or pay certain claims.

“Do I think brokers will let it go? Yes, they do. Scale is important in the brokerage business,” said John Ludlow, former CEO of Airmic, a trading agency that represents in-house insurance purchasers and risk managers. (John Ludlow) said. He added that one of the industry’s biggest concerns is the “strangulation” of large brokers.

Brokers disputed any such suggestions, stating that they have an obligation to advocate vigorously for their clients.

“What happened to the oligopoly?”

Brokers also opposed the view that their scale is problematic, emphasizing that the threshold for setting up an insurance brokerage company is low, and citing fast-growing challengers such as London-based McGill and Partners.

CEO of Aon Greg Keys Refused to describe the industry as a “zero-sum game” between insurance companies and brokers, saying that its focus should be on providing new ways to help companies manage emerging risks.

Gallagher pointed out that rising commercial insurance prices prove that insurance companies have not lost out to increasingly powerful intermediaries.

“if [the concerns over growing broker power] It’s true that we will never have a tough market,” he said, using an industry term to describe the current rise. “Our first job is to transfer risk and help customers manage risk. The key players are [insurer]If we have the power, we will never give them a raise. They are all raising their salaries substantially now. What is oligopoly? “

The market value/revenue (x) line chart shows that Willis’s valuation has been affected as competitors advance

The chief executives of the three commercial insurance companies said they are worried that the strength of brokers will increase when the insurance price market is weak and their negotiating power diminishes.

They worry about the so-called increase in usage Broker facility, Insurance companies basically agree to underwrite certain types of risks in advance, giving brokers the opportunity to insert companies that comply with the Act into the structure without the need for the insurance company to sign separately.

An insurance company said that this may be a “gun in our head”. For example, the insurer either signs up for a risk pool in a specific area or runs the risk of losing the brokerage business.

Two years ago, the British financial regulator discussed this in a market study. The Financial Conduct Authority was unable to draw conclusions about the structure of such “paid games”, but admitted that “neither quantitative analysis nor qualitative analysis can necessarily confirm that there are no paid games.”

The senior underwriter stated that the broker who combined the pool of funds “started to make underwriting decisions on the mixed results of the portfolio”, adding: “This could hurt the market… They may be eating our breakfast. .”

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