Risk managers predict further consolidation of the broking sector following Marsh’s £4.3 billion takeover of JLT, but fear mergers will reduce the level of choice for insurance buyers.
Marsh & McLennan completed the takeover of its smaller rival last week, in deal combining two of the biggest international insurance brokers. Risk managers expect more mergers involving brokers and insurers, as major players partner up due to growth pressures.
Franck Baron, Group Deputy Director, Risk Management & Insurance at medical and travel security services business International SOS, and Chairman of the Pan-Asia Risk & Insurance Management Association (PARIMA), said: “The deal is no surprise, as market consolidation is expected. Organic growth is not robust enough [in the broking sector] to satisfy financial markets expectations especially with cash flow easily available.”
Baron expects other brokers to look at potential consolidation opportunities. “Some ripple effects are expected, which should further nurture this acquisition trend. Financial markets and shareholders will probably pressure the leading industry players to develop similar growth strategies.”
The Marsh-JLT takeover follows a host of high-profile insurance mergers in recent years, as major underwriters and brokers react to pressure on the sector. Kelvin Wu, Group Risk and Insurance Manager at International SOS, said: “The deal is reflective of the overall trend in the insurance industry, where we have seen a lot of consolidation going on in the past few years, such as Chubb and Ace, XL and Catlin then Axa, or Willis and Towers Watson, etc).
“It is indicative of an industry that is trying hard to seek new growth narratives, and in the absence of that, undergoing acquisition activity instead,” Wu added.
The JLT takeover gives American giant Marsh a bigger presence in Asia and Latin America. Patrick Smith, former Airmic chair and director of Acumen Advisory, a specialist risk and insurance consultancy, said the deal made sense for the brokers: “On the face of it there is reasonable synergy, particularly JLT’s Asia strength. From a technical perspective, JLT’s speciality practices should enhance the capability and approach of the overall organisation.”
Following the completion of the deal, risk managers expressed fears that ongoing consolidation will reduce the level of choice available to insurance buyers and lead to reduced competition for service.
Wu expressed fears that the merger could leave risk managers with fewer options. He said: “Similar to the consolidation among insurers, it ultimately results in a reduction in choice and options for risk managers and the corporations we represent. At least in the case of consolidation among insurers, one could argue that the reduction in options is slightly offset by the increase in capacity and hopefully a greater capability/balance sheet to bear risks. In the case of the insurance brokers, risk managers are going to suffer from the reduction in options, with no obvious immediate benefit.”
Wu said the merger would limit most corporates to using “the big 3 of Marsh, Aon and Willis Towers Watson”. He raised concerns brokers involved in merger deals could be more focused on internal reorganisation: “Most companies in the immediate aftermath of an acquisition are far more focused internally, to generate the right level of synergies and cost saving, and drive profitability to justify the valuations of the acquisitions, while clients bear the brunt of the effects of transition and consolidation.
Baron said the recent M&A frenzy highlights the need for, and relevance of, niche, specialty, and boutique brokers. He said specialist firms were needed in a rapidly-evolving risk landscape: “The support needed by risk managers calls for specialised expertise and attention to the specificities of each client. This is especially true in a very changing risk environment.”
Smith said the true impact of broker and insurer consolidation “remains to be seen”. “While the number of global broking houses reduces, the deal could create a platform for a wider service set and increased capabilities of both former firms. The question is the degree to which the deal is motivated by, or places the buying community, at the heart of the integration, and whether this materialises in a breadth and level of service the buyer could have got from either firm previously.”
Following the deal, Wu advised risk managers to try and minimise disruption to their service and insurance advice. He added: “It becomes even more important for risk managers to come together via platforms like PARIMA to ensure that we as buyers and clients can have a collective voice to lend us greater strength in discussions with the industry players.”
Smith said it was important for risk managers and insurance buyers to understand their current and emerging risks, as well as “really understanding” the service proposition of their broker. He said risk managers should look at “what they have contracted, what they are getting, and what is available”.
Smith said it may be a good time for risk managers to review their broker relationship: “It is time to think about an RFP, to see how the deal articulates itself when competing, and how competitors are responding. Particularly in light of a hardening market, is the buyer really “contract certain”? And will insurance respond in a way that it is hoped? How is the broker supporting that quest?”