Earlier this month, news of a potential mega merger between insurance brokerage giants Aon Plc and Willis Towers Watson (WTW) hit the global headlines with a bang. Rumours of Aon’s potential bid were shared by Bloomberg on Tuesday, March 05. The reports valued WTW at $24 billion, which would have made this the industry’s largest merger on record.
Amid major media speculation, Aon later confirmed it was in the early stages of considering an all-share business combination with WTW. However, less than a day later, the preliminary talks hit a roadblock and Aon announced it was no longer pursuing the combination. The 24hrs of industry fervour has now calmed down … but speculation remains as to what a merger between two of the three largest insurance brokerages in the world might mean for the wider industry.
Jonathan Froelich, partner, KPMG Advisory, commented: “A mega deal between two of the three largest brokerages in the world has the potential to impact a variety of constituents in the insurance marketplace. For carriers, brokers are the intermediary force that act as the go-between with the policyholder. As you get more premium controlled by fewer intermediaries, I think this increases the potential to drive up prices for carriers.
“The second potential impact of such a merger would be in the broader commercial marketplace. The bread and butter business of a lot of the mega insurance brokers is in larger commercial risks for global businesses. If you take one of those brokers out of the marketplace by merging it with another, you’re potentially offering less choice to the large global corporations that really need partners with expertise and presence in the world markets – something that isn’t always offered by some of the smaller and medium-sized brokerages. That could potentially have multiple impacts on the broader commercial market.”
It’s also important to remember that the major brokerage houses do more than just traditional broking. Most of the top global firms are also present in the growing employee benefits space, the analytics and technology space, and in reinsurance broking. They offer business process outsourcing, call centre capabilities and other things of that nature. In that regard, the implications of a mega-merger to the industry are “much wider than just the broking piece,” explained Mark Purowitz, US Insurance M&A leader, principal, Deloitte Consulting LLP, Deloitte US.
“With a prospective deal between two of the top three brokers, you have to consider the potential anti-trust considerations, not only on the broking side but in all aspects of their businesses,” said Purowitz. “Even the consolidation on the firms’ respective human capital consulting and employee benefits businesses are going to be pretty dramatic. The regulatory implications and the aspect of analysing whether it makes sense to go ahead with a deal is going to be on multiple levels, not just on the broking side.”
As for the wider brokerage market, while a mega merger between two of the top three might seem like a daunting prospect, it actually has the potential to unlock new opportunities. For example, smaller brokerages might get a chance to pick up any talent displaced by the deal, and they might also gain opportunities to compete up-market for accounts that were previously beyond their reach.
“If the big three becomes the big two, there’s the possibility that they might start entertaining the next level down of insurance brokerages as an intermediary for some of their business. This could potentially allow some of these brokers to move up-market and compete for accounts that they wouldn’t otherwise get an opportunity to compete for,” Froelich told Insurance Business. “Also, whenever you merge two businesses of that size with large and disparate producer forces, I think there’s some potential for some loss of producers and loss of business. This could present opportunities for some of the smaller brokers because those producers, that premium and that commission has to land somewhere. So, there’s an opportunity for these brokers to attract some talent out of the emerging platform.”
Not all the outcomes of a mega-merger are positive. So, what’s the driving force behind a potential combination of two of the top three global brokers? At this point it’s helpful to look at Marsh & McLennan Companies’ (MMC) US$5.6 billion (about CA$7.5 billion) takeover deal with Jardine Lloyd Thompson Group (JLT), which was announced in September 2018 and has since received US antitrust approval and shareholder approval. It has been widely reported that the economics of the Marsh-JLT deal largely revolved around scale, diversification and cost synergies. JLT, which Bloomberg described as “a relative minnow in this global industry, dwarfed by the likes of Marsh & McLennan, Aon and WTW” was holding too much capital but struggling to grow. Merging with Marsh was the answer.
“One component driving these major brokerage deals is geography. Brokers are looking for the ability to cover clients on a more multi-geographical basis,” commented Purowitz. “Merging with another major broker might enable them to fill in holes either in geographic coverage, in product or in the service offerings they bring to certain markets around the world. Ultimately, when you take a look at the buy side and the sell side, you have to ask the question: ‘What are you solving for?’ Some brokers might be market-leading in one part of their business but slightly behind in another. In order to provide a more well-rounded set of capabilities to clients, they might want to buy an organisation with a certain set of capabilities that enhance any strategic goals.”
Moving forward, the likelihood of seeing a mega-merger between two of the top three global insurance brokerages is relatively low, according to Froelich. There are numerous challenges to getting a mega deal done, most notably the complex regulatory approval processes that must be met, and the anti-trust considerations mentioned by Purowitz. But the Aon and WTW news earlier this month shows that those conversations are being had … so who knows that the future holds?