Rise of the challenger broker – Part 1

Marsh & McLennan Companies’ acquisition of JLT Group – the much smaller, but biggest rival to the ‘Big Three’ – was a bolt from the blue.

MMC had done a spectacular job of keeping the transaction secret and, at a stroke, changed the face of the global broking market.

The acquisition, originally announced in September 2018, ensured that both its insurance and reinsurance broking arms – Marsh and Guy Carpenter – became the world’s biggest and also made it, in the words of sister publication Insurance Insider “a London market powerhouse”.

The news which followed in March last year, that fellow behemoth Aon was to swallow up smaller Big Three rival Willis Towers Watson (WTW), was less of a shock, but no less earth-shattering in its implications for the future broking landscape.

Described as ‘the worst-kept secret in insurance’ by Insurance Insider, Aon’s intentions towards WTW had been the subject of rumour for years, and had resulted in an aborted run at its rival in March 2019. However, almost a year to the day after that retreat, Aon was back.

According to analysis from Insurance Insider, at first glance the Aon-Willis merger in 2020 was expected to catapult the combined entity past the recently-merged MMC and JLT, to give it total revenue (based on 2019 figures) of around $20bn – just over 20% higher than MMC’s 2019 total revenue.

These two deals have, in the process, raised second-tier player Gallagher up the rankings – making it in fairly quick succession, the fourth-largest and then third-largest global broker in revenue terms, at $7.2bn in 2019.

It would be tempting to assume that such upheavals would leave the mega-brokers in an unassailable position, with their massive market share, global reach, and staggering revenues, sucking in all possible broking revenue like matter flowing into black holes.

Boasting significant insurance and reinsurance broking arms, covering every imaginable class of property and casualty business, and with the addition of increasingly significant additional functions such as analytics and modelling, health and benefits advisory, delegated authority business and management consulting divisions, the mega-brokers seemingly have it all covered.

However, this continued consolidation of the broker market raises the question of what broking clients across the spectrum look for in an intermediary; whether scale and diversification offer the most compelling prospect for all clients; and whether these growth strategies are the ultimate goal for all intermediaries.

Nowhere is the growing disparity between the multi-functional giant intermediaries and smaller-scale multi-line and specialist brokers more evident than the London market, where niche specialty and reinsurance broking starts-up have a historical precedent.

At Insurance Insider’s recent London Market Live conference, BGC Insurance CEO Steve Hearn –formerly Willis Group deputy CEO and Willis Re CEO – was sceptical about the likely benefits to both clients and the (re)insurance marketplace of the proposed merger of Aon and Willis Towers Watson

Hearn said he did not believe the “heft of analytics” would be improved by the merger, adding: “I don’t think this is in the interest of customers or employees, definitely not insurers, or competitors for that matter. This is about shareholders.”

He makes a trenchant point. While all brokers like to talk about their strong focus on customer satisfaction, with huge, publicly-held companies, shareholder value is bound to be a primary concern.

And one criticism levelled at expansive broking groups backed by private equity is similarly that the clients’ interests are not always paramount when there are the investors’ time horizons to consider.

“The large brokers in London are cost centres – they’re effectively providing fulfilment to the network, but they cost a lot of money. So the name of the game is industrialisation - trying to improve the process,” says one London market broker.

While that’s all very well in a soft market, the source argues, in a changing (re)insurance environment, clients will need help navigating the market. Unfortunately, he suggests, the “industrialisation” process at big brokers means that much of the broking talent with hard market experience has moved on to new pastures.

As a consequence, he says, brokers are “loading up transactions onto emails and spreading it across the whole market”, with the result that underwriters are spending an increasing amount of time “triaging their inbox” to find any risks they would consider underwriting.

“This is an unsustainable model, because the underwriters don’t have the resources to properly do their job and the brokers don’t necessarily have the right people to really give the clients the hands-on service they require,” he says.

Another factor to consider in the climate of consolidation is whether bringing together disparate businesses is likely to work culturally.

Simon Matson, CEO of UK broking and underwriting at Gallagher, claims the broking group has got this right with its acquisition programme.

“What’s really nice is the interplay between all of the businesses - because we don’t want warring factions within the Gallagher estate,” he says.

Matson suggests there is “a great temptation” when firms are looking to acquire new businesses “to seize great revenue and turn a blind eye to the culture you may be bringing in – and that’s a very short-term, disruptive thing”.

Away from the mega-mergers, there are other reasons why diversifying through acquisitions isn’t always the best outcome for all concerned.

People are typically the first resource to be cut when savings need to be made, which doesn’t always sit well with the business owners and senior executives in the acquired entity and inevitably leads to staff defections.

As one broking source told Insider Engage about the experience of being acquired: “I thought I was in the business of starting a [company] and growing it, and all of a sudden I was in the business of trying to save lots of money by firing lots of people, which wasn’t my aim really.”

One problem that sources have identified at large, highly-diversified brokers with multiple legacy operations, is that different arms are likely to have separate P&Ls and revenue targets, meaning business units can end up pulling in different directions.

In some cases, they can end up in aggressive competition for the same business, to the point where divisional heads end up at war with each other - rather than collaborating on the most effective route to matching risk with capital.

“You are technically dis-incentivised to do the right thing for the client – and even where you are engaging multiple units, the internal debate about who gets paid what is unbelievably destructive and time-consuming,” says one broking source.

There are clearly benefits to working with a broking partner that can offer a broad spectrum of product lines, has a meaningful global presence with local representatives and relationships in the territories it covers, and that can command some of the best broking talent in the market.

In addition, big firms are more likely to have the funds to invest in valued-added services such as analytics, modelling, proprietary online placement and binding services, claims management functions and so on.

That said, a major strength of markets like Lloyd’s and Bermuda is that they foster an environment where a number of specialists can thrive.

Many of these, formed in response to a particular spike in market activity, have since been swallowed up by other players, but the rapid contraction of the broking universe in recent years has prompted discussion of whether the broker market is now at an inflection point, to be followed by a Big Bang-style explosion of nimble specialists.

“If you go back over the last 25 years or so there [were][ probably 1,000+ specialty (re)insurance brokers that have been rolled up into – principally, but not exclusively – the three mega firms, which have re-branded themselves as professional services companies,” says Karl Hennessy, partner and head of specialty broking at McGill and Partners, which launched in May last year, with $250mn in backing from private equity firm Warburg Pincus.

Hennessy’s own career reflects that shift in market dynamics. Having started out at Fenchurch International he moved to Lloyd Thompson (which later merged with Jardine Matheson to become JLT) and then on to Aon, where he worked his way up to global president of Aon Broking and CEO of Aon Carrier Solutions.

However, his recent move to the boutique start-up suggests there are other opportunities out there.

He says the concept phase of McGill and Partners involved a significant amount of “engaging with clients and carriers, to identify what it was they were seeking that the market wasn’t currently providing”.

“The diversity of choice for clients had gone and, to some extent, a lot of specialist knowledge had been diluted in the larger firms that were becoming more generalist,” he recalls.

“The strong response was that there was a gap for a boutique broker which, rather than offering an incredibly broad range of services, would actually be very focused on (re)insurance transactions, and would combine market expertise and the ability to link risk and capital more efficiently with industry sector and solution expertise.”

Read part 2 of 'Rise of The Challenger Broker'for more on the benefits of the owner-worker model, the war for talent and weighing up the ‘diversification versus specialisation’ argument