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Brokerage

Broker Consolidation Is Good News for Insureds. Well, Maybe.

With broker consolidation comes more depth. But there are still pros and cons to this M&A growth that insureds should know.
By: | September 14, 2018 • 6 min read

The frenzy of wholesale brokerage consolidation continued at a rapid pace in 2017 and 2018, driven by a large capital surplus, advancements in technology and aging owners. Just look at the recent consolidation announced Sept. 18 between Marsh & McLennan and JLT Group — an 11-day deal in which Marsh agreed to acquire insurance broker JLT for $5.7 billion.

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Wholesalers are also coming under increasing pressure to merge by large retail brokers seeking to reduce their pool of intermediaries to drive volume, increase commission and fee income and control premium flow.

There is also the need to keep up with the growing sophistication of distribution systems and the appetites of hungry private-equity firms entering the market. Added to that is the increasing consolidation of retail brokerages, meaning fewer companies for wholesalers to do business with as the Big Three global brokers continue to snap up more targets.

Steady Growth in M&As

Last year alone was the highest in recorded history for U.S. insurance broker mergers and acquisitions (M&A) at 536, as well as the largest number of deals closed in the fourth quarter for six years, according to M&A advisory firm MarshBerry.

David Blades, senior industry analyst, A.M. Best

The top 10 acquirers accounted for 50 percent of announced deals in 2017, with Acrisure, HUB International, BroadStreet Partners and Arthur J. Gallagher comprising the top four.

Futhermore, consolidation in the specialty brokering space broadly mirrors M&A among insurers, many of whom have been buying up specialty teams to help manage their underwriting cycle in a low-rate environment.

But as companies are acquired or merge, new start-ups are springing up in their place, often formed by previous owners who have sold up, adding to the competition.

David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance, said the current surge in wholesale brokerage consolation was the result of profitable wholesaler business and retailer capital surplus. It also stems from the larger retail brokers forcing smaller wholesalers to sell up by not doing business with them, he said.

“Generally, their margins are much better than the underwriters and insurers can generate; so, it’s an attractive and profitable business,” he said. “There also continues to be a surplus of capital interested in owning and investing in insurance brokers and encouraging growth and M&A.

“Third, the larger retail brokers are forcing many smaller wholesalers to sell if they choose not to allow their firms to trade.”

But what does all this mean for the insurance buyer at the end of the insurance value chain?

Benefits of Consolidation

One immediate advantage is that, as larger brokers take on the specialist expertise of small wholesalers, they can scale up their operations, bringing specialty capability to a wider market. David Blades, senior industry analyst, A.M. Best, said the key benefit of brokerage consolidation for insureds is working with a company with more efficiencies and economies of scale as part of a larger organization. It also provides them with a greater knowledge base and product range, he said.

“From a buyer’s perspective, there may be fewer wholesalers to choose from, but they have the advantage of being able to access stronger and better capitalized organizations with more depth and the ability to move quickly in the market place,” he said.  “It also exposes them to a greater expertise and geographical and product reach.”

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Robert Raber, associate director, A.M. Best, said that despite the change, buyers will still have access to the same channels for placing their business. He added that as long as there is demand for E&S, there will always be well-capitalized companies with a strong financial rating willing to provide it.

“[The insurance buyer] may actually pick up some gains as a result,” he said. “At the end of the day, they will still be able to deal with the same insurance carrier [as] in the past.”

James Drinkwater, president of AmWINS Group, said consolidation enhances the technological capabilities available to insurance buyers. If anything, having this technology at their disposal puts added pressure on wholesale brokers to be more efficient in their delivery, he said.

“The larger acquiring wholesale brokers have greater sophistication and capacity,” Drinkwater said. “There’s more specialization of product, market access and technological capabilities.”

Brady Kelley, executive director of the Wholesale & Specialty Insurance Association, said that as an insurance buyer itself, the Association benefited from the competitive environment that is driving brokerage consolidation.

“During my tenure, we have seen a big shift in the premium structure, including dramatic changes to the limits we can get and the enhancements we can negotiate,” he said. “In certain cases, we have been able to enhance our coverage with very little change in our premium. I believe that consolidation for the purpose of acquiring best practice, advancing technology and enhancing depth of talent and expertise delivers far more value to the insurance buyer.”

Jeremy Chaseley, head of specialty wholesale, Zurich North America, said an advantage of being moved to an acquisitive larger wholesale broker for the insured is their ability to benchmark coverage, pricing and claims more effectively. By strengthening in this way, they can also reinvest in these capabilities, he said.

“The larger and more sophisticated wholesale brokers are joining the data and analytics revolution not just in the insurance industry but in wider business,” Chaseley said. “This has given them the capability to benchmark coverage, claims and pricing for those unique and complex risks they are acquiring.”

Rising Premiums

Bresnahan, however, said one of the potential downsides of brokerage consolidation is that it could result in higher premiums. With brokers looking for higher commissions and fees, that will put even greater pressure on insurers to increase rates.

“There may be fewer wholesalers to choose from, but they have the advantage of being able to access stronger and better capitalized organizations with more depth.” — David Blades, senior industry analyst, A.M. Best

“Arguably, in the longer run, it could lead to [higher premiums] as more wholesalers and retailers look to the insurance carriers for higher commissions and fees,” he said. “There is not much margin in the underwriting results, so eventually premiums will have to reflect these higher acquisition expenses.

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“All of these factors require the larger wholesalers to focus on providing their client with far greater resources. That way they can add real value to the insurance buyer.”

As far as continuity of service, he said: “All of the issues relative to the service continuing at a high or satisfactory level need to be managed at a local level by the customer. Naturally, if an insured values the service provided by both the retailer and the wholesaler at the local level, then the main risks relative to retailer RFPs and following wholesale consolidation are when that wholesale broker could be foreclosed to continuing to work with the retailer and customer, or the wholesale broker leaves or is let go post-merger.”

On balance, the advantages of M&A for the insurance buyer outweigh the disadvantages. But it remains to be seen how long this consolidation feeding frenzy will last and whether benefits for insureds will continue. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]