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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]