Willis Towers Watson: a risk & capital connector in re/insurance?

The merger between insurance and reinsurance broker Willis Group and global professional services firm Towers Watson has officially completed today, with the newly joined 39,000 person company now having an interesting, perhaps compelling opportunity in re/insurance and ILS.

When the shareholders of the two firms voted in favour of the merger it was perhaps surprising to some, as a number of proxy firms suggested the merger was not in the best interests of all investors and that often sways a vote.

But the $18 billion merger went ahead, completes today and positions the new global risk, re/insurance, finance and professional services firm, Willis Towers Watson, with an opportunity to become a risk and capital connector in re/insurance and ILS.

While the merger already has clear benefits for both firms and positions Willis Towers Watson to become a major player across a much broader area of financial services than either firm alone could have achieved, the opportunity in insurance and reinsurance for the firm to be bold and innovate is perhaps one of its most compelling opportunities.

The resulting financial services powerhouse has an opportunity to disrupt the insurance and reinsurance industry, even further than we have seen to date, by connecting the risk that the re/insurance broking teams produce with the large amounts of capital from institutional investors that Towers Watson advises on and manages.

Willis, of course, is one of the world’s leading insurance and reinsurance brokers, with deep access to risk markets globally and also an active capital markets and insurance-linked securities (ILS) specialism in its Willis Capital Markets & Advisory (WCMA) unit.

Towers Watson, meanwhile, provides investment advice and oversight to 1,000 asset owners, with assets worth over US$2 trillion advised on, including from pension funds, endowments, foundations, sovereign wealth funds, insurers and family offices.

So one side can bring the risk, while the other side can marshal the capital. That presents an interesting opportunity in the current insurance and reinsurance market climate, where the value chain is being disrupted, broken down and even brokers are becoming risk capital conduits, through facilities and follow-form arrangements.

As the reinsurance business model gets increasingly disrupted, the global broker community holds many of the keys to the risk. They often own the relationships, can have the best view of market pricing, can in some cases influence and set the pricing or terms, and in many cases today act as marshals for the capital and capacity that underwrites it.

As the layers between responsibilities in the market are eroded and capital tries to get closer to the ultimate source of the risk, it makes sense that the broker model will increasingly shift towards the underwriter, assessing, pricing and controlling capital to a greater degree.

So a company like Willis Towers Watson, with its broad global expertise across risk, reinsurance and investments, could put those three competencies to work in a meaningful way and further disrupt an already disrupted re/insurance market.

With many suggesting the traditional insurance and reinsurance cycle will never be the same again, since the advent of insurance-linked securities (ILS) and catastrophe bonds, and the entry of alternative capital and the capital markets on a meaningful level, the next phase of disruption could be business model based, and may serve to soften this cycle even more.

The evolution of the broker business model is one area that will have a meaningful effect on the market cycle, with Willis Towers Watson now positioned to be a leader of a new disruptive trend, if it should choose to follow this course.

Granted, Willis Towers Watson is not the only firm with this opportunity, with capital markets investors, structuring and marketing teams, as well as the broker producers to bring the risk to this efficient source of capacity. But perhaps the newly joined firm might be the one brave enough, or in the right position to review its strategy, to go boldly forwards to disrupt its own brokerage model, becoming more of a price setter and conduit for risk capital.

How far brokers can go, towards becoming risk and capital connectors, remains to be seen. But it is a clear threat to the relationship based traditional reinsurance model, as efficiency and breaking down the barriers and friction between underwritten risk and the capacity to back it are clearly the way brokers will have to move in years to come.

How far Willis Towers Watson will choose to, or be able to, leverage its new role as a connector, will be fascinating to watch. It has a unique opportunity right now to set out its stall, embrace disruption and to do things differently.