Aon & Willis Towers Watson merger to “significantly lessen competition”

The Aon and Willis Towers Watson (WTW) merger will “significantly lessen competition” in the supply of commercial risk, reinsurance and employee benefits broking, the Australian Competition & Consumer Commission is concerned.

The Australian Competition & Consumer Commission (ACCC) is not the first to raise significant concerns about the merger, as similar issues had been raised by the New Zealand Commerce Commission as well.

Aon and Willis Towers Watson (WTW) responded to the New Zealand concerns, citing a wide range of reasons that their merger should not be considered anti-competitive in the commercial insurance and reinsurance market.

But concerns appear widely held, given a second country has now also raised these issues.

The merger, which we should really point out is the acquisition of WTW by Aon, is also under scrutiny in Europe, with the European Commission also investigating the proposed combination of Aon and WTW.

The clock on that EC review of the merger deal has now been halted, while the European Commission (EC) waits for more data from the brokers to support their case to proceed.

The Australian concerns from the ACCC are detailed and all relate to the fact Aon and WTW are two of the big three brokers, after Marsh / Guy Carpenter, so their coming together reduces choice and competition in the insurance and reinsurance marketplace.

“We are concerned that the combination of Aon and WTW will remove a significant competitive constraint from the markets for commercial risk broking to large customers or those with more complex and/or high-value insurance premiums; reinsurance broking; and employee benefits broking in Australia,” explained ACCC Commissioner Stephen Ridgeway.

The concerns include that price increases or reduced service levels may be seen, for large and complex commercial insurance customers.

While smaller brokers may find the playing-field even less level, limiting insurance coverage and pricing they can offer.

The ACCC is especially concerned in certain niches of commercial risk insurance and is considering whether the effects of the merger could be particularly pronounced in some lines of business, such as financial and professional, cyber, marine insurance and insurance for construction projects.

In reinsurance, there are concerns about how the merger of Aon and WTW could affect the supply of reinsurance broking and advisory services, especially for “the supply of reinsurance which covers all current and future policies written by the primary insurer for particular risks.”

“Reinsurance is vital for the Australian economy as it enables insurers to continue to write new insurance policies. The ACCC is concerned that the proposed merger will reduce insurers’ choice of reinsurance brokers in an already concentrated market. This could lead to price increases or reduced service levels for customers, including the ability to access sufficient reinsurance capacity,” Ridgeway explained.

The reduction of major service providers from three to two and so the reduction in choice available, is also highlighted as concerning on the benefits and consultancy side, especially for clients requiring a global service in these areas.

There’s also a concern that other brokers may coordinate their efforts, further reducing true choice and price competitiveness.

“Reducing the number of brokers in these already concentrated markets, increases the potential for the remaining brokers to align their pricing and strategies,” Ridgeway said.

The ACCC has requested submissions from parties to opine on the merger and air any concerns they may have. This process is expected to run for some more months before a final decisions is made, with May 27th 2021 the proposed date for the announcement of a final decision.

With Aon and WTW still hoping to close the merger in the first-half, that remains possible. But as the noise ramps up and analysis of the deal intensifies the chances of a delay likely rise.

The ACCC makes an important statement in its documentation of issues related to the Aon and WTW merger, saying that, “Large customers lack alternatives to the three major brokers and the bargaining power of large customers is low, given their inability to bypass brokers and (as discussed above) smaller brokers are not capable of servicing large customers to the same extent as Aon, WTW and Marsh.”

Adding that, “The ACCC’s investigation has indicated that tender or contract renewal processes are likely to be less competitive after the proposed merger because of the lack of viable alternatives. In addition to brokerage cost increases, customers have raised concerns that service and quality of the offering will decline, including day-to-day servicing (including claims and crisis management). These concerns are potentially significant: the ACCC’s investigation has indicated that brokers are likely to compete more on quality of service than on brokerage price.”

The ACCC also notes that market participants view Aon, WTW and Marsh as “the only reinsurance brokers with the expertise, data, analytical, and modelling capabilities and global reach to meet the requirements of insurers in Australia. Other reinsurance brokers (either in Australia or overseas) were not viewed as adequate alternatives.”

Data is also raised as a competitive issue, potentially giving advantage in terms of insights and pricing. But of course it is only down to the sophistication and scale of the big three brokers that they have this.

While some of these issues may appear damning of the merger, it is important to remember that to be considered anti-competitive the Aon and WTW transaction must be deemed to give the merged company an unfair level of pricing power.

As we explained before, the question for competition authorities is whether the scale and market penetration of a combined Aon and Willis Towers Watson will give them pricing power?

The answer to this is nuanced, with pricing power potentially evident in some sectors, but not in all.

While alternatives do exist and clients could go more direct if they desired, or use technology to help them cede their risks. But how viable that actually is remains to be seen.

As an aside, it is perhaps also noteworthy that Warren Buffet’s Berkshire Hathaway purchased a significant stake in Marsh & McLennan in recent weeks.

Does Warren suspect that the MMC share price will prove to be the winner out of all of this, perhaps believing this merger won’t proceed? Food for thought.

Also read:

– Aon & WTW cite alt. capital, disintermediation & marketplaces in defence of merger.

– Aon & Willis Towers Watson reveal leadership of combined company.

– Willis Re divestment seen necessary for Aon – WTW merger to complete.

– If Aon / WTW leads to divestitures, AJG seen as “best fit” for Willis Re: KBW.

– EC investigates Aon / WTW deal, cites competition “concerns”.

– Aon + WTW to “extend proven model of catastrophe bonds” – CEO’s Case & Haley.

– Aon & Willis Towers Watson to merge.