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

Broking, advisory, benefits and consulting giants Aon and Willis Towers Watson have defended their merger, with a response to the New Zealand Commerce Commission that cites alternative reinsurance capital, disintermediation by the big four and marketplaces such as Tremor, as threats to their own combined business.

The New Zealand Commerce Commission had opened a case after receiving a clearance application from Aon plc to acquire all the shares of Willis Towers Watson Public Limited Company as part of the impending global broking M&A transaction.

The case received some responses, that cite the erosion of choice in the New Zealand market as a concern should the insurance and reinsurance merger go ahead.

In particular, reinsurance and commercial insurance broking appear to be the focus again, with the responses saying that the reinsurance broking market would be constrained for choice as a result of Aon and Willis Towers Watson (WTW) coming together, which they see as particularly important for a market like New Zealand, where the smaller, independent brokers don’t venture so much, especially on the reinsurance side.

Aon and WTW have responded, with a lengthy document that goes on the defensive and lays out why the pair don’t agree, saying that, the evidence shows, “there are numerous other reinsurance brokers which can, and do, compete for New Zealand cedents notwithstanding the lack of a physical presence in New Zealand.”

The broking groups have a point here, as there is nothing stopping New Zealand cedents from reaching out to other brokers, which would happily help them arrange their reinsurance.

Also, some of the concerns raised seem to focus on the facilitisation of reinsurance and how that affects choice as well, but of course these efforts, while offering something that can help a broker to accumulate more business, are ultimately all about lowering the cost-of-reinsurance capital, so should be viewed as beneficial to the market perhaps.

But competition concerns persist and with the European Commission also investigating the proposed combination of Aon and WTW, the arguments made in defence are important.

It’s a lengthy response, which you can read in full via the NZ CC website here. But a few highlights jump out and are worth mentioning.

On alternative reinsurance capital, so insurance-linked securities (ILS), catastrophe bonds and the like, the response to the NZ Commissions enquiry explains that the brokers see alternative capital as an area providing more choice to their clients, cedents and reinsurance markets.

It hints at the fact cedents could use alternative capital and a range of broader alternative risk transfer instruments to actually take business away from brokers, perhaps going more direct or establishing their own structures for reinsurance.

It also notes, that insurance-linked securities (ILS) activity by its nature can involve a broader range of intermediaries as well, with investment banks also getting in on the action.

On specific risk transfer, “The use of alternative capital particularly for the latter widens the distribution options to investment banks e.g. Goldman Sachs, which further constrains brokers,” Aon and WTW’s response states.

Disintermediation is also raised in the form of large reinsurance companies going increasingly direct, a market force that can take brokerage away from the likes of Aon and WTW.

Citing a seeming lack of concern over competition in some of the issues raised, Aon and WTW said cite, “The constraint from the threat of disintermediation from reinsurers such as Munich Re and Swiss Re.”

They also cite the increasing sophistication of large reinsurance buyers, who can opt to go direct themselves, or use alternative structures.

On the responses received by the Commissions enquiry on the merger, the brokers say, “It seems unwarranted that the Commission may have concerns while the very cedents who will be impacted by the Transaction do not.”

While this may come down to interpretation of some of the concerns raised, the brokers do have a point that they no longer have it all their own way when it comes to sourcing business and providing reinsurance solutions, as the options for cedents continue to proliferate, while their sophistication increases.

Finally of note, we feel, is the fact Aon and WTW have specifically raised the subject of marketplaces for risk transfer as another threat to their businesses and one which means they don’t have dominance any more.

Here, the specifically mention Tremor Technologies, the insurtech providing an advanced and auction driven marketplace for reinsurance trading, programmatic placement and syndication.

They cite the recent partnership between their competitor Lockton Re and Tremor, also noting that Tremor recently announced that it had placed more than $1 billion of reinsurance limit in 2020.

On all of the alternative options available to reinsurance cedents, including marketplaces, Aon and WTW explain, “Cedents will increasingly be able to discipline the Combined Entity through these alternative means. Should the Combined Entity be perceived to have degraded the value of its service or increased its price, alternative risk management strategies are a viable option for cedents. Reinsurance is merely one way for cedents to match capital with risk.”

Finally and in concluding on the issue of competition in non-life reinsurance distribution, Aon and WTW state on their proposed combination, “The view that the Transaction would reduce the number of competitors from three to two is inconsistent with the empirical evidence that in this global market there are numerous other reinsurance brokers which can, and do, compete for New Zealand cedents notwithstanding the lack of a physical presence in New Zealand.

“In addition to the constraint imposed by direct business, the Parties would continue to be constrained by the prospect of entry (which does not need to be physical) and other methods of managing risk.

“Respectfully, the Parties consider that the evidence provided by cedents in the Commission’s own market testing should not be ignored: the Commission should not sustain competition concerns that are not supported by the very customers that would be impacted by the Transaction.”

The response is well worth a read, see the link further up, as it provides a clear view of the defence provided by Aon and Willis Towers Watson on the potential for their combination to affect competition and choice in the market.

They rightly point out that there are a numerous and increasing number and range of reinsurance options and strategies available in the market, but of course the fact that the combined company will have a level of dominance in the global reinsurance market still cannot be denied.

But, the question for competition authorities really is, will the scale and market penetration of a combined Aon and Willis Towers Watson give them pricing power?

It’s not entirely clear that there is a clear-cut answer of yes to this. Perhaps any answer is really far more nuanced and pricing power may be evident in some sectors, but not in all. The discussions and submissions of issues and evidence look set to continue.

Also read:

– 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.