Aon-WTW merger – a Gordian Knot the market has yet to fully unravel

The London market is looking long and hard at the merger between two of the world’s three biggest broking entities.

As soon as Aon confirmed it was buying Willis Towers Watson (WTW) in March last year, concerns were raised over the level of market share the combined business would enjoy.

WTW pre-empted some of those concerns with the disposal of Miller Insurance. The market is also rife with suggestions that reinsurance arm Willis Re may also have to be divested if the merger is to get the green light.

The two brokers have spelt out the reasons for the move, which comes down to their concerns that insurance needs to change if it is to meet the needs of its client base.

It points out that current and future risks are fundamentally different from those two decades ago, given the rise in technology and increasing intangible risk exposures.

Aon declined to speak to Insurance Times on the merger, but the public domain is littered with documents which provide an insight into their rationale.

It believes that the merger will deliver the economies of scale to create enhanced analytics and insight capabilities, as well as accelerate innovation. It will also improve access to new sources of capital and introduces new structures that improve client choice.

“On day one, the combination of Aon and Willis Towers Watson will enable us to combine data, analytics and technology to create new, more powerful predictive models – that look forward and not only look back – and develop solutions at a pace not previously possible,” it stated. “What we are building together defies traditional categorisation.”

A European microscope

However, despite all the positivity, there remains industry concerns over having such a dominant player in the market. Fears have been expressed over what this will mean for client choice and the impact on the ability of insurers to resist the pressure to ease terms and conditions and reduce rates from such a dominant entity.

Regulators have also aired their concerns over the deal.

Earlier this month, the European Commission announced it stopped the clock on its in-depth investigation into the merger.

A spokesperson for the Commission said the decision had been taken due to the need for documentation that had yet to be provided.

“This procedure in merger investigations is activated if the parties fail to provide, in a timely fashion, an important piece of information that the Commission has requested from them,” the spokesperson said.

In announcing the in-depth review, the EC’s executive vice-president Margrethe Vestager, responsible for competition policy, said: “We have opened an in-depth investigation to assess carefully whether the transaction could lead to negative effects for competition, less choice and higher prices for European customers in the commercial risk brokerage market.”

The Commission said its initial concerns were around the reduction in competition in specialty classes such as multi-national property and casualty, financial and professional services, credit and political risk, cyber, marine, space and aerospace manufacturing risks.

“At this stage, the Commission considers that Aon and Willis Towers Watson are two of the very few brokers that are able to provide these services on a multi-national scale,” it said.

Market musings

A large proportion of specialty business in written in the London market and there are those in the square mile who are concerned that a broking entity with such a sizable market share could impact the market’s ability to drive process reform.

The Lloyd’s Blueprint for the Future scheme spells out the need for standards for the transfer of data to be the foundations on which the future market will be built.

The potential refusal of a broker the size of the combined Aon-WTW group to participate in the use of those standards would be a fatal blow to the market’s plans.

Dan Ryan, a senior director in the property and casualty ratings division at AM Best, told Insurance Times that the implications for the market of the merger were extensive.

“Combining two firms the size of this reduces the global broker landscape considerably,” he said. “As for the clients that use these broker services, their choices and options will now be narrowed down to essentially two firms.”

Ryan added that there would be upsides from the deal, however.

“While the merger clearly reduces choice for insurance and reinsurance buyers around the world, the benefits could be extraordinary, as the combination of intellectual capital and resources could lend itself to more options in terms of risk financing and new alternative risk solutions, more advanced data analytics and a broader range of services - all advantages to insurance buyer,” he explained.

“To insurers, however, this could mean less premium finding its way into the commercial market or more risk being transferred to capital markets, alternative risk vehicles and other sources.

“On the other hand, the insurance industry should benefit from innovation and finding ways to solve for risk regardless of its form.

“In terms of reinsurance, this merger not only puts Aon-Willis on equal footing with Guy Carpenter, but the combination also could likely drive both brokers to be more competitive and innovative, which would no doubt be an advantage to all insurers that use them.”

Food for thought

But the industry will have to be patient for these advantages, Ryan continued.

“The benefits of the merger are likely to take some time given the size and scale of these two companies and the virtual business environment,” Ryan added.

“The global effects of the Covid-19 pandemic and today’s remote work environment could slow the overall integration process and lead to some retention issues.

“How well post-merger initiatives are executed could determine what, if any, teams of people or business finds a new home as a result of this mega-merger.”

Even with the European Commission’s decision to delay its review, Aon and WTW are confident that the merger will be completed by the end of 2021’s second quarter.

Whether this will prompt a rapid round of divestment or the movement of teams which feel they have not been provided with the roles they had hoped for is still to be decided.

What is certain is that the entity will provide food for thought for brokers and underwriters of all sizes and likely act as a call to action for many.