The Australian Competition & Consumer Commission (ACCC) is concerned that the proposed combination of Aon and Willis Towers Watson (WTW) will significantly lessen competition in the supply of commercial risk, reinsurance and employee benefits broking and advisory services in Australia.
The announcement from the ACCC comes just weeks after the competition authority in New Zealand raised similar concerns following an enquiry into how the merger would affect local firms.
“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,” said Stephen Ridgeway, ACCC Commissioner.
The authority warns that the proposed transaction could also lead to price increases or reduced service levels for large, complex or high-value commercial insurance customers. It may also serve to limit the insurance coverage and pricing smaller brokers in the market are able to obtain for their customers, the ACCC continues.
As part of its review, the ACCC is exploring whether the impacts of the proposed combination are especially pronounced in certain commercial insurance risk classes or industry specialities such as financial and professional, cyber, marine and insurance and coverage for construction projects.
Additionally, the authority is concerned about the supply of reinsurance broking and advisory services following the merger. In particular, the ACCC raises concerns over 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,” said Ridgeway.
Ultimately, the proposed combination of Aon and WTW will reduce the number of major providers of employee benefits broking and consultancy services in Australia to two.
“Reducing the number of brokers in these already concentrated markets, increases the potential for the remaining brokers to align their pricing and strategies,” added Ridgeway.
Currently, Aon has 40 branches in Australia including in all capital cities and a number of regional locations. WTW currently has five branches in Australia, located in Adelaide, Brisbane, Melbourne, Perth, and Sydney.
In its documentation of issues related to the proposed combination of the two major brokers, the ACCC states 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.”
“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,” it adds.
Furthermore, the ACCC notes that effectively, participants in the market see 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.”
For the competition authorities, the question is whether or not the scale and reach of a combined Aon and WTW will give them pricing power. Of course, alternatives are out there in the markets and clients could look to go more direct if they choose to, but the benefits of this, alongside the use of advanced technology to help cede risks, remains to be seen.
It might also be worth highlighting that in recent weeks, Warren Buffett’s Berkshire Hathaway acquired a significant stake in Marsh, which might suggest that the reinsurance industry veteran suspects that Marsh’s shares could ultimately be the winner out of all of this.