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Aon / WTW defend proposed merger after competition concerns raised

29th January 2021 - Author: Luke Gallin

Global re/insurance brokers Aon and Willis Towers Watson (WTW) have cited a range of competitive dynamics in defence of their proposed combination; after the New Zealand (NZ) Commerce Commission’s Statement of Issues (SOI) and subsequent responses highlighted some potential concerns.

aon-willis-towers-watson-logosAhead of an expected completion date sometime in the first-half of 2021, the Commerce Commission launched an enquiry into the merger asking how it would affect local companies.

As of January 26th, 2021, the Commerce Commission had received an anonymous response and also a response from FMG, the fifth largest general insurer in the country and the largest NZ owned carrier.

In its submission, FMG notes concern that access to locally based commercial insurance will be “severely constrained” by the proposed combination, as well as concern about the “medium-term competitiveness” of NZ domiciled insurers.

Additionally, FMG is concerned about the competitiveness of the reinsurance broking market in NZ should the merger go ahead. Currently, reinsurance brokers are limited to Aon, WTW, and Guy Carpenter (Marsh), meaning that if Aon does acquire WTW then competition in the market would reduce significantly.

“This would severely limit competition and ultimately limit the ability of NZ based insurers to access competitive reinsurance services and in turn covers,” says FMG.

Adding: “While Aon has suggested that WTW will be retained as a subsidiary of Aon and will operate completely autonomously as it currently does, we have some serious concerns that being part of the same group will ultimately put our data and the Intellectual Property we have developed over many years at risk. Furthermore, we would contend that even with a subsidiary structure the two brokers would likely become very similar over time, further limiting effective competition in the market.”

The anonymous submission on SOI, received January 12th, relates exclusively to the provision of commercial insurance services, and claims that the combination of Aon and WTW would “result in a substantial lessening of competition and would be detrimental to many commercial customers.”

Citing the SOI published by the Commerce Commission on December 21st, 2021, the anonymous submission also highlights the issue of the potential merger leaving just two major commercial brokers. Although it does acknowledge the presence of Crombie Lockwood, the submission argues that it must be classed as a ‘transactional broker’ without the capability to provide a full suite of risk management services.

Additionally, the submission calls on the Commerce Commission to take a closer look at the charging structures of Aon, WTW, and Marsh. And also stresses that owing to the size of NZ it is unlikely that the market would expand beyond the current major brokers, which suggests that clients would be left with just two brokers to choose from for the foreseeable future.

“It would be naive to believe that Marsh / Aon as a duopoly would not use this merger as an opportunity to drive broking costs upwards,” continues the anonymous submission.

Concluding that “the NZ insurance market is too small to be able to lose a major broker without a detrimental effect being felt.”

In a joint response, Aon and WTW have said that there’s “No potential competition law concerns with respect to commercial non-life insurance distribution.”

Specifically, the pair state that the relevant market should not be segmented based on customer size and/or mandate complexity, and should also not be segmented for specialist industries and/or risk types.

Discussing the other brokers in the region, Aon and WTW argue that both Gallagher and Crombie Lockwood will continue to provide an effective competitive constraint on the combined Aon / WTW.

“Regardless of market definition, Gallagher/Crombie Lockwood can and does compete with Marsh, Aon and WTW and can similarly service “large” clients and/or their “complex” needs however they are defined,” says the joint statement.

The pair also argue that regardless of their proposed combination, they will continue to be constrained by other brokers individually and in the aggregate as there are numerous other intermediaries that are able to compete effectively.

“To conclude, the Parties will continue to face competitive constraint from Marsh, Gallagher/Crombie Lockwood, the Steadfast Network, NZbrokers/AUB Group and other brokers. The threat of disintermediation also constrains the Parties and will remain unchanged post-Transaction.

“The removal of WTW as an independent competitor will not result in a substantial lessening of competition given the constraints that will continue to exist which, individually and in aggregate, are substantial. The Parties will have to maintain a quality offering, on attractive terms, in order to remain competitive post-Transaction,” says the statement.

Aon and WTW also say that there’s “No potential competition law concerns with respect to non-life reinsurance distribution,” arguing that the description of the merger as a “three to two” does not reflect the global nature of these markets.

The threat of disintermediation (cedents avoiding brokerage fees by contracting directly with reinsurers) is also raised by Aon and WTW.

The pair note that the “relevant market should include direct placement of non-life reinsurance” and call for the Commerce Commission’s analysis to take into account the threat of disintermediation as a competitive constraint. Additionally, the pair note how they are further constrained by “threat of new entry and expansion,” as well as a host of other constraints which will remain in place should the transaction move forward.

“To conclude, 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,” say Aon and WTW.

Adding: “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.”

Perhaps not too surprising considering the size of the proposed deal, Aon’s acquisition of WTW has been scrutinised by regulators as they explore the potential for negative effects on competition.

Regulators have suggested that Willis Re, the reinsurance arm of WTW, would have to be sacrificed for the deal to go ahead; something which is also deemed necessary by certain market participants.

While it remains to be seen exactly what the combined entity will look like post-merger, it is now clear who will be leading different parts of the business, with Aon and WTW recently announcing the new Executive Committee.

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