When the going gets tough…

… brokers find alternatives and new competitors emerge. Here’s how efforts to find a home for clients’ hard-to-place risks have opened up some new thinking

By Terry McMullan

While market domination isn’t always the intention, mergers at the top end of an industry have the potential to crush smaller competitors, or at least limit their opportunities.

That’s why the Australian competition regulator expressed disquiet on February 18 about the impending merger of Aon and Willis Towers Watson. Following so soon after the 2019 merger of Marsh and JLT, the Australian Competition and Consumer Commission’s “preliminary concerns” about the impact of the merger on the local market is understandable.

The ACCC says Aon, Willis Tower Watson and Marsh “are the only three major brokers capable of providing commercial risk broking to large customers, reinsurance broking and employee benefits services in Australia”.

The local regulator’s concerns are similar to those of its UK and European counterparts, and reports from London suggest Willis Re – a significant player in the global reinsurance market – may have to be sold to placate them, despite the protestations of Aon CEO Greg Case that Willis Re is “complementary” to Aon Re.

When the dust finally clears with finalisation of the Aon-Willis Towers Watson merger later this year, Marsh will have given up the global broking top spot to Aon. But in Australia, Marsh will still dominate the S&P/ ASX 200 corporate market, with a local market share of more than 50%.

The merged Aon-Willis Towers Watson will have a combined local corporate market share of around 28%. Between them, Aon and Marsh will control around 80% of the local corporate market.

Marsh has gained additional weight from JLT’s strong specialty profile in the middle market, which is where more of the growth action is happening.

For brokers focused on the SME market, the affairs of the corporate market operators may be of little more than passing interest. But in the middle market at least, competition is likely to become more intense over the next few years after two cashed-up London brokers announced their arrival in Australia and their determination to make an impact.

The first two months of the year have seen three announcements (all reported first by insuranceNEWS.com.au, incidentally) that demonstrate not only the continuing attraction of the Australian insurance market to foreign entrants, but also that insurers’ plummeting risk appetite has led Australian brokers to look overseas for capacity for some willing and able partners.

Two of the announcements heralded the arrival in Australia of a pair of heavyweight British broker groups with the financial and technical nous to shake up the entire insurance market and possibly, over time, rattle the corporate market domination of Marsh and Aon as well.

In January Steadfast, Australia’s largest locally owned broker network, revealed that London-based international insurance broker Howden has formed a “strategic partnership to support Steadfast’s London Market broking requirements”.

The deal brings with it a clear path into the London Market for Steadfast brokers encountering problems placing clients’ hard-to-place risks in the Australian market. Managing Director Robert Kelly says the alliance with Howden is a “clear opportunity in the Australian broking market for a credible international alternative, and for the existing clients of Steadfast members to have access to expertise and capacity in London and globally”.

Howden Broking has also moved into the local market as a Steadfast member, promising to take the fight up to the dominant international brokers. Mr Howden says it will be a “challenger broker” for Corporate, People Risks (including Employee Benefits), and other specialty lines.

Howden Group – formerly known as Hyperion – employs 8000 people in 220 offices in 40 countries. It also owns, among other things, an extensive underwriting network that includes Dual Australia. With 2019 total revenue of $US942 million according to AM Best, it’s the 16th-largest global broker.

Offering new solutions: David Howden

The group’s founder and Managing Director, David Howden, told Insurance News from London that consolidations in the insurance market “show a real need for credible and talented broking services”.

“Clients increasingly need data and information and expertise,” he says. “We have good data, and very efficient ways to analyse and translate that data. Aon and Marsh are great businesses, but they don’t work for everyone. Howden clients enjoy dealing with people who work in a business they also own.”

He says Howden’s 20-year relationship with Steadfast has involved “Dual on the underwriting side, but also on the broking side across a number of technical areas, including acting on the placement of their bigger authorities on the London Market”.

The fact that the strategic partnership was negotiated from opposite sides of the world via phone and Zoom – “there were plenty of early morning and late night calls,” says Mr Howden – set the seal on a working relationship that has spanned more than 20 years.

“Now we’re taking our relationship to the next level,” Mr Howden told Insurance News. “Howden is capable of servicing large clients and complicated risks here in Australia, but critically for capacity in London, Singapore or even through Miami, Stockholm or Helsinki or wherever.

“And it has come at a time when there’s a definite need, not just an opportunity.”

The Steadfast-Howden deal was followed in mid-February by news that authorised representative (AR) network Resilium has sold a majority stake to UK broking group Ardonagh.

For Resilium Chief Executive Adrian Kitchin the acquisition is the perfect way to move forward, with Resilium now having the wherewithal to build a much more competitive future.

Turbo-charged: Resilium’s Adrian Kitchin

Ardonagh says it’s keen to grow locally, leaving Mr Kitchin and his management team to get on with the job.

Paul Lynam, who is Chairman of Ardonagh Australia, will also chair Resilium, act as its mergers and acquisitions chief and work with Mr Kitchin and his team to “leverage opportunities for Ardonagh’s wider portfolio within Australia”.

London-based Ardonagh says it has gross written premium of more than $US10.7 billion and income of more than $US1.4 billion, driven by mergers and acquisitions and organic growth. Its chief executive David Ross is best known for building Arthur J Gallagher’s international network before moving to run diversified UK broker Towergate in 2015 – a move that resulted in an £8 million compensation payment to the US broker.

Among the deals Mr Ross made at Gallagher was the 2014 acquisition of Australia’s then-largest locally owned broker, OAMPS. The deal came 17 months after acquiring the largest privately owned Australian underwriting agency, SRS, whose majority shareholder was Mr Lynam.

Towergate formed Ardonagh in 2017 following the acquisition of a significant number of UK brokers. It is now the UK’s largest independent broker and sits at 17 on the AM Best global broker rankings.

Mr Kitchin sees the strategic backing of Ardonagh allowing him to – as he puts it – “turbocharge Resilium’s trajectory, giving us access to the capital and resources to explore strategic, complementary acquisitions across the country while also continuing to grow organically”.

Mr Ross says Resilium will be “the centerpiece of Ardonagh’s Australian operations”, expressing admiration for the Australian company’s “unwavering focus on recruiting the very best talent in the market, alongside a commitment to professional development”.

Following the Resilium move came news that Austbrokers, the broking arm of AUB Group, has established a dedicated unit, Austplacements, to handle complex risks. It will be managed by Heath Amber, who is the Managing Director of MGA-owned underwriting agency Millennium.

While quite different to Steadfast’s strategy in its approach, AUB’s move is much the same in its intent: to secure additional capacity overseas for its member brokers and underwriting agencies in response to the local market’s restrictive conditions and low capacity levels.

“It’s become increasingly challenging to place risks in the local market, and we, unfortunately, anticipate this will continue for the foreseeable future,” AUB Group Managing Director Mike Emmett said.

“This new enterprise will enable us to improve the placement of almost $1 billion in premium that falls into this category.”

Mr Emmett says more risks are likely to be placed through international markets like London and Singapore.

Mr Amber will also take responsibility for AustRe, Austagencies’ bespoke London placement and reinsurance capability.

While the local brokers gear up and join forces with expansive internationals on the rise, the regulatory and media focus remains at the top end of the market, where the mergers of the four global broking companies – each with a substantial presence in Australia – have brought upsides as well as downsides for their smaller competitors.

Regulators worry about lessened competition at the corporate end of insurance, but the two giants have dominated that sector for years. No such problems in the hugely competitive but very subdued local market, where brokers are working hard to meet insurers’ increasingly stringent conditions – often without a positive result.

Hopefully Ardonagh and Howden will encourage small operators to climb the steep path of professionalism at the same time as they provide important solutions, expert risk knowledge and data.

Both companies are careful to acknowledge the strength and expertise of Aon and Marsh, but they have already demonstrated in their home markets that they’re lean and ambitious. That may make competition in the corporate and middle markets sharper than it has been for a long time. And, possibly, ease the ACCC’s worries about competition.

“Brokers are entrepreneurs,” Mr Howden says. “Winston Churchill said to ‘never let a good crisis go to waste’. I think COVID has taught us you can’t control the way things happen, so we just all need to get on with it.” 0

Playing monopoly at the top end

With every merger comes rationalisation, particularly in management ranks. That means there has been – and will continue to be for some months – a ready availability of experienced and skilled broking executives who have taken a redundancy package, possibly because they are confident another job is just around the corner.

Others have lost out to a manager with the same skillset, or have found their career progression compromised. Or they simply didn’t like or “fit into” the merged entity’s culture.

The merger of No 2 global broker Aon and No 3 broker Willis Towers Watson was announced in March last year and is expected to be completed before mid- 2021, if regulatory misgivings can be dealt with.

It followed the previous year’s deal to merge No 1 broker Marsh with the (considerably) smaller Britishbased broker JLT.

Following the merger with Marsh Andre Louw, who worked for JLT for nearly eight years and was most recently its chairman Australia & New Zealand, was appointed Marsh’s chairman for the Pacific region.

He left Marsh in August and is now Chairman of Howden Australia. Igor Fijan, another JLT alumni, is the Chief Financial Officer of Howden Australia. He was CFO and company secretary at JLT, and took up the CFO role at Marsh after the merger.

Mr Louw is confident the deal with Steadfast is a game-changer for clients in the Australian market, saying it will transform the broking landscape “by offering choice, expertise and local distribution against the backdrop of a consolidating market”.