April 16, 2021
Willis Re looks set to be cast aside as part of the Aon mega-merger, likely divorcing it from any retail leverage and possibly, existing technology assets. A bleak picture, but could offloading its legacy accelerate the firm’s transition towards a leaner reinsurance broker model?
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In his interview, Gardner discussed how scaleup broker Lockton Re planned to take advantage of the competitive gap and labour dislocation created by consolidation amongst the largest reinsurance brokers. His weapons of choice: talent, technology and brand.
With a team recruited to a more collaborative and client-centric culture from larger peers, the outfit would have big broker thinking and existing relationships with buyers at the largest clients.
With investments in innovation and technology, Lockton Re would also surround its talented team with compelling tools and analytical capabilities to enable the firm to differentiate itself against its larger competitors.
And, with the well-established and familiar brand of Lockton’s global retail business, Gardner was excited to highlight that the door to clients would already be open.
Let’s take a pause on that last brand point. It's a familiar narrative, exploited by nearly every major reinsurance broker, yet from the cedent perspective can be one that rather complicates the outwards shopping basket.
Many of us have experienced cases – for posterity, let’s say a few isolated, historical cases – in which the door to clients can be more than just open. Where it seems the broker, like a determined bailiff, has a hefty foot planted resolutely over the threshold, preventing the door from closing. What starts with Gardner’s discussion of working with a familiar brand, can quickly become a minefield, as cedents try to navigate the unspoken quid pro quo of reinsurance broker tendering.
As my last article on the new breed of reinsurance brokers highlighted, rebrands at a number of challenger brokers – and even the dissolution of the Benfield brand in 2018 – have drawn attention to each reinsurance team’s potentially intimate relationships with their primary counterparts. The retail firepower these combinations can collectively wield, with seemingly unlimited discretion, results in an additional, even if unspoken, mafioso sales angle during reinsurance broker tenders.
Naturally, this floats a little awkwardly alongside the other two more tangible offerings of reinsurance talent and technology, but as nobody wants to see the taps accidentally turned off, it can be difficult to avoid placements becoming mired in politics. And when some tenders appear to be a foregone conclusion, this makes the job of challenger brokers even tougher: after all, it’s hard for cedents to please everyone, when they only have so many programmes to offer.
For a fair fight based on genuine talent and technology capabilities, it's better for brokers to aim for leaner, rather than meaner. They will rely on each others' honour in doing so – as conduct regulators have yet to iron similar risks out of the insurance markets, let alone in reinsurance – making the role of the competition regulators all the more important as they consider the wider impacts of mega-mergers.
Hot on the heels of Guy Carpenter’s purchase of JLT, Aon's own acquisition of Willis Towers Watson has the market braced for a substantial concentration of (re)insurance business and pricing power in just two enormous firms. That is, if Aon can appease an ever wider array of global regulators, without compromising the value of the deal.
And, though as a secondary outcome of the acquisition, cedents may indeed want greater choice of reinsurance brokers beyond the two largest egg-baskets available, that’s not to say that the phones will be ringing off the hook at challenger brokers (and not only because nowadays, there are quite a few of them). The soft power of the big two will increase, and even if only subconsciously, customers will remain cautious of breaking ties immediately.
They say absolute power corrupts absolutely, so the risk is likely largest with the largest, especially with reinsurer capital abundant and growing. Even if the big two’s conduct remains angelic, fears of upsetting gatekeepers to such large portfolios of inwards business will do little to keep the outwards playing field level. If Little Red has seen how big grandma’s eyes are, she probably doesn’t want to risk seeing how big grandma’s teeth are.
Do brokers really bare their teeth like this, though, or is it all in our imaginations? Anecdotally at least, we still hear stories of cedents and reinsurers receiving ‘words of caution’ from brokers who find themselves on the wrong side of a tender result. And the soft power derived from the distribution scale of retail and even inwards reinsurance operations is readily acknowledged by most in our industry, whether or not we want to talk about it.
That being said, leverage alone maketh not a reinsurance broker. Having described the capabilities of Lockton Re’s larger competitors as ‘ferocious’, Gardner would be the first to acknowledge that while the biggest brokers can play this card most effectively, it’s far from the only trick up their sleeves.
One of the biggest reinsurance brokers will be looking especially hard up its own sleeves, given that it looks set to be divested, rather than included in the new 'Big Two'. With no more primary business to leverage, a lone Willis Re will 'have no teeth' – while Aon’s will grow bigger and sharper still.
Willis Re may be able to leverage its inwards re firepower to sustain retro relationships, but it will be some feat to leave the wider reinsurance crockery untroubled, while the tablecloth is pulled from beneath its portfolio. Without its retail leverage, Willis Re could be vulnerable to challenger brokers who, though far smaller in size, may try to tempt away cedents with offers of deeper relationships, beyond reinsurance.
Of course, a divestment-related acquisition may be pending, which could change that outlook to some extent. But for now, Gallagher Re, Lockton Re, Acrisure Re and Howden Re all sit within Top 20 global insurance brokerages, which may give them an edge, if we assume all other aspects are equal.
Is that a fair assumption, though? On talent, excellent individual reinsurance brokers can now be found throughout the top ten, as noted in my last review of the challenger brokers. So, in theory, cedents should be in safe hands whoever they choose to work with.
On the other hand, there does seem to be quite a difference between firms – dare I say, a differentiation – when it comes to technology.
You’ll notice I didn’t mention a couple of other substantial reinsurance brokers above. That’s because by the same reckoning, the fourth largest reinsurance broker, TigerRisk Partners, might be considered a tiger with no teeth: though they still seem to be burning bright enough.
So what should we define as TigerRisk’s teeth? Its technology capabilities? Its expertise? Its relationships? While it might not have the huge molars of Guy Carpenter and Aon, it has canines for pursuing prey in its specialist lines, alongside technology solutions like TigerEye, that can move the conversation away from how much retail business they can bring to the party.
Likewise, we’ve just seen a large group of reinsurance brokers leave Guy Carpenter for Howdens, betting their careers that for the business they hope to service, they will not require quite as many rows of teeth as were available at Marsh. Or that otherwise, they back the exciting innovations underway at Hyperion X, under the legendary David Flandro.
At the talent-heavy end of the spectrum, Holborn operates a comparably toothless operation in North America, with reportedly very low churn. There’s no song and dance about technology, no primary business to leverage. It’s all about talent and focused on clients, who like what they get and have built long-standing, trusted relationships. The same might be said for McGill and Partners, who in their reinsurance business are going all-in on talent, without waiting around for their primary book to get ahead of them.
Perhaps cedents quite like working with reinsurance brokers where there is no prerequisite to offer a bite at the outwards business, to get a share of the inwards. And perhaps also, they appreciate the limitations of technology offerings built in-house by a single broking firm – where also, if they came to rely on that one broker’s solution, it would be even harder to shake that foot out of their doorway.
And perhaps this is yet another signal that it’s time more brokers considered adopting shared technologies that can create compatibility across the reinsurance ecosystem, rather than pouring funds into siloed efforts that make trading with them more, not less painful.
We are about to witness an arms race between navel-gazers and stargazers: those who will continue to build own-branded tools in-house, versus ecosystem players leveraging SaaS to plug into the new breed of vendors known as insurtechs.
Large intermediaries can offer some valuable insight when they have amassed large amounts of data and expertise around a market, as perhaps Aon Inpoint can demonstrate best. But as Gardner was quick to highlight in his interview:
‘The biggest brokers are confronted with legacy systems that are incredibly hard to change, and as a result, they end up with these fairly monolithic structures that have worked for the last twenty-five years, but they’re twenty-five years’ old’.
So what’s the alternative to large broker tech solutions that only work in one-player mode? And how do we avoid the modern renaissance of reinsurance brokers giving birth to ten different half-versions of the same products, each exclusive to that one broker?
Reinsurance might be wise to take a steer from other industries and look at how independent solutions can transform the capabilities of the industry, while creating a win-win-win for all participants. These market networks typically have a clear goal, venture-backing and the independence needed to avoid being held back by committees and politics.
Particularly in a world of APIs, a shared but independent platform for reinsurance data, placements and relationships will put more tools at the disposal of the modern reinsurance broker than any one broker can develop alone, in-house. And the resulting ease of doing business will be welcomed by cedents and reinsurers alike.
When we first started work on Supercede (at the time, Riskbook), our go-to analogy was found in the platforms used by real estate agents to connect home buyers and renters with sellers and landlords. We wanted to build ‘Rightmove for Reinsurance’, as the UK’s platform is known – read more in our interview with Sønr, back in 2019. Since then, we’ve also discovered other brilliant companies like Goodlord, who take the concept a step further still.
The largest estate agents all have nice websites. They might even automate some workflows for their staff. But soon, all of their smaller competitors began to leverage a third-party technology specialist for the manual tasks common to everyone.And nowadays, so do they.
This spreads the costs of investment and maintenance between a larger number of players and, with more customers to satisfy, typically leads to a better product. And it means customers can access technologies like local school checkers, broadband availability estimates and 3D floor plans, regardless of the agents they choose to work with.
After all, it wouldn’t make sense for every broker to build its own video calling systems, word processors, spreadsheet software programmes and email clients. Especially if that meant they wouldn’t be compatible with anybody else. Nowadays, the same can be said for workflow and automation tools that take the pain out of placements for reinsurance brokers, no matter where they work – tools that also benefit cedents and reinsurers, upstream and downstream.
Don’t get me wrong, there will always be specialist technology capabilities that remain worth investing in. All the same, rest assured that when it comes to shared solutions for reinsurance analytics, placements and networking, we’ve got that covered.
In the context of this shifting technology landscape, it was striking to see innovation positioned as the main rationale for the Aon-Willis deal. The argument being that today, customers are underserved by fragmented broker solutions, but that if Aon and Willis are combined together, they will finally have enough innovation power to meet client needs.
To some extent it conjures imagery of the travel industry: an analogy in which we see Aon offering all-inclusive package holidays to its cedents (and arguably, its reinsurers too). Customers will be able to fly on a plane, stay in a hotel, and enjoy experiences all provided within the single brand, capabilities and network of one company, which in turn can harness the value of a captive audience. Undoubtedly, there’s a market for that.
But this strategy restricts the protagonist to taking big bets only: centralising flights, resorts and experiences around the most promising destinations, while it tries to keep such a weighty, multidimensional proposition from toppling over and hurting the overall brand. From its acquisition manifesto, Aon’s headline big bets will include IP, climate change and cyber – the latter already under attack by challengers, Gallagher Re.
This approach is less helpful to customers who want to choose from a broader pool of airlines, have their pick of the world’s best hotels and sample experiences from any local provider. These pickier customers will require an agent that can build an offering around them: with access to a network, deals and data beyond their own resources.
Could customers build their own vacations from scratch themselves, sticking together the best deals, with flights from Skyscanner, hotels on Booking.com and selected Airbnb experiences? Probably, but like me they might end up in Fukuoka the day after the Sumo Grand Tournament has finished, scrabbling to rearrange everything at the last minute.
Especially for something as important as a reinsurance purchase, cedents are better off leveraging the support of expert brokers, who do this day in and day out, and have intimate knowledge of the counterparties they will need to rely upon. And ideally, the brokers they choose will be ‘power users’ in the latest and greatest technology available – not just what they can find lying around in their own back store cupboard.
Following the Guy Carpenter JLT announcement, Aon at first made it very clear that they had no interest in making a similar move, which was at the time likened to acquiring more Blockbuster stores in the age of Netflix (amazing case study here).
By building an acquisition rationale around innovation – not expense synergies (though some are expected) and not new talent and relationships, but rather a combination of the data and analytics technologies that are currently offered separately by each firm – it seems almost as though Aon has determined to build its own Netflix. Perhaps, the Amazon Prime Video of the story?
If so, the recent concessions offered by Aon make it unclear whether they would be able to fully achieve this goal, leaving the acknowledgement that ‘client needs continue to outpace innovation’ unaddressed, on the reinsurance side at least. Particularly as it remains unclear whether Aon would acquire Willis Re’s technology solutions, in the event that Willis Re is divested.
In either case, one hopes that Case himself truly believes this statement:
“The solution lies beyond the capabilities of either Aon or Willis Towers Watson alone. We realized that to fully serve clients across all industries and geographies, we must look beyond our own organizations and capabilities.”
And that for reinsurance at least, we might see the biggest brokers move a step closer towards supporting independent technology solutions, shared across the industry.
The Willis Re team, meanwhile, might well be feeling lighter than air, having narrowly avoided ingestion by a mega-merger machine. With an operation that has talent, relationships and deal flow by the bucketload – and that now, just needs a plug-and-play tech stack to operate through – they have a real opportunity to define how reinsurance brokers leverage ecosystem technologies like never before.
Free from the politics of an insurance arm with other technological priorities, we may see Willis Re carve a leaner and meaner path to success, leveraging the reinsurance technology ecosystem. And from there, it’s a short journey towards proving to clients that they have big broker thinking, but small broker agility, like Gardner’s intended model for Lockton Re set out at the beginning of this article.
And let’s not forget, Willis Re remains the third largest reinsurance broker by portfolio size, which brings an inwards reinsurance leverage of its own, and a wealth of credibility in front of clients. What’s more, if Aon starts throwing sandbags as large as Willis UK out of the hot air balloon to keep the acquisition afloat, who knows – the lucky buyer (or buyout) might find a few insurance gems in their basket too.
Not to mention Willis Re’s army of seasoned practitioners who, like their counterparts at TigerRisk, Holborn and McGill, have shown that they don’t need a pile of primary leverage to do a great job. The changing narrative of reinsurance brokers to their cedents will be less that they have more teeth than their competitors – whether that be retail firepower, ‘unique’ in-house technology tools, or otherwise – but more, that they know how to use the teeth they have.
As teams begin to emerge from the garden at long last, the final homework assignment (quite literally) for the challenger class of 2021 will be graded on how effectively brokers can leverage their reinsurance talent. It's time to free up exceptional reinsurance people from repetitive manual tasks, with solutions like Supercede, and help them to spend more time focused on delivering real value to their clients and their markets – including, as the world reopens, a bit more quality time in the pub.
Related: Reinsurance broking in the garden: do emerging challenger brokers have what it takes?
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