Aon Willis merger - a risk for the SA reinsurance market?

It was with interest that I read Mark Geoghegan's assessment of the Aon Willis merger in his September column, The $72bn broker, on The Voice of Insurance (https://www.thevoiceofinsurance.com/post/the-72bn-broker).

Geoghegan cites a number of areas where the joint manifesto - penned by Aon's Greg Case and Willis Towers Watson's John Haley - falls short. These include its unfathomable omission of any reference to its people, retaining and attracting top talent, career progression opportunities, and efforts to make the new business a diverse and inclusive one.

While these are all valid points, it was Geoghegan's interrogation of the manifesto's premise that the two global broking giants had to merge in order to innovate that stood out the most for me.

'Does waking up one day as a $72bn company make you come over all nimble and creative? We all know necessity is the mother of invention. Aon merging with Willis removes the necessity to innovate. Indeed the merger makes innovation almost irrelevant for years to come. Innovation is not going to move the dial on a $72bn broking monster with overlaps in all classes, in all services, in all territories and almost all cities,' he writes.

I couldn't agree more. As a reinsurance professional with more than 22 years' experience, including stints at Munich Re, Aon Benfield and Willis Re, I know how quickly innovation slips down the list of priorities in larger firms - and that's before we get into 'mega-firm' territory, as presented by this merger.

Lumbering giants like this are incapable of achieving one critical aspect required by the current broking environment: agility. If necessity is the mother of innovation, as Geoghegan attests, then it is agility that drives it.

It is therefore difficult to imagine the innovative prowess the joint firm promises to the benefit of clients driven by the increased size, where either firm may have previously lacked. It is however much easier to appreciate the increased shareholder value - which is very likely the basis for the merger.

Broking, and reinsurance broking in particular, is highly sensitive to clients' needs, especially during these strange, unpredictable times. 'Lean' brokerages are far more capable of making efficient, effective decisions closely aligned to their clients' needs compared to their larger counterparts. It is unrealistic to expect a behemoth to be as adaptive as smaller players in the current environment, which is forcing firms to think on their feet.

Effective broking also requires simple processes that aid the flow of reinsurance business, communication and client solutions without bottlenecks. Smaller, employee-centric companies encourage free-flowing communication up and down the organisation, enabling such firms to quickly move from solution conception to execution without red tape hindering the process. In massive firms, this is seldom the case.

It is also much easier for smaller brokers to ensure their clients remain the focus of their efforts. At Reinsurance Solutions Intermediary Services, our employees are empowered to make decisions with an entrepreneurial mindset, allowing them to deliver localised and even customised solutions more effectively. Our nimble operation allows us to quickly and easily collaborate across teams and geographical areas to bring the best skills and product offerings to our clients, irrespective of where the business originates within the group. This approach is built into our culture; it's how we do business.

Company culture - and aligning all employee efforts to these shared values, goals and behaviours - is a critical component of successful broking. Aon and Willis have two distinctly different company cultures, and it is difficult to see how the two will seamlessly combine into one. I suspect the firms' top talent may be most at risk of leaving after the merger, especially those who previously worked at either Aon or Willis and left that firm, only to now find themselves once again working for their previous employer.

A sort of 'collateral damage' idea might be at play here, where staff in the now overlapping business units will be sacrificed, but I cannot possibly see how this would be a sound strategy where the company's most talented people are concerned. As the joint manifesto does not mention protecting jobs, one can only assume there will be job losses.

New players entering any market is always positive, as this boosts competitiveness and consequently, the quality of products and services being offered. New players in name only, that are effectively just amalgamated entities of existing players, is not the same thing. In fact, mergers do not augment sectors, they constrict them.

Look at the South African reinsurance market and CAT modelling, for instance. CAT modelling plays an integral role in determining the amount of catastrophe reinsurance cover clients buy, as well as providing regulatory and corporate governance comfort.

There are currently three CAT models developed for South Africa - these models are owned by Willis, Aon and Guy Carpenter. Following this merger, clients will be left with only two options (i.e. the Aon and Guy Carpenter models). This amounts to a monopoly, as it forces clients to choose between these two reinsurance brokers solely on the basis of their CAT modelling capabilities and not on their service and the value they provide. This monopolistic behaviour is further exacerbated in instances where the broker is not prepared to offer clients their CAT modelling services if they are not appointed as the placement broker.  Independent CAT vendor models available elsewhere in the world are not available in South Africa, compounding this problem even further.

Is it time to consider the development of an industry CAT or vendor model? Such a model would level the playing fields and give insurers more choice. I would be interested to hear the views of other industry participants on this critical issue that has the power to reshape our sector going forward.

Personally, I think there is little to celebrate around Case and Haley's announcement. In fact, it raises a red flag around the availability of diversified offerings in the global reinsurance arena and certainly in South Africa, where our highly differentiated market necessitates equally varied, localised solutions. It is fair to say that this merger will most likely benefit shareholders. However I'm not sure whether the same can be said for clients, employees and the broader re/insurance market.