Brokers, as the speciality insurance sector’s consummate dealmakers, should be expected to carry off M&A with panache. This week’s surprise acquisition of giant JLT by behemoth Marsh has all the characteristics of a great deal: the well-kept secret is a superb outcome both for the buyers and the sellers. It provides the former with a massive new platform; JLT runs several sector-leading teams, and brings Marsh valuable additional reach in the international speciality market. The latter will enjoy an enormous capital gain.
Customers, the third party to consider, have lost some choice, but the plethora of able, qualified broking firms in London and around the world means that they face no oligopoly. For the many that will stick with post-merger JLT or enlarged Marsh, any increased leverage achieved by their broker-agents (to whom they now pay, indirectly, up to two-fifths of their premium) against risk carriers can only count as positive. Meanwhile, some smaller intermediaries (now comprising all of the others) will no doubt benefit from the inevitable fallout of talent and clientele.
Markets will be less pleased. Since ‘divorce’ in the 1980s, which saw brokers forced by law to divest their considerable ownership interests in Lloyd’s managing agencies, they have, with slow determination, regained the whip hand within the market. This was achieved initially through a round of consolidation which created the so-called ‘alphabet companies’ and removed the focus of Lloyd’s brokers on placing their business solely at Lloyd’s.
In recent years the market strength of the larger broking companies, with the top three alone delivering more than half of Lloyd’s premium income, has been transformed (for better or worse) into control. Urged on by John Nelson (the former Lloyd’s Chairman who loudly declared brokers, rather than buyers, as Lloyd’s customers), the bigger brokers began again to pipe the tune, this time through fees for data, massive facilities, and other innovations which have driven up markets’ acquisition costs and pushed down their profits commensurately.
The creation of an even bigger Marsh can only exacerbate the pressure that brokers are inclined to exert over the underwriters with whom they place their business, but some silver linings may emerge for the speciality-risk-carrying community. Enlarged Marsh will have unparalleled data to share with (or sell to) its markets. It will possess greater resources to fund e-trading initiatives and modelling tools, particularly for reinsurers. It will have expanded expertise and broader reach.
Such possible consolations did not prevent a collective moan of resignation at news of the broking sector’s latest mega-merger. It will, of course, be up to underwriters to find ways and means to profitably take advantage of the swallowing of JLT. Those that choose to see their distributors as genuine partners – and treat them as such – are likely to realise the greatest benefits. With acquisition expenses gulping such a large share of premium, that may be a difficult attitude to adopt, but positive parley between business partners is surely a step towards bringing them down.