Adrian Leonard looks at broker consolidation in the London market, from a street-level perspective.
Overheard in Lime Street:
Q. Do you know about the new broking house, Aon Now?
A. Yes, every broker I ask says he works there.
Acquisitions have reshaped the broking scene. The big two, Aon and Marsh & McLennan (through Guy Carpenter, the subsidiary that now incorporates Sedgwick), dominate reinsurance distribution, but instead of a threat many smaller companies are seeing tremendous opportunity in the giants' ascendancy.“We have picked up dozens of very good people, and we are always interested in hearing from anyone who might be interested in making a move,” says the managing director of one London broking house, which has catapulted from being a bit player in a field of hundreds to rank as an international top 10 contender.Other insiders are less reserved about the reality of the current broker employment market. “There are a couple of people in the firm who came from (another company) a few years ago, and they are on the phone to their old colleagues at (the other company) all the time trying to get them over here,” a senior broker confides. “If we can reunite the team over here, and if they can bring business with them, why not?”
The following advertisement appeared in Insurance Day, after Marsh McLennan bought Sedgwick:
“Following months of speculation, it is now evident that the merger process of the major broking houses is approaching its conclusion, resulting in many directors and employees facing a very uncertain future. We see the current climate as promising, and are looking for teams of dedicate professionals with proven track records in any class of insurance or reinsurance to come to discuss with us the opportunities to join our ever growing family.”
Such poaching is a regular occurrence. Brokers are switching allegiances in a grand game of musical chairs, but many continue to take responsibility for the same old insurance business. Insureds (and to a much lesser extent cedants) may be completely oblivious or entirely unconcerned as to the ultimate destination of their risk - or even of the underwriter immediately behind the broker. Indeed, for many insureds the broker is their only point of contact with the world of commercial risk transfer, so whether he works for a small independent, a listed London company, or a global broking giant may be of little importance.Even if a broker gets a new business card, he remains the same person. In a business in which (at least in principle) utmost good faith is the number one fundamental, an insured's custom will, in many cases, stay with a broker no matter who he works for. “We use Howden,” says the risk manager of a major international petrochemical company said a full two years after the Alexander Howden name disappeared into Aon.
Such strength of precedent means broker-underwriter relationships can survive the turmoil currently churning the sector. “It is all the same faces,” one long-time Lloyd's property underwriter says. “I am seeing the same business brought by the same people as always. A lot more of my business comes from two broking houses - I do not need to name them - but on the individual level things have not changed.”
The counterbalance to opportunity, however, is threat. For many brokers, from those on the street to those in senior management positions, the future does not seem to be one of security. All but a very few people broking in the London market have experienced at least one involuntary change of business card in the past three years, and many have been caught in the turmoil of several acquisitions. Thus few believe that where they are now is where they will remain.
“Everybody is looking over their shoulder,” a hull broker said. “If you leave the office an hour early, and you do not say where you are going, people assume you are at a wine bar somewhere talking about moving companies. I have never seen the market so nervous. The soft market does not help.”
The threat of redundancy is another lurking worry. The mergers are in part about market dominance, in part about providing clients with an extensive and full service network and, it must be said, in part about megalomania, but they are also in part about savings - and savings mean, inevitably, unemployment for some. But the “rationalisation” which inevitably follows broker mergers will take more blame for sector redundancies than it really deserves. The simple fact is that it takes many fewer people to do the business these days. The distinct fading of the buzz in the Room at Lloyd's and the near-monastic silence which permeates the Institute of London Underwriters' building stand in testament: bigger lines on slips mean fewer transactions; fewer transactions mean fewer broker/underwriter visits; fewer visits mean fewer brokers.
“There is no following market anymore,” one young broker comments, as he wrote a new company name on one of his old business cards. “I know, I used to broke to it. I am just lucky that I have a few friends.”
Gardening leave is a possible part of the redundancy process for some senior producers. It is particularly favoured when an individual newly employed through acquisition shows, intentionally or otherwise, that the new team strip has been badly tailored for his build, but that his clients have a particular affinity for him.Unfortunately a back-yard sabbatical is no guarantee that a broker will leave his business behind when he is sent home with full pay - describing business to underwriters in wine bars, making re-employment arrangements with very long lead times, and introducing underwriters to facilitating brokers from a future employer can be a very effective way of maintaining one's all-important client relationships while between appointments.
Rationalisation savings for brokers do, of course, extend beyond personnel costs. The bigger the broker, the more weight it has to throw around with underwriters. “I just crossed that off the slip,” a following treaty underwriter for an Italian reinsurer said of a contract clause which specified that any retrocession of the risk ceded through the slip would have to be placed by the same broker who placed the initial reinsurance. Likewise brokers' efforts to insist that millennium losses be included in coverage, at the risk of other business not being shown to underwriters bold enough to exclude possible bug losses, were foiled, at least in London. In continental markets, where the solidarity between carriers is much less pronounced, the brokers are said to have had more success at persuading carriers to cover Y2K.
From a mega-broker's annual report and accounts:
(The company) has evolved into a leading global provider of brokerage, consulting and consumer insurance services. This dramatic growth in scale, capabilities and geographic reach has been carefully planned and executed to enhance our competitiveness and to create value for all of our stakeholders.
One area in which broker muscle has proved inflexible is London's terms of trade. Underwriters can no longer specify with efficacy the time limits within which premium must be released by brokers into their hands, as several large broking houses have simply said that the terms of trade grid will not be observed. “No underwriter is going to tell me how to manage my accounts,” the head of a very large reinsurance broker says indignantly.
From a Deloitte Consulting report:
“It is hard to find any organisation that isn't either looking at deals or being looked at. Because consolidation will be a way of life in the industry, many organisations are beginning to gear up internal M&A organisation . . .”
The merger process is far from over. The number of acquisitions - at least in the UK - will almost certainly slow down in the near term, although several second-tier brokerage managers have made it clear that they are always open to approaches (and that they such merger offers are received with surprising frequency). Meanwhile, enlarged groups are digesting their acquisitions.
“It is all a bit messy at the moment,” is one speciality broker describes the situation in his company, which has been an acquirer, rather than an acquired. “But considering it was only about two years ago that we merged with (the first company), and now (the other merger) has followed on so closely behind it, they have gone through extremely well. Major issues have been addressed by the senior management in the UK and on a global basis very rapidly.
His division should announce its new, post merger name this month, with new business cards to accompany the move. It will not the last, no doubt.
Adrian Leonard is a freelance insurance writer.