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Risk managers view the continuing trend toward mega-mergers among brokers and underwriters with decidedly mixed emotions.
On the one hand, such consolidations as that announced earlier this month by Marsh & McLennan Cos. Inc. and Johnson & Higgins, and the acquisition of Alexander & Alexander Services Inc. and Bain Hogg Group P.L.C. late last year by Aon Group Inc., can mean risk managers will benefit from economies of scale and a wider variety of goods and services in one place, say some risk managers (BI, March 17). The trend may also mean more favorable reinsurance prices for risk managers who buy reinsurance for captives and greater business opportunities for captive managers that are not affiliated with the brokerage giants.
On the other hand, mega-mergers could have a more significant downside than simply reducing risk managers' choices when seeking a broker. Consolidation can mean more market power in the hands of fewer players.
Some risk managers are concerned that the industry's urge to merge also could mean a more homogenized approach to business that will give risk managers more headaches as they try to place unusual risks and the possibility that a less competitive brokerage market could also mean a less creative brokerage market.
"My reservation is that consolidation among the insurers and brokers reduces the options that the buyers have. On the other side, I can see the economic benefit of consolidation on their part because it can make them more efficient and offer more services to their buyers," said John Toay, director-risk management for Family Dollar Stores Inc. in Charlotte, N.C.
Mike Kaddatz, principal with Lake Forest, Calif.based risk management consultant ARM Tech, said:
"The question clients most frequently ask is: How will that impact me? Will I get any more clout in the marketplace?"
"I truly don't believe there will be much change for the client from this merger" because M&M and J&H already have a great deal of clout, he said.
"I believe there will be a period of reduced competition, but that will quickly be filled by opportunist and regional firms that will fill any service void," because they would be more nimble and able to respond more quickly than their giant competitors, he said.
A key factor in whether consolidation ultimately proves to be good or bad is how well the mega-brokerages will be able to mesh their drive toward achieving operational efficiency with the need to maintain and cultivate the personal relationships critical to many risk managers when they deal with brokers.
"I personally don't have any particular concerns. We see a lot of consolidation, not just in brokerages but in the economy in general," said Charlotte Humphrey, director-risk management for Golden Corral Corp., a Raleigh, N.C.-based restaurant chain.
"I think that whether you're a client or a prospect, anytime there are changes in the industry, such as mergers or acquisitions, you may take a second look just to make sure that you don't have any worries in the transition. That would be up to the individual customer," Ms. Humphrey said.
"If there's ever been a business that's a people business, this is it," said Jim Spivey, executive director of C.J. Spivey Associates Inc., a Charlotte-based risk management consultant.
"Expertise is possessed by people, and I find that nobody has a lock on that. You will find where they have both an M&M and J&H office, one will be stronger in one area and one will be stronger in the other. I would hope that the merger will allow them to retain the stronger people in each area," Mr. Spivey said.
"It doesn't surprise me and it doesn't necessarily mean that getting big is going to mean less service or a less competitive market, but the whole drift depends on how much latitude they give the employees and good people who are working," he said.
"I really don't envision any change in the relationship with the brokers I deal with," said Christopher Mandel, director-risk management for PepsiCo Restaurant Services in Louisville, Ky. Mr. Mandel, a J&H client, said he doesn't think there will be a lot of change among the people who service the accounts of Fortune 1,000 clients.
Consolidation will continue, he predicted.
Predicted Steve Coombs, president of Risk Resources, a Westchester, Ill.-based risk management consultant: "I think the largest impact will be on the larger organizations or those with multinational operations or those that have multibroker relationships. In the short term, with risk managers, it's going to be a question of sorting things out regardless of which merger you're talking about. There will be some growing pains."
Other large brokers will have to struggle with finding more efficiencies in order to compete. It puts pressure on other brokers for additional strategic mergers, said Mr. Coombs.
Mr. Mandel noted broker compensation has been moving from commission to fee-based compensation for years, and that has lowered the revenues for brokerages. He added that he expects brokers to become less important to risk managers over time as risk managers negotiate directly with insurers.
"Direct communications with underwriters is the wave of the future," he said.
"It's kind of a two-edged sword. It's natural to worry about the consolidation because it gives you fewer choices, but actually it's only fewer choices among the big brokers," said David R. Haight, director-risk management for CF Industries in Long Grove, Ill. M&M is CF's broker.
That concentration "would tend to homogenize the markets" so that a risk manager with a unique risk might have a harder time finding a market for it than would be the case in a more competitive market, he said.
Mr. Haight noted, however, that large brokers' various offices always have competed with each other within the brokerage. A broker in one city might favor one insurer for a certain type of risk; another broker with the same company in another city might have a different insurer, he said. If that continued, some of the impact of homogenization might be mitigated, he said.
Diane Threlkeld, manager-corporate risk management for Intergraph Corp. in Huntsville, Ala., shared the concerns about lessened competition.
"My primary concern, and it's a concern that a lot of risk managers have, is the lack of competition. I think competition forces a person to be creative, and I think if there's only a few at the top, there will be less creativity. I think the competition makes a person stretch, forcing them to bring new things to the table," said Ms. Threlkeld.
Mr. Spivey took a more positive view, saying that no matter what the impact of the most recent round of mergers, "risk managers will always have the services and providers that they need, because if the commercial market doesn't provide them, then they (risk managers) will generate a response as they have been doing in the past. More and more risk managers have been looking to their own devices."
And if those devices require reinsurance backing, mega-mergers may ultimately make risk managers' lives easier, said reinsurance professionals.
Reinsurance rates will likely be pushed down even further as the large brokerages wield their clout, said John Berger, president of F&G Re Inc. in Morristown, N.J.
The large brokers will be placing a huge amount of business with insurers, and in return they will want to place the insurers' reinsurance. Then, the reinsurance arms of the brokers will have so much business to place with reinsurers they will demand lower rates in return for the huge volume of business, he said.
"It's a great time to be a buyer of reinsurance," Mr. Berger said.
And the buyers of reinsurance should not see a deterioration in service as a result of the mergers, as all four of the merging brokerages-Aon, A&A, M&M and J&H-are "first-class organizations," said John Smithson, chairman, president and chief executive officer of PMA Reinsurance Corp. in Philadelphia.
But reinsurers could see a deterioration in rates as the number of brokers dwindles and the survivors become more powerful, he said.
"From a selfish standpoint we would wish that instead of eight or 10 reinsurance brokers there were 20 . . .but there is still a viable competitive market," Mr. Smithson said.
Rates already may be so low that they cannot be driven any lower, said Bard E. Bunaes, chairman and CEO of Constitution Reinsurance Corp. in New York.
"The market is so soft now that the mergers will probably not have much impact on pricing levels in the market," he said.
In fact, the mergers will likely lead to the loss of some business by new gigantic brokerages, Mr. Bunaes said.
"In any merger there is a significant fallout, and business seems to follow people," he said.
For example, senior brokers at the large firms may leave and join or form smaller brokerages, largely with the book of business they serviced at the established brokerages, Mr. Bunaes said.
Large foreign brokerages could also take advantage of any dissatisfaction among senior U.S. brokers and hire away teams to strengthen or launch their own U.S. operations, said Mr. Berger of F&G Re.
The mergers also should lead to opportunities for rival captive managers, said Denville C. Reed, president of Sedgwick Management Services (Bermuda) Ltd. "It's a terrific opportunity for us," he said.
The captive management arms of the merging brokers will have to go through a disruptive period when they will have to focus much of their attention on uniting the different cultures, Mr. Reed said.
"You take your eye off the ball for a week or two and you find you have a few uncomfortable clients," he said.
The captive management arms of the merged brokers may be so large that they will find it difficult to provide the level of service that many clients require, said Colin C. James, president and CEO of Atlantic Security Ltd. in Bermuda.
For example, the combined Bermuda captive management operations of J&H and M&M will have nearly 300 captive clients, he said.
"The problem with controlling a management company that size is staffing it," Mr. James said.
Independent managers with long-term staff may benefit as clients seek a more personal service, he said.