March 10, 2020
The Aon-Willis-Coronavirus Merger
by Paul Carroll
When I worked at the Wall Street Journal, in the pre-internet days, we’d often see companies try to bury bad news by issuing a press release after the markets had closed and the ticker had shut down, right before a weekend—better yet, a long weekend. How much play would we give a days-old story that following Monday or Tuesday, even if that was the first time print readers would learn of it?
Well, the reverse happened to Aon and Willis Towers Watson, which announced their $30 billion merger Monday, only to have it smothered by news of the biggest drop in the stock market since the 2008 financial crisis, amid continuing fears about the coronavirus and, for good measure, an oil price war between Russia and Saudi Arabia.
Let’s still spend a couple of minutes looking at the implications of the Aon takeover of Willis Towers Watson, because it pushes the industry in some important directions, including toward more advisory services and accelerated consolidation. There’s even a coronavirus connection; the current global health crisis could amplify one of the major effects of the merger, in the middle market.
The most immediate effect will be on the brokerage world, where Aon and Marsh will individually be larger than the rest of the top 10 put together. (According to the Insurance Information Institute, Aon/Willis had $19.13 billion in revenue in 2018; Marsh, $16.84 billion; and the rest of the top 10—Gallagher, Hub, BB&T, Brown & Brown, Lockton, USI and Acrisure—totaled a combined $16.03 billion.)
Aon/Willis will amp up competition because it will have broader scope than the companies did on their own and will put pressure on everyone to cut costs. Aon says it expects to take $800 million of annual costs out of the combined entity within three years, and that seems plausible. Research I did for a 2008 book, Billion Dollar Lessons, on what to learn from corporate catastrophes found that, while revenue synergies almost never pan out, the kinds of cost-cutting synergies posited by Aon routinely do for companies with similar businesses. Aon, smartly, says that, while it expects revenue synergies, it isn’t baking any expectations into the numbers at this point.
Customers should see a change, too, because the addition of Willis Towers Watson will accelerate Aon’s recent push into advisory services. The first talk I did in front of an insurance audience was titled, “Whoever Sells the Least Insurance Will Win,” so I applaud the thought that Aon/Willis may lead the brokerage industry to focus less on selling products and more on providing the informed counsel that clients want and need.
Done right, this focus on advice could lead to the kind of self-reinforcing, information advantage that we see in Big Tech. Google isn’t Google just because it’s a great company. Google is Google because it established an advantage early on and kept building on it. Even though Microsoft spent billions of dollars trying to make its Bing search engine as good as Google, and may have briefly come close at the technical level, Google’s search engine was still seeing 80% or more of the searches that people did, so it could keep learning faster than Bing about what people wanted, how they formed their questions, how they wanted answers formulated, etc. Amazon has the same advantage. It not only sees what you buy; it sees what you considered buying and set aside, what you bought from another vendor at a lower price or in a slightly different form, and so on. If Aon/Willis and Marsh can turn their advisory work into a similar sort of information advantage about what customers want, what they don’t want, etc., then they can keep learning faster than smaller competitors.
Attaining that sort of information advantage is by no means a done deal, but the issue is worth watching.
In any case, the effects of the merger may extend beyond brokers, customers and products/services and address a question that has puzzled me since I got involved with Insurance Thought Leadership back in 2013: Why are there thousands of insurance companies?
When I chatted with my old ITL colleague Wayne Allen after the merger announcement, he predicted that the increased bargaining power for brokers would bring about a major consolidation among insurers. He said Aon has already been reducing the number of insurers that it works with, as it rationalizes working arrangements across the sprawling business in a “one firm” initiative it calls Aon United. Wayne, now a principal with IE Advisory, says Aon seems to be heading toward an 80/20 rule and will surely apply that as it incorporates the Willis Towers Watson business—great if you qualify in that top 20% in Aon/Willis’ view, but not so great if you fall into the 80% according to a company that controls so much of the brokerage business.
Wayne speculated that the balance of power will shift so much to the brokers and to their big corporate clients—bigger, in many cases, than the carriers serving them—that insurers increasingly will just be viewed as a source of capital. The brokers and corporate clients will lay out a risk management plan, then decide where to line up any capital needed to support that plan, in Wayne’s view.
Again, far from a done deal, but perhaps worth a thought or two if you work at an insurer that isn’t clearly an industry leader….
Wayne also offered an intriguing idea about the middle market that gets me back to my statement about the effect of the coronavirus. He predicts that the accelerated advisory push and the increased power of the biggest brokers will put all kinds of business up for grabs by reorienting the insurance industry’s approach to mid-sized firms from horizontal to vertical. In other words, rather than thinking horizontally, in terms of transportation businesses or manufacturers of a certain size, brokers will help their large clients drill vertically down into their supply chains to manage risk as thoroughly as possible.
The fact that the coronavirus emerged out of nowhere and in slightly more than three months not only has disrupted supply chains even at world-class companies like Apple but also threatens to stall major economies underscores the need for more focus on supply chains and on resilience. (And the math of epidemics suggests the problem will get far worse before it gets better; if you really want to scare yourself, read through this Twitter stream on how the numbers might unfold.) So, mid-sized companies can expect to have more insurance and risk management requirements placed on them by the large corporations they supply.
And guess who increasingly will be advising those mid-sized companies, on behalf of their large customers?
If you’re not one of the Big 2 brokers, you might want to start thinking about how to keep those mid-sized customers.