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Merger Mania

Major Insurance Broker Mergers

Volume 3, No. 4, Third Quarter 1997

By Donald W. Bendure, MBA, CPCU, RPLU, RF, AC

Insurance "merger mania" has dominated the journals for the last year. Aon, one of the largest brokers in the U.S., agreed last December to purchase Alexander and Alexander, Inc., also one of the largest. Keep in mind that Aon was not even ranked in the top 20 brokers worldwide in 1994. The significance of this single purchase is not understood until it is clear that this purchase catapulted Aon to within 12 percentage points (based on gross revenue) of overtaking the largest broker in the world, Marsh & McLennan, Inc. Not to be outdone, Marsh & McLennan agreed this March to purchase another one of the largest brokers, Johnson & Higgins, Inc., stretching Marsh’s lead over the Aon group to 39 percentage points. This will give the new J&H Marsh & McLennan, Inc., almost five billion dollars of market clout. It will create a bipolar world for the large commercial insurance consumer as well as for all of the insurance companies that try to compete for those consumers’ dollars. As Mr. Rogers would put it, "Can you say oligopoly?" I thought you could. Better yet, can we see its effects?

I would postulate that we are seeing market effects in very definite and disturbing ways, which will accelerate into the near future. Those of you kind enough to be reading this have the right to ask, "How does this affect me?" You may have probably heard many of the boilerplate answers already: (1) "These mergers will lead to further reductions in pricing" — the problem is that this is not terribly interesting to anyone, including the consumer, (2) "These mergers will lead to further consolidations" — this only leads to the "who’s next" game when we need to concentrate on what these mergers mean first. Here are some thoughts that I have been tossing around in my head for some time which I hope will, in turn, be food for thought for you and your clients.

Insurance Agent’s E&O

As a result of these and other mergers, the past year has been witness to the largest turnover of personnel handling sophisticated insurance programs in U.S. insurance history. And it isn’t over. Those consumers who have not changed brokerage organizations will in all likelihood see a change of broker internally within their brokerage organization. As these brokers that are kept within brokerage organizations are reassigned to different accounts, experience gaps will be created that will be difficult to fill. Learning curves take time. Brokers without sufficient expertise in their area of insurance must be trained quickly and be adequately monitored or they will become the E&O casualties of tomorrow. The insurance industry has suffered 10 years of a slow, agonizing brain drain since the liability insurance crisis of 1986. Now with further consolidations, more talent will no doubt be lost at the altar of corporate economics and efficiency.

Employment Practices Liability (EPL)

Of course, many of those lost will not be very happy about it. Human resource departments have learned many defensive techniques and as a result have limited much of the damage that can befall an organization in rapid, massive transition. But if history is any teacher, the upward trend in EPL claims will not go down because of these mergers. The insurance industry is more exposed than it ever has been to EPL losses because of compromises that inevitably result from economic decisions. As they say, "There’s many a slip between the cup and the lip." And what’s in the cup may not be tea.

Coverage Clout

Here’s where I get on my soapbox. Insurance pricing is an issue. The insurance market has been cheap for years, and barring some unforeseen event, will remain so for the foreseeable future. Most insurance companies have forgotten what it feels like to get a rate increase at renewal. But the real battle for market share is being waged on the field of enhanced coverage and new coverage combinations. The large brokers are gathering so much clout in the marketplace that the insurance companies are being forced to provide coverage in areas that would have been unthinkable only a year ago. "And oh, by the way, Mr. Insurance Underwriter, just go ahead and also lower that premium by another 20 percent just to show good faith to your longtime client of one year." Be still, my heart.

The disturbing issue in my mind is not that many of the coverage enhancements and new coverage combinations are given. It’s the casual way in which they are given that creates issues. Sometimes the same insurance company has many versions of the same coverage, which differ for no readily apparent reason. Variance in language from one company to another can lead to differing interpretations from one layer of insurance to another. Some of the more mistaken attempts lead to coverage broadened beyond the original intent. Other attempts beg the question of original intent from the first sentence. And where does a lot of this wording come from? Much comes from the brokers themselves, who demand the coverage, verbatim, as submitted. Now try to define original intent. Coverage interpretation just became a little more difficult.

But even after these coverage combinations are written and put to bed, my question is, "Where will these pearls of underwriting wisdom and brokerage persuasion lead us?"

More Suits??

The short answer to those questions, in my opinion, is that we will see more litigation over coverage issues in the coming years than we have seen in possibly any period of time in our professional past. There is, quite simply, too much being written into policies with too little thought being placed behind the wording and the interdependency of coverage parts. Underwriters may be tempted to resist writing any of the coverage enhancements, but the prudent underwriters will recognize that market forces now demand a different insurance product. Those insurance companies that do no respond to the market call for fundamental change in coverage will be left in the dust. One has only to look at the clout that has been created this year, and the clout that is yet to come. I don’t think that there is any going back to a kinder, gentler insurance product. In order to assure that those companies that do respond to the market are not left in the dust or covered by ashes, what must be done is to create an environment which is faster and more thorough with regard to coverage wording. These two concepts are not mutually exclusive. This environment must combine the core disciplines of underwriting, actuarial, legal, claims, and claims litigation, all of which work synergistically and with speed. Together we all can answer the call of Captain John Luke Picard and "Make it so."