Insurance Brokers on the Hunt for Acquisitions, Advisen Says

Size matters, even when you are a mega-insurance broker, says insurance research firm Advisen Ltd., which predicts in its "The Carousel of M&As" report that the two biggest in the business, Aon Corp. and Marsh & McLennan Cos., are on the hunt for acquisitions.

But here's the counterargument: some things matter even more, such as making money.

Brokers are the people who sell insurance policies to companies. Advisen says Aon and Marsh are in a head-to-head competition to achieve dominance and are looking to scoop up middle-market brokers, those who focus on smaller companies, as fast as they can. The middle-market is considered the sweet spot because, while larger companies will shop for price and dump a broker who can't deliver, smaller companies form a relationship with their broker that generally survives for years.

"Smaller brokers have historically been quite successful in this sector," says Advisen.

But most of the smaller ones who avoided the jaws of Aon and Marsh back when the big guys were in full acquisition frenzy in the early part of the century seem quite happy to stay independent. True, there were two big acquisitions in 2008 when third-ranked Willis Group Holdings bought Hilb Rogal & Hobbs and Aon bought reinsurance broker Benfield Group Ltd.
But mom and pop brokers would need a powerful incentive to want to be part of Aon, Marsh or Willis. And the reason for that dates back to 2005 when then New York Attorney General Eliot Spitzer took all three of them to the woodshed for things like bid-rigging.

The net result was that all three agreed not to take payments from insurance companies to sell their products to companies. Since brokers were supposed to give independent, honest advice to clients, that made some sense, but it cut deeply into their revenues and some, like Marsh, have never recovered.

Smaller brokers, the kind Aon and Marsh now want to buy, are under no such obligation, and can take all the money they want from both insurers and the companies they work with.

So if you're one of those smaller brokers being eyed lovingly by Aon or Marsh, you would have to ask yourself, "Why sell?" Remember that when elephants feud, the grass gets trampled.