When the number one insurance broker Marsh & McLellan decides to buy the number three broker in London, Jardine Lloyd Thompson, you know they are hurting.
It is not that JLT always said it was not for sale, though that was the message. Nor is it that Marsh Mac sees conventional opportunities in the business that JLT itself could not spot or could not capitalise on, though that is one supposed rationale.
It is certainly not that JLT has an army of dedicated staff who will slot in happily in Marsh Mac, because there are bound to be redundancies.
Rather it is that insurance is more competitive and the brokers are struggling — even the biggest of them — to seem relevant.
The nature of insurance is changing. The biggest corporate risks, the multinational corporations, used to think they could and should cover 90% of their assets.
But that was in the days when they did their manufacturing in-house, and fire and flood were natural hazards. People knew what the risks were, even if they did not know where they would strike.
These days it is different. Risk is much more abstract. Firms have to contend with cyber, with reputation, with rogue traders, with supply chains, with terrorism, with intellectual property.
They don’t know what the risk is, and underwriters don’t really know either. As a result underwriters fight shy of taking these risks on, and multinationals struggle to cover 30% of their exposures. Insurance has also been assailed by hedge funds and catastrophe bond providers, who cherry-pick.
Pension funds buy cat bonds which give a good return day to day but have to pay out if there is a disaster, just like insurance. Hedge funds have been adept at moving in when markets look like they are turning up and riding the upside.
Again, insurance provides a better yield than conventional assets — in the good times.
Then there are emerging risks, like driverless cars. Whereas now everybody has a car policy and the claims are manageable in the sense that they require straightening a bit a metal, or putting a person through rehab, it will be different in future.
There will be no accidents with driverless cars until some day when a software engineer screws up and the whole of London has a crash. An era of small steady claims suddenly becomes highly unlikely but potentially catastrophic.
Insurance is also bothered by fintech, or insure tech. There are several interesting models — like Lemonade in the United States which rebates premiums — and others where people only need cover if they are actually driving. In China at the airport you can bet on flight delays and with another app you take a selfie and that is enough information for life assurance.
So insurance is a business which is starved of premium, plagued with over- capacity, and unable or unwilling to provide the range and extent of products which customers want. This puts the brokers in a dilemma — and trying to take additional fees off underwriters, as they are, to compensate for strains elsewhere is not the way to solve it.
But some corporates have responded. The oil market for example, is exploring in ever more dangerous places.
Wells are sunk 30,000 feet deep — think of an aircraft at 30,000 feet and imagine what that is like underground — where the drill has only an eighth of an inch of free movement. Insurance brokers say these kinds of risk are just too complex — like BP’s Deepwater Horizon Gulf spill — so rather than be confrontational, client and broker should collaborate. Both sides should agree what the risks are, rather than seek to get an edge over the other.
Broker expertise would be shared with the client and they would become customer-led rather than producer-led, meaning the client, not the insurance underwriter, would hold sway.
Brokers would seek to minimise what the risks were and use their expertise to help the client to make sure they were not made real.
They would stop taking on whatever risks the client identified in the hope that a gullible underwriter would sign up, because in reality those exposures are utterly catastrophic if they do materialise — in which case the underwriter is out of business.
The broker would get a fee from the client for his consultancy rather than brokerage from the underwriters for placing the business.
That is the rationale of this merger — both sides working together as consultants to reflect the mutual interest of client and broker. But whether Marsh Mac pulls it off is another matter.