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SCMP Reporter

The world is becoming a relatively safer place to live, and as a result, the world's insurance brokers are suffering.

   It may sound morbid, but unless there is a large earthquake, or a calamitous flood hits a densely populated city, insurance analysts predict that the wave of consolidation now sweeping through the industry will simply intensify.

   At a recent conference in London, National Association of Professional Surplus Lines executive director Richard Bouhan said even Hurricane Andrew, which swept the United States in 1992 causing US$15.5 billion of damage, had no impact on insurance rates.

   The view that rates will become softer, and premium income will decline, is held widely within the industry and is manifesting itself virtually every month through billion-dollar mergers.

 The latest example is the $1.8 billion tie-up between US groups Marsh & Maclennan Cos and Johnson & Higgins, creating the world's largest insurance broker with combined revenues of $5.3 billion.

   'Changes in the rapidly growing and increasingly competitive global market place have created new challenges and opportunities for service firms with great reach, innovation, more quality of service and financial strength,' Marsh & Maclennan chief executive officer A.J.C Smith said.

 Analysts say the insurance brokerage market has become so competitive that growth has fallen to single digits across the industry. Natwest Markets insurance brokerage analyst Tony Silverman says that in Europe and the US growth has fallen over the past three to four years to just 1 to 2 per cent.

   'Insurance is no longer a growth sector in developed economies,' he said.

   As a result, that declining growth means the huge costs and staffing levels maintained by top-tier companies are becoming unsustainable.

   In the case of the insurance industry, the cost savings of a merger make for a highly persuasive case.

   It is estimated that cost savings can amount to 5 to 10 per cent of earnings.

   As brokerages have an average industry margin of 15 to 20 per cent, such savings can mean a significant boost.

   The woes facing the insurance brokerage industry are also being explained by two pressures which have had an impact on brokerages, and been evidenced in significantly weak premium rates.

   This is the increasing process of self-insurance by large corporate clients that is taking place, and improved risk management by clients of their assets.

   Both have resulted in lower volumes of insurance being taken out.

  The trend towards self-insurance has come about where companies insuring themselves against loss or damage of assets have become more selective about which assets they insure, taking protection only against those assets which are deemed to have the higher risk, and not insuring others.

 Improved risk management is deemed to have occurred as insurance companies are increasingly reporting an improved claims experience, perceived to have been brought about by better risk management among corporations which have less need for all-embracing protection.

  'It means that it contributes to weak premium rates and commissions [for brokers],' Mr Silverman said.

   Commentators say consolidation is the obvious answer to this problem but in the longer term, there is also a need to become more heavily focused on the faster growing regions in the world. Inevitably this means Asia.

   While Europe and the US languish under low growth rates, Asia is seen as averaging growth in the mid to high teens.

   Certainly, executives involved in two recent mergers have cited Asia as one of the prime reasons for their alliance.

   Last year, the US giant Aon Corp bought Hong Kong's largest brokerage, Bain Hogg, better known as Inchcape Insurance Services, from the British group Inchcape in a GBP160 million (about HK$1.96 billion) deal. And last December, Jardine Insurance Brokers, which has one of the largest networks in the region, announced a GBP304 million merger with Lloyd Thompson, a well-known Lloyds of London broker.

   In both cases, executives said their desire to have an established presence in Asia, prompted their decision to merge. How lucrative Asia turns out to be is still open to question.

  In countries such as China there is only one officially mandated foreign insurance broker allowed to operate - the British insurance brokerage Sedgwick - which itself is now seen as a potential merger client.

   While other countries also have high barriers to entry, these are slowly coming down, providing more opportunity for companies to expand.

   In the meantime, the consolidation taking place in the industry worldwide means that there is a much better chance of healthier earnings for brokers as the competition is neutralised, and costs cut.



Insurers victims of a safer world