In the middle of October, global insurance broking giants Aon and Willis Towers Watson formally sought New Zealand approval for their US$30 billion merger, a deal that will reshape the international insurance advisory industry.
The combination of the two companies accelerates years of consolidation in the insurance broking sector, with the biggest companies across the globe looking to build size and scale in the new broking landscape.
The two international companies have a significant presence in New Zealand; both Aon and WTW operate regional offices across the North and South Islands. It is unclear how the merger will impact New Zealand’s network of smaller, independent brokers, but it is likely to ramp up pressure in the market.
The Aon-Willis deal follows a host of other mergers in the broking space over the past few years. Marsh acquired JLT for US$5.6 billion last year, while NZ broker Crombie Lockwood was acquired by New York-listed Gallagher in 2014, bringing a well-known Kiwi name under the umbrella of a US giant.
There are a dwindling number of large players in the NZ market. In light of the frenetic deal activity and consolidation, how will smaller businesses cope? Do they face a tough future in the era of the mega-broker? And will small companies be able to operate effectively under the new financial advisers’ licensing regime?
Dr Michael Naylor, a senior lecturer in finance and insurance at Massey University, says he “can’t see consolidation having a major impact” on the smaller independent adviser businesses in New Zealand.
Naylor says the market remains “quite competitive”, but believes broader industry changes, such as the emergence of new technologies and artificial intelligence in the insurance market, will have a greater effect on the industry in the years to come.
In the near-term, Naylor says the new licensing regime will be a challenge for advisers.
“It will be more demanding, with emphasis on better customer outcomes and customer service. It can impose a cost. It does mean that brokers will have to start working on their internal systems.”
Mel Gorham, chief executive of IBANZ, says smaller broker businesses continue to take consolidation “in their stride”.
“There’s a marketplace for all brokers, and the industry is incredibly dynamic,” she said. Gorham believes smaller operators will continue to thrive, most are part of larger networks, which offer support, size, and scale, to compete.
The likes of NZbrokers, Steadfast, Insurance Advisernet, and PSC Connect provide backing to smaller businesses so they can compete with better-resourced larger brokers.
While consolidation may be the talk of the industry at the moment, the biggest challenge for small and independent brokers is the threat of looming new regulation.
Changes under the Financial Services Legislation Amendment Act, due to come into force next March, will shake-up the industry, with a new licensing regime for advisers and greater regulatory compliance around customer disclosure and quality financial advice.
Gorham says she’s “concerned about the level of administration and requirements under the new regime”: “They are being passed to every Financial Advice Provider [license holder], so if you want to be a FAP under the new regime there will be a considerable impact.”
While some smaller businesses will choose to take on their own FAP license, many small brokers will be able to work underneath the license of their network, shifting some of the compliance and regulatory burden to their larger network partner, allowing them to focus on the customer.
Gorham believes smaller broker businesses have a bright future despite growing consolidation in the sector. She says New Zealanders often prefer a local broker relationship.
"Never underestimate the desire to work with local people. One positive take out of Covid-19 is that people want to buy NZ and keep local. A lot of clients want someone they know whether that person works for a large international or a smaller or locally owned brokerage."
Regulation, rather than consolidation, is likely to be the most pressing issue, she says: “I think there’s a concern around the regime and a lack of clarity about what is required of advisers.”
How do independent brokers feel about the current landscape?
William O’Brien, brokerage manager at Montage, based near Auckland, doesn’t expect the rampant consolidation to have a massive impact on the independent NZ broker market.
“A lot of people prefer smaller firms they can pick up the phone and talk to,” he says. “I’ve managed to bring a few clients in from the larger firms because clients want a relationship.”
O’Brien’s firm is part of the NZ Brokers network, and is weighing up its options under the new regime. The firm may take its own FAP license or merge with another company to build scale, he says.
“A lot of people are deciding to do it [take a FAP] themselves,” he says. “But for many smaller players, there isn’t a lot left after all the bills have been paid, so they may be looking at the cost and time element [from the new regulation].”
Jo Mason, chief executive of NZ Brokers, a 49-member strong adviser network, says smaller businesses would feel “more threatened” if they weren’t part of a larger group or network.
“Joining a network allows us to act as a big boy on their behalf,” She says. “Advisers can maintain independence and get the benefits of a large business.”
Mason believes smaller and independent brokerages will maintain a competitive advantage over larger corporates in NZ, with SMEs more likely to seek a close personal relationship.
“Most businesses don’t want to deal with a branch manager of a large corporate; they want to speak to a fellow local business owner.”
She says small, independent advisers often have a wider range of insurer options, rather than being “locked into facilities” with one product provider.
Mason also argues that executives at merged companies can often “take their eye off the ball and become internally-focused”, creating business opportunities for smaller rivals.
Jason Smith, of P&C Insurance brokers in Feilding, which has about 2000 rural, domestic, and SME clients, believes regulation is the main focus for smaller businesses right now.
“Consolidation has always been a thing, and it just continues,” he said.
Smith, who is part of the Steadfast network, believes it’s vital for broker businesses to be part of a network for “backup” when the new regulatory regime comes around.
P&C, founded in 1991, will take its own FAP license, but says many businesses will benefit from having the licensing support of their network and working under a network FAP.
“Being part of a network will help companies meet their requirements. If you’re not part of one, it will be a struggle.”
He expects NZ’s independent industry “will continue to thrive”, and predicts we may see more brokerages emerge from the embers of mega-mergers.
“You may see someone who worked for a large corporate go out on their own,” he says. “With every change, there’s always an opportunity.”
Smith is bullish about the future, and notes a trend to “buy NZ and buy local” since Covid, with local businesses choosing to support independent brokers rather than place their business through a large corporate.
“It’s quite a movement, and people want to support local businesses,” Smith adds.
