Competition Bureau statement regarding its review of Aon’s acquisition of Willis Towers Watson

On July 13, 2020 the Bureau was notified of Aon plc’s (Aon) Business Combination Agreement with Willis Towers Watson plc (WTW), an all-stock transaction valued at approximately US$30 billion (the Transaction).

Aon is headquartered in Dublin, Ireland and WTW is headquartered in London, England. Aon and WTW are global professional services firms with expertise in risk management, actuarial and insurance brokerage services. Aon and WTW rely on client data, third party data, and complex analytical tools to advise commercial businesses, insurance companies, and health and pension plan managers. Following a thorough review, the Bureau concluded that the Transaction would result in a likely substantial lessening of competition with respect to treaty reinsurance consulting and brokerage services in Canada.

On July 26, 2021, Aon and WTW announced that they had agreed to terminate the Business Combination Agreement and would not be proceeding with the merger.

Throughout its review, the Bureau cooperated with its counterparts in other jurisdictions, including the U.S. Department of Justice and the European Commission. On June 16, 2021 the U.S. Department of Justice filed a civil lawsuit to prevent the Transaction, alleging a substantial lessening of competition in violation of the Clayton Act. On July 9, 2021 the European Commission announced its approval of the Transaction, subject to the divestiture of several lines of business, including WTW’ treaty reinsurance division globally.

This statement discusses the Bureau’s review, as it relates to treaty reinsurance. The Bureau’s investigation relied on information obtained from Aon, WTW, and numerous other stakeholders, including customers and competitors.

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Background on Reinsurance

The risk taken on by an insurer when insuring a business against certain adverse events constitutes liabilities for that insurer. These liabilities become losses in the face of a viable claim. Reinsurance transfers risk (and premiums) from a primary insurer (the cedant) to another insurance company (the reinsurer). Reinsurance is a means to reduce concentrated exposures by spreading risk, and allows insurance companies to take on clients whose coverage demands would otherwise be too large to assume on their own.

Reinsurance brokers like Aon and WTW broker the transfer of risk from cedant to reinsurers. The first step in this process is, consistent with the client’s overall risk management objectives, advising on the appropriate dollar value of liabilities to be ceded. This requires an understanding of the particular risk tolerance of the primary insurer, along with their current balance sheet liabilities. Then different levels of risk retention and the likelihood of claims are modelled to present the client with a range of possible loss scenarios. Once the client decides on the particular loss scenario they are willing to accept, the second step is the actual ceding of excess liabilities to willing reinsurers. This involves negotiating capacity and pricing with individual reinsurers that are typically located globally. These reinsurance consulting and brokerage services are remunerated through commissions paid by the reinsurer and/or fees paid by cedants.

A reinsurance “treaty” is a reference to a contract in which multiple insurance policies are ceded at the same timeFootnote 1 and typically involves policies within a particular risk class (e.g. a reinsurance contract that cedes multiple property policies is referred to as a “property treaty”). Treaty reinsurance can be subdivided by risk class, contract structure, and type of exposure ceded.

Any of the different primary insurance risk classes (property, casualty, accident & health, professional indemnity, etc.) can be ceded to a reinsurer, although property treaties make up the majority of ceded reinsurance premiums in Canada. Reinsurance contracts can be structured in different ways to proportion the liability assumed by each of the cedant and the reinsurer in the event of a claim; for example, in an “excess of loss” reinsurance contract, the reinsurer assumes responsibility for losses that exceed a specified limit. In terms of exposure type, property losses due to natural perils like floods or winter storms (i.e. a “catastrophic” event) can be ceded in “catastrophe treaties”. For catastrophe treaties, arriving at the appropriate dollar value to assign to the risk being taken on by reinsurers is more complex as it requires modelling both the likelihood of a natural event occurring, as well as the probable losses should such an event occur.

Competition Analysis

While the subdivisions by class, structure and exposure type aid in categorizing different treaty types, the Bureau defined the relevant product market for assessing the competitive overlap between Aon and WTW as consulting and brokerage services for all types of treaty reinsurance. This is because most Canadian insurers prefer using a single reinsurance broker capable of facilitating all of their treaty reinsurance needs, including the more complex modelling requirements associated with the reinsurance of catastrophe treaties. While reinsurance brokers require a global footprint to access reinsurer capacity in multiple jurisdictions, the Bureau’s relevant geographic market definition included a requirement for a Canadian footprint. This is because Canadian insurers prefer dealing with reinsurance brokers with personnel located in Canada that specialize in modelling Canada-specific perils. For example, in order to model the potential loss exposure of Canadian properties to flooding, a reinsurance broker requires, among other things, expertise associated with Canada-specific hydrology modelling tools (i.e. “flood plain maps” specific to Canadian urban centres).

Insurers typically enter into reinsurance contracts, including negotiating premiums, on an annual basis. Insurers have the option of using their existing broker, or can choose to go to market by issuing a formal tender. Brokers compete by offering a complete portfolio of high quality services, and less so through price. Established brokers like Aon and WTW market to prospective clients their risk management and analytical expertise, access to peer-specific data from their pre-existing customer base, and the ability to leverage reinsurers in domestic and international markets.

Conclusions

The Bureau concluded that Aon and WTW are close competitors for treaty reinsurance consulting and brokerage services in Canada and there is a limited presence of effective remaining competitors. In addition, the barriers to developing peril-specific and geography-specific modelling expertise, as well as a global footprint to access reinsurer capacity, make timely and sufficient entry or expansion unlikely. While access to modelling tools is important (including both third-party and proprietary modelling tools), the true value of reinsurance brokers lies in the advice they provide with respect to choice of model, their access to data used as inputs in the different models, and model validation (how reliable are the loss scenarios predicted by the model(s)).

For these reasons, the Bureau concluded that the Transaction would result in a likely substantial lessening of competition for treaty reinsurance consulting and brokerage services in Canada. The Bureau and the parties were working collaboratively towards the finalization of a consent agreement to be registered with the Competition Tribunal requiring the divestiture of this business when Aon and WTW announced the abandonment of the Transaction.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.

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