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In the commercial insurance brokerage world, just four companies control 70 percent of the market. By any definition, that's an oligarchy. And oligarchies are bad news for commercial insurance buyers. Not just sometimes. All the time.

Four brokers control the distribution of commercial insurance in the United States: Marsh Inc., Aon Corp., Willis Group and Arthur J. Gallagher & Co.

In some corners, those occupied by institutional shareholders and Wall Street for example, these four companies are revered for setting aggressive growth targets. They rake in the lion's share of commissions generated by commercial insurance transactions.

In other corners, those occupied by state attorneys general, these big numbers have been viewed with skepticism. And over in the buyers' corner, the one that matters most, insurance purchasers don't have enough of a choice as they stare down the distribution goliaths.

It doesn't take much for this little merry band of oligarchs to assert control--indeed undue control--over prices and bully buyers. As it turns out, the market isn't really free at all, a fact, one suspects, that buyers knew all along.

And that's why oligarchies are bad for business. Small groups with too much power and too much influence end up spinning around their own axis instead of representing the interests of purchasers.

The price-fixing and collusion scandals that have wracked the commercial insurance brokerage industry over the past few years just go to show how easy it is for outsize players to bully risk managers into accepting a quote.

Don't get me wrong here. I'm not advocating the wholesale elimination of Marsh, Aon, Willis and Gallagher. They provide a service, and often a very good service at that. Where else could a large commercial insured--General Motors, for example--find a one-stop shop for all it's brokerage needs?

To whom does an international company in need of excess capacity for hard-to-place risks requiring tens of millions of dollars turn? Not a small brokerage shop in the middle of Michigan.

Besides, there's nothing to be gained from shutting down any one of the Big Four.

But buyers sure would benefit if these behemoths were trimmed by 30 percent or 40 percent. Take a little off the top, and nip a little off the sides. Why not split up this cartel and make sure no single firm can control 5 percent or 10 percent of the market? That would make for some healthier competition, and it would make life fairer for buyers.

Of the leading writers of commercial-lines insurance by direct premiums written in 2005 in the United States, only one, AIG with 11.3 percent market share, had more than 10 percent of the market, according to the Insurance Information Institute, citing NAIC data.

Why can't commercial brokers share the market in similar fashion?

Listed in terms of U.S. business by 2005 revenues, according to one estimate, Marsh led the pack, followed by Aon, Gallagher and Willis. All the other brokers are left to fight over the crumbs.

Isn't there enough lopsidedness around as it is? Isn't it time brokers, who survive by doing so much for individual clients, ought perhaps to think about doing something for clients as a whole?

Rebalancing the distribution universe into more equitable slices of the market-share pie would serve buyers their just dessert.

CYRIL TUOHY is managing editor of Risk & Insurance®.

April 1, 2007

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