Prudential buys AIA

Let me first say that I am perplexed as to why this has happened. Although AIG does have many problems I would think that AIA was something that they should have held on to. It is significant that after trying to rebrand themselves for the past year, AIA now has to relinquish it's brand to Prudential, making it perhaps the largest foreign insurer in Asia. Let's look at what would actually happen in the context of the Singapore market.

A lot could be saved on operations. Advertising, business development, underwriting. This would mean savings being passed on (hopefully) to the consumers. Also, there would be a lot of money and energy saved on trying to "outbrand" and "outmarket" each other. More time and resources could be channeled towards providing better customer service to customers. On top of that, Prudential and AIA clients should gain access to customer service from both brands.

However, I would think that this move was motivated more for the shareholders rather than the consumers. A larger sales force would equate to Prudential having a better standing in the eyes of possible investors. If all works well, Prudential would be in a better position to negotiate with investors, regulatory bodies and would be able to be the de facto market leader whereby it would be the one to innovate financial products and the other companies would be playing catch up by immitating.

Here's why I think this merger would be more disasterous than beneficial for everyone.

1) More often than not, there's a limit to how big a company can grow. With the huge and sudden influx, there is so much Prudential can do to accomodate so many agents under one brand. People will feel left out and they will leave. Imagine AIA's top group going from perhaps number 1 in the company to becoming number 10 or more after the merger or vice versa. As a top team you do get special bargaining power. Top teams will leave as they cannot accept playing second fiddle and having a smaller voice once the merger is complete.

2) AIA has a very long standing tradition and reputation. To be "eaten up" by one of it's fiercest rivals would be a slap in the face for many AIA agents. Some of whom would rather leave than to try to eat humble pie and accept Prudential's culture.

3) Prudential will have a hard time trying to assimilate commission schemes. There will definitely be some who will end up short changed. This is unavoidable. Also, many AIA products are rather similar to Prudential in terms of characteristics but differ in the payout schemes. Certain policies take 6 years to fully payout their commission. Imagine having to merge both accounting systems under one umbrella.

4) AIA has a very good retirement package. Prudential, in my opinion, is more geared towards immediate payout. This has to be sorted out. It's either one or another. To continue with the good retirement scheme and lower the immediate returns or vice versa, never both. Money just doesn't grow on trees for insurance companies.

5) Prudential's target client has always been one of higher net worth. For example, their shield plans only cater for private or A wards. They do not have the lower end plans like what NTUC or Aviva has for the masses. Does AIA have the same target audience? If it doesn't it would mean realigning the salesforce to gear them towards a single goal.

6) Most importantly, in my opinion, this is going to be a fantastic time for the other insurers in Singapore to step up and be prepared to catch whatever falls out from this mess. If I could use a metaphor to describe the situation then Prudential is like an apple picker who has already filled his basket with apples to the brim and yet is intent on stuffing even more apples into that already bursting basket. Great Eastern, NTUC, AXA, HSBC, Manulife and all the independent financial advisory firms have to walk behind and pick up the apples that are dropping out of the basket. For all you know, the ones that drop out of the basket could be much sweeter than the ones inside!

For those who have championed for this deal, I believe that this benefits the company more than the clients. In my opinion, after the merger, the total value of the single entity will be lesser than the total value if they were seperate. Premiums will not drop and customer service will not be optimal.

A better move would be to save the money on this merger and acquisition and develop a general insurance arm to try to add value to the consumer. However, this was perhaps not pursued due to the fact that many aspects of general insurance like motor insurance are a bleeding business. Sometimes you have to bleed for the customer to show him that you care.

Anyone thinks this is anti-competition?