Aon Settles Probe For $190M; CEO Apologizes For Conflicts

Aon Corp., the world's second-largest insurance brokerage, will repay injured clients $190 million and adopt a number of major operational reforms to resolve probes by three states into alleged fraud and anti-competitive practices.

The agreement resolves investigations in New York, Connecticut and Illinois into incentive payments the broker accepted from insurers.

The deal also resolves a suit filed by New York Attorney General Eliot Spitzer in State Supreme Court in Manhattan on the day the settlement was announced, as well as a citation issued by the New York Insurance Department, which alleged that for years Aon received special payments from insurers to the detriment of its clients. The payments were described as “above and beyond normal sales commissions.”

These payments, known as “contingent commissions,” were billed as compensation for “services to underwriters,” but Mr. Spitzer's complaint said they were actually “rewards” for business Aon steered and allocated to insurers. Aon announced last year that it would stop accepting such payments from insurers

Under the settlements provisions, Aon will provide $190 million over a three-year period as restitution for policyholders.

Among the reforms adopted by Aon is a new policy that will see the broker accepting only a specific fee from the client and a specific commission from the insurer, which is set at the time of purchase. Any commissions paid by an insurer will be fully disclosed at the time of placement and must be approved by Aon customers.

Aon Chairman and Chief Executive Officer Patrick Ryan issued a public statement apologizing for Aons conduct. He said Aon had made contingent agreements with carriers that “created conflicts of interest,” adding: “I deeply regret we took advantage of those conflicts. Such conduct was improper and I apologize for it.”

In a March 4 conference call, Mr. Ryan said he believes there will be no criminal charges filed against any Aon executives.

“I believe that the business reforms emerging from these investigations provide a foundation for a new model that must be embraced by the whole industry,” Mr. Ryan said. “We are now moving to an even higher level of transparency, also ensuring that every client transaction is free of even the appearance of conflict of interest. We are absolutely committed to this and will not rest until every one of our clients is clear on the terms of our relationship.”

Mr. Ryan went on to say that there remained disagreements between the New York attorney generals office and Aon over “a number” of the allegations and conclusions laid out in the civil suit, but a settlement was reached in the interest of “putting this behind us.” He said he would not comment on the differences.

“I don't believe these allegations are indicative of common Aon practice,” said Mr. Ryan. “Forty-eight thousand employees across the globe work hard every day to meet and exceed the expectations of our clients. I would be remiss if I did not recognize their commitment and their contribution. This has been a difficult process for our industry, Aon and for our employees, and we must now look to the future.”

The settlement is expected to be tax deductible, Mr. Ryan continued, and will not result in layoffs.

The agreement with Aon was modeled after a Jan. 31 settlement for $850 million that was reached with Marsh & McLennan Companies, the parent of Marsh, according to Mr. Spitzer.

“The underlying complaint in this case shows that improper conduct was pervasive at Aon,” he said, announcing the settlement together with Acting New York State Insurance Superintendent Howard Mills, Connecticut Attorney General Richard Blumenthal, Illinois Attorney General Lisa Madigan, and Illinois Acting Director of Insurance Deirdre Manna.

Mr. Spitzer noted that to Aon's credit, “the company has acknowledged the problems, has agreed to compensate policyholders, and has adopted reforms that will provide greater accountability”

The complaint against Aon acknowledged that industry representatives have defended the longstanding contingency fee practice as acceptable and even beneficial to clients. However, Mr. Spitzer's office and the New York Insurance Department said they have uncovered “extensive evidence” showing that the practice distorts and corrupts the insurance marketplace and cheats insurance customers.

The suit also alleged that Aon, in addition to promising to send business to insurance company partners in exchange for extra cash payments, promised to place business with insurers who agreed to use Aon's reinsurance brokerage services. Mr. Ryan, it was charged, as CEO was involved in efforts to boost placements with an insurer in exchange for that company's use of Aon Re for reinsurance brokering.

The complaint against Aon cites various internal communications in which “top executives openly discussed these efforts to maximize Aons revenue and insurance companies revenues,” without regard to Aon clients interests.

It was also charged in the complaint that Michael OHalleranAon's chief operating officer and the broker's second-in-commandpersonally negotiated “claw back” arrangements in which Aon Re would provide insurers with discounts or rebates on its reinsurance commissions on the condition that Aon could recover or “claw back” these discounts through retail placements made with the same insurers.

In response to the settlement, Standard & Poor's Rating Services said it removed Aons financial strength rating from CreditWatch, where they had been placed on Oct. 21, 2004, when New Yorks investigation into misconduct by brokerages surfaced. S&P also said it affirmed its “triple-B-plus/A-2″ counterparty credit and financial strength ratings of Aon, with a “Negative” outlook.

S&P credit analyst Steven Ader explained that S&Ps “Negative” outlook reflects “ongoing competitive and financial uncertainties” resulting from possible damage to Aons reputation and the implementation of a new business model.

Fitch Ratings announced it is cutting Aon's long-term issuer rating and related senior debt ratings to “triple-B-plus” from “A-minus.” Gretchen Roetzer, the lead analyst for Aon at Fitch, told National Underwriter that the $190 million settlement amount was generally what has been expected since it is roughly what Aon took in from contingency fees in 2003.

The ratings firm said that while the settlement agreement “favorably eliminates one major uncertainty for Aon,” it is outweighed by other near-term challenges including the broker's susceptibility to a decline in franchise value and the possible drop in revenues if clients leave the firm.

Ms. Roetzer also speculated that there may very well be more allegations and charges brought against other brokerage firms. “I think it's inevitable that there will be additional findings, but I would expect the magnitude to be less,” she said.

“[Aon made contingent agreements with carriers] that created conflicts of interest. I deeply regret we took advantage of those conflicts. Such conduct was improper and I apologize for it.”

Patrick Ryan, Chairman & CEO

Aon

“Improper conduct was pervasive at AonThe company has acknowledged the problems, agreed to compensate policyholders, and adopted reforms that will provide greater accountability”

Eliot Spitzer, N.Y. Attorney General

Tease To 24: Reverse Bar

Did Aon Freeze Out AIG? See Page 24

Reproduced from National Underwriter Edition, March 10, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Aon Settles Probe For $190M; CEO Apologizes For Conflicts

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