March 6, 2005 by Canadian Underwriter
Aon Corp. has created a US$190 million fund to compensate clients as a result of investigations in three states into contingent commissions and business practices.
The fund applies to policies incepted or renewed between January 1, 2001 and December 31, 2004, the broker notes.
Aon faced investigations by five different authorities attorneys general in New York, Illinois and Connecticut, and the New York and Illinois insurance departments. No fines or penalties are to be paid, but the brokerage has agree to reform its business practices.
Aon says these reforms include "heightened disclosure of remuneration and the elimination of practices that may have posed conflicts of interest (i.e. contingent commissions)." A compliance committee of the board will also be set up.
Aon CEO Patrick Ryan has issued an apology noting "that some Aon personnel engaged in improper conduct, but said its internal review found "no evidence of price fixing, bid rigging or the solicitation of fictitious quotes".
However, complaints filed by authorities allege the brokerage "promised to place business with insurers in exchange for the insurers’ agreement [to] use Aon’s reinsurance brokerage services". Specifically, the complaint filed by New York Attorney General Eliot Spitzer alleges senior executive Michael O’Halleran "personally negotiated ‘clawback’ 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". He notes the reforms include Aon accepting payment from insurers at the time of placement, with this payment fully disclosed and approved by clients.
Ryan responds by saying, "while we do not agree with a number of allegations in the complaints, the settlement permits us to look to the future. I believe that the business reforms emerging from these investigations establish a model that can be and should be embraced by the whole industry."
Aon notes that it has set up a US$40 million reserve for related litigation, along with US$180 million for the settlement, on top of US$50 million in reserves already announced. The financial impact of US$0.32 per share these reserves entail will be recorded in fourth-quarter 2004 results.