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Aon Settles Trio of Investigations  |   State Legislators Weigh in on Producer Compensation Debate |    Marsh Leaves 5,500 Jobs on Cutting Room Floor, Will Aon Follow Suit?  |    Homeowners Rates See Minimal Increase  |    Get Hopping on Asbestos Reform Before Easter, Says Specter |   Increase Profits by Getting Rid of Prospects      |     Big "I" National News   |

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
Aon Settles Trio of Investigations
Allegations Singled Out ‘Top Executives’

Aon Corporation will dole out $190 million to settle allegations of fraud and anti-competitive practices in three states. The settlement, in which Aon did not admit to wrongdoing, also calls for the broker to implement several business reforms.

The settlement lays to rest the investigations of New York Attorney General Eliot Spitzer, Connecticut Attorney General Richard Blumenthal, Illinois Attorney General Lisa Madigan, New York’s acting insurance superintendent and Illinois’ acting director of insurance into specific business practices by Aon relating to the placement of insurance and reinsurance business it handled.

Spitzer’s lawsuit against Aon—filed in conjunction with the settlement’s announcement on Friday—accused the broker of engaging in “complex and creative schemes to obtain improper compensation from insurers,” including withholding lower quotes from clients in order to place business with insurers that paid Aon extra commission. According to a statement from Spitzer’s office, “These payments—known as ‘contingent commissions’—were characterized as compensation for ‘services to underwriters’ but were, in fact, rewards for the business that Aon steered and allocated to the insurance companies.”

Spitzer’s suit also singled out the roles of Aon’s “top executives,” including Chairman and CEO Patrick G. Ryan and Senior Executive Vice President Michael O’Halleran, in the alleged illegal activities. O’Halleran, the suit alleges, “personally negotiated clawback arrangements in which Aon Re would provide discounts or incentives on its reinsurance on the condition that Aon could ‘clawback’ the discounts by increasing retail placements, which gave Aon incentives to steer to the same insurers.”

Blumenthal described Aon as having instigated a “pervasive, hidden pay-to-play scheme” in which it “demanded kickbacks from insurers in exchange for business, even as it was paid by customers.”

“The scheme distorted and corrupted the insurance market—inflating prices and stifling competition,” Blumenthal said in a statement.

Although he issued an apology for the improper actions of a few employees, Ryan said in a statement that, “While we do not agree with a number of the allegations in the complaints, the settlement permits us to look to the future.”

The $190 million settlement will be paid out to eligible U.S. clients with policies created or renewed or consulted between Jan. 1, 2001 and Dec. 31, 2004. The settlement also requires Aon to adopt business reforms. In addition to eliminating contingent commissions (which the broker already did Oct. 1, 2004), Aon is required to “implement company-wide written standards of conduct regarding compensation from insurers” and establish a Compliance Committee to “monitor Aon’s compliance with the standards of conduct regarding compensation from insurers” that will report to the board of directors on a quarterly basis the results of its monitoring activities for a five-year period. Further, Aon agreed to only accept “a specific fee to be paid by the client; a specific percentage commission on premium to be paid by the insurer set at the time of purchase, renewal, placement or servicing of the insurance policy; or a combination of both.” 

The settlement goes on to require that Aon cannot accept any commission “unless, before the binding of any such policy: (a) Aon in plain, unambiguous written language fully discloses such commissions, in either dollars or percentage amounts; and (b) the client consents in writing.”

“I believe that the business reforms emerging from these investigations establish a model that can be—and should be—embraced by the whole industry,” Ryan said.

According to the March 7 New York Times, “For years, Aon channeled home and personal auto coverage for wealthy Americans to two big insurers, which paid Aon bonuses and helped pay the salaries of some of its brokers,” the article says. The article singles out the two companies named in the documents released Friday as Chubb Corporation and Fireman’s Fund.

In other investigation news, The Principal Financial Group, a retirement services and life-health insurer, received a subpoena from Spitzer Thursday inquiring about compensation agreements associated with sale of retirement products.

MetLife also is receiving attention from investigators. In a Securities and Exchange Commission filing, the company said it received a “civil investigative demand” from Massachusetts Attorney General Tom Reilly seeking information on bids and quotes it issued in the state as well as communications with an unnamed “certain broker.” It also received a subpoena from Spitzer seeking information on compensation agreements and “fictitious” and “inflated” quotes, and another subpoena from Blumenthal seeking information on contingent commissions.

Additionally, Marsh & McLennan, the first broker to settle with Spitzer, will spin off MMC Capital, its private equity arm, in an attempt to avoid perceived conflicts of interest, according to a March 4 Reuters report. Employees will take over the company’s operations and management of funds in the spin off.   

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.   | T O P |

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
State Legislators Weigh in on Producer Compensation Debate

State insurance departments and attorneys general have dominated the recent public debate regarding the Marsh bid-rigging scandal and the ensuing discussion about the future of producer compensation, but a new and perhaps more significant voice—that of state lawmakers—has now joined the fray.

For nearly four months, the National Conference of Insurance Legislators (NCOIL), a prominent national organization of state legislators that focuses solely on insurance policy matters, quietly examined producer compensation issues and considered how best to respond. On March 5, the investigation culminated with lawmakers approving their own model bill and, in the process, provided a perspective distinct and more restrained than their executive branch counterparts.

The National Association of Insurance Commissioners (NAIC) hastily developed a model law in late December. That particular proposal has been criticized for its broad scope, imprecise nature and lack of clarity. Perhaps not surprisingly, no jurisdiction has yet adopted the regulators’ proposal.

The new NCOIL model is a disclosure-oriented proposal that utilizes the framework of the NAIC draft, but it includes several important and critical revisions. Some of the most notable elements of the new proposal include:

• It only applies to transactions in which a producer or its affiliate receives compensation from a customer for the initial placement of insurance and compensation from an insurer or other party for the same placement.

• The disclosure requirements apply to the initial placement of insurance and not to renewals.

• In any transaction covered by the model, a producer must fulfill certain disclosure and acknowledgment obligations. Specifically, customers must be provided with a “description of the method and factors utilized for calculating the compensation to be received.”

• Through a revision to the definition of “documented acknowledgement,” the NCOIL model eliminates the need to obtain the customer’s written customer consent.

• The NCOIL model includes two new exemptions. The first clarifies that the disclosure requirements do not apply to secondary or residual market business. The second further clarifies the scope of the model and exempts any “producer whose sole compensation for the placement is derived from commissions, salaries and other remuneration from the insurer.”

• Subsection (D) of the NCOIL model allows the disclosures to be made by the producer directly or by an affiliate.

The Big “I” played a very active role in the NCOIL model’s adoption and worked closely with NCOIL President and Texas State Representative Craig Eiland, the proposal’s sponsor, and other legislators in the process. The Big “I” views the new draft as a tailored, targeted and reasonable legislative response to the concerns that have been raised about the compensation of insurance brokers and as an improvement on the NAIC alternative. NCOIL’s action is significant because it is the first time a group of national lawmakers has weighed into this debate. Before now, we have only heard from insurance regulators and attorneys general, two groups that are charged only with implementing the laws enacted by legislators.

In related news, the NAIC will resume its discussion of these issues and actually consider an expansion of its producer compensation model during its Spring Meeting, which begins on March 12. The regulators are exploring a number of troubling proposals, and the private sector has been asked to provide both written and oral comments on the new ideas. The Big “I” will testify on these items during a March 14 public hearing.

Wesley Bissett ( wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations.    | T O P |

V I E W : P & C    T R E N D S
Marsh Leaves 5,500 Jobs on Cutting Room Floor, Will Aon Follow Suit?
What broader implications will cuts have on industry?

On releasing its fourth quarter numbers last week, Marsh & McLennan Cos. said an ongoing restructuring of its business could result in the loss of another 2,500 jobs, pushing the company’s total announced layoffs in the wake of New York Attorney General Eliot Spitzer’s investigation to 5,500. With Aon’s recently announced Spitzer-related settlement, what should we expect from the world’s second-largest broker?

In assessing the impact on your business in matters of macro-employment, it is helpful to get a baseline. According to the Bureau of Labor Statistics (BLS), of the approximately 150 million gainfully employed individuals in our economy, almost 1.5% or 2.1 million are employed by the insurance industry. As the chart below shows, about 630,000 are at an insurance agency and brokerage. Considering that BLS lumps together both property-casualty and life-health, the 115,000 jobs at Aon and Marsh are an enormous percentage of the mostly property-casualty-side of the business most of us work in. Although some of Marsh and Aon’s employment is based internationally, what happens at these organizations clearly affects all of us. As business managers, we should keep a careful watch.

*Source: Bureau of Labor Statistics and Yahoo! Finance Corporate Profiles

Marsh announced its $850 million Spitzer-related settlement in January. Last Friday, Aon announced its $190 million Spitzer-related settlement. Both firms have sworn off contingency fees going forward. So, will Aon follow suit and add thousands more to the Marsh 5,500?

News of any planned layoffs at Aon has been non-existent in both the insurance trade press and in Aon’s hometown Chicago press. At this point, it is hard to say what will happen.

Note the cadence of the settlements, however, with Marsh settling in January and Aon settling in March. We may be just one quarterly report away from Aon having to face the same realities of required stockholder returns that Marsh has had to face. Time will tell.

Next week’s IN&V will look at the 632,220 jobs at stake in the “Insurance Agents, Brokers and Other Insurance Related Activities” as estimated by the BLS for insights on who may be entering our labor pool. If 100 or so new applicants enter the job market in your state, will their skill-sets hit the available labor pool based on BLS averages?

Paul Buse(paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary.   | T O P | 

P & C    T R E N D S
Homeowners Rates See Minimal Increase

Good news to pass along to your policyholders: Homeowners insurance rates are expected to increase by a minimal 2.5% in 2005, the smallest increase in six years.

According to a new Insurance Information Institute study, 2005’s average cost of homeowners insurance will be $677, a $17 increase over 2004’s $660. The anticipated moderation is due to “small decreases in the frequency and cost of claims (that) have helped improved insurer financial performance,” says Robert Hartwig, I.I.I. senior vice president and chief economist.

The increase—although small—is driven in part by consumer behavior. If you pop by your local Home Depot or Lowe’s, you’re bound to see hordes of homeowners embroiled in the current home improvement craze. The I.I.I. study says that between 2001 and 2002, approximately 41 million homeowners have added to or otherwise improved their homes.

“Over the past several years, millions of families took advantage of near-record low interest rates, purchased larger homes or made additions and improvements to their existing homes in record numbers,” Hartwig says. “Bigger, newer and upgraded homes cost more to insure simply because they’re more expensive to rebuild or repair.”

The report also addresses insurance’s cost drivers, singling out losses as the most important influence on homeowners’ insurance premiums. Between 1990 and 2002, home insurers paid out about $1.17 in losses and expenses for every $1 earned in premiums, the I.I.I. says. This number improved in 2003, with insurers paying out about $0.98 for every $1 earned. However, 2004’s series of hurricanes pushed losses up to about $1.01 for every $1 earned.

Catastrophes also contribute to rate increases. The study says that 2004’s four hurricanes inflicted $22.5 billion in losses, contributing 83% of 2004’s record $27.3 billion natural disaster losses.

“Homeowners insurance rates in some parts of the country continue to rise because of the extraordinary costs associated with paying these catastrophic claims,” Hartwig says. “In fact, virtually every part of the country is either at risk or has experienced a billion-dollar disaster.”

Tommy Cook, president of Myrtle Beach, S.C.’s John T. Cook and Associates, says a coastal location and propensity for hurricanes impacts his regions’ marketplace rates. “Companies are constantly changing their rates, underwriting guidelines or just leaving the marketplace totally,” he says. “We are now forced to use E&S markets for almost all of our homeowners.

Cook says he doesn’t expect a huge rate increase next year, but warns that “if a client that is insured with a standard company gets cancelled because of a claim, they can see a huge increase if they have to be renewed in the E&S market.”

The small rate increase isn’t universal—some regional areas will be hit with higher increases. Tom Minkler, vice president of agency development at Keene, N.H.’s Clark Mortenson Agency, says that agents in New Hampshire and Vermont expect to see rate increases of 5% to 7% in 2005.

“Most carriers have been saying for quite some time that rates have been inadequate for the claims activities in that line of business, and they’ve been trying to get back to parity for quite some time,” Minkler says.

Although claims activities slowing down around the country, insurers in the Northeast continue to experience a high volume of claims, causing rates to increase at a faster pace. Minkler speculates that winter storms—which are a sure thing annually—may play a large role in the region’s frequency of claims. 

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.    | T O P |

O N   T H E   H I L L
Get Hopping on Asbestos Reform Before Easter, Says Specter

Asbestos legislation must go to the Senate floor by the first week of April, or it might not come up before 2006. That’s the word from Senate Judiciary Committee Chairman Arlen Specter (R-Pa.), as quoted in several Capitol Hill and insurance-trade publications this week.

Specter, in an op-ed for The Washington Times published March 1, indicated that Senate Majority Leader Bill Frist (R-Tenn.) had reserved time for floor debate on asbestos litigation reform legislation around Easter (March 27).

“Now is the break point,” Specter wrote. “As chairman, in projecting the work for the Judiciary Committee for the 109th Congress, I know we will not have time to return to asbestos with our crowded calendar and prospective Supreme Court nomination hearings.”

Specter reportedly repeated his prognosis after a private meeting March 2 with Frist. Once again citing the expected heavy schedule for his committee, Specter reportedly told Congress Daily: “It’s then or never. I don’t think anybody should rely on a window [in the floor schedule] for asbestos if we don’t get it done then.”

Specter held hearings on the Fairness in Asbestos Injury Resolution (FAIR) Act in January, and since that time, movement on the legislation has been bogged down. Specter, in his op-ed, discussed some of the points of contention, including whether a $140 billion trust fund, to be funded by manufacturers and insurers, is large enough to resolve all claims, or whether some claims would return to the court system if not adjudicated in a certain timeframe. The Big “I” has concerns with the latter issue; organized labor has persistently called for a larger trust fund.

The Big “I” and its industry partners also have expressed concern that the proposed legislation contains no aggregate payment levels, which makes it impossible to determine the cost of the proposed trust fund. Insurers are pledged to pay a maximum of $46 billion to the trust fund. The industry partners also noted they were concerned about paying these massive contributions into the trust fund when the proposed legislation leaves the door open for a return to the legal system.

“It is very important that the funding proposal be fair and explicitly stated, so that insurers do not risk being on the hook for more money than was envisioned all along,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs. “We also believe policymakers should not require insurers to pay vast sums into a trust fund that may not provide a final resolution to the problem.”

Given the claims explosion that has come largely from people who have little or no illness, the legislation ideally should only compensate victims who have had legitimate exposure and are now sick, while also addressing the issue of pre-existing medical conditions.

Specter’s article labeled manufacturers, labor, trial lawyers and the insurance industry as “combatants” and warned them not to push too hard for their own positions.

“If everyone insists on the last bit of advantage, there will be no bill,” Specter wrote. 

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.   | T O P |

P & C   T R E N D S
Increase Profits by Getting Rid of Prospects

Smart insurance companies also realize that segmenting customers is important. For example, a few are segmenting customers into categories such as “How do they like to buy insurance” and “How much service do they want.” For customers who like personal and professional service, these companies are using independent agents. For customers that like to avoid insurance salespeople (at their own risk), these companies offer insurance through 1-800-numbers and the Internet.

Agencies, too, must think about who they want for their customers. The time has long passed when every breathing human should be considered a prospect. Most agencies’ customers are people who value the professional services independent agencies provide. Beyond that, most agencies only segment their markets by size and account type, such as personal lines, small commercial, middle market, truckers, high-end personal lines, contractors and so forth. These delineations still apply, but more important divisions exist.

It is important to consider how much service an account desires, how much service an account requires (a critical difference exists between desired and required), the preferred purchase method whether it be through an agency or another source, customer age group, socio-economic status, lifestyle and personality such as analytical, impulsive, and so forth. Think about these factors along with the traditional means of account size and type to identify your best prospects based on your agency’s personality and abilities. Also consider these factors to learn how to best win their business and service their accounts.

For example, one razor company has defined its target very well even though only subtle differences exist in its market. It goes beyond the usual, “Our razor gives you the closest shave you’ve ever had, and women will love you if you use it!” The company specifically aims at teenagers and their parents as they buy boys’ first razors. It advertises mostly at Christmas and on very limited television programs. It is quite successful even though it never tells the audience anything about its target audience. By limiting its advertisements to only its target audience, it cuts costs, achieves a higher penetration of its target market and makes more money.

Think about your target market. With which groups are you most successful? Young people, old people, educated people, people that desire lots of service, people that require very little service or people who want an agent’s involvement but also want to get certificates and make changes online? I’ve seen agencies make a lot of sales by targeting every breathing human in their county, but I’ve never seen one do that and make exceptionally high profits. Make more profits for less work because your hit ratio will be higher by selling to those that desire your services and to those you desire to serve.

To read the complete article, available on the VU Web site, click here. 

Chris Burand (chris@burand-associates.com) is a VU faculty member and president and owner of Burand & Associates, LLC.   | T O P |