Conflicts of Interest in Insurance Brokerage Business Under Scrutiny

New York Attorney General Eliot Spitzer has been investigating the insurance brokerage business, focusing on activities beyond those already publicly identified as under scrutiny. Aon Corp. and other companies have sworn off "contingent commissions", but Aon has other ties that can put its interests at odds with those of its clients. Aon's 16% stake in Endurance Specialty Holdings Ltd. gives it an incentive to place client premiums with Endurance, and its ownership of Swett & Crawford, the largest wholesale insurance broker in the world, creates a similar conflict. Aon's claims management business also raises concerns.

Key Takeaways:

• Aon's 16% stake in Endurance Specialty Holdings Ltd. creates a potential conflict of interest, as it may prioritize placing client premiums with Endurance over other reinsurers that may offer a better deal.
• Aon's ownership of Swett & Crawford, the largest wholesale insurance broker in the world, creates another conflict of interest, as it may refer clients to Swett & Crawford instead of other wholesale brokers.
• Aon's claims management business, part of which it sold earlier this year, also raises concerns, as clients often ask Aon to recommend claims managers.
• Bryon Ehrhart, executive vice-president of Aon's reinsurance brokerage, serves as a director on the board of Endurance Specialty Holdings Ltd.
• Aon's profits from Endurance have contributed 14% of Aon's earnings in the first half of 2004.
• Aon's stake in Endurance warrants Aon holds contributed to Aon's earnings, but the exact amount was not specified.

Statistics:

• Aon's stake in Endurance Specialty Holdings Ltd. is 16%.
• Aon is responsible for one-third of Endurance's $1.07 billion in premiums during the first six months of this year.
• Profits from Endurance have contributed 14% of Aon's earnings in the first half of 2004.
• Aon's profits from claims management business contributed to Aon's earnings, but the exact amount was not specified.
• Swett & Crawford is the largest wholesale insurance broker in the world.

Sources:

• "Aon to phase out 'contingent commissions'", by Steve Daniels, Crain's New York Business, no date
• "Aon fires Hudson", by Steve Daniels, Crain's New York Business, no date
• Endurance Specialty Holdings Ltd. Initial Public Offering Prospectus, 2002, page 13
• Fox-Pitt Kelton Group report, "Aon and other big brokers", by Jon Balkind, October 25, 2004, page 2