Aon, the second-biggest insurance broker, is the latest to announce it will stop taking incentive commissions - the fees that are at the heart of New York attorney-general Eliot Spitzer’s investigations into the insurance industry.
Both Chicago-based Aon and Willis, the London-based broker, were on Friday downgraded to a “negative” outlook by Moody’s Investor Services as a result of the probes into the insurance industry and, in Willis’s case, its decision to stop accepting incentive commissions.
Moody’s has held both broker’s actual ratings steady. A negative outlook is a signal a company is in line for a potential downgrade to its ratings.
“As additional substantive information becomes available on the investigations and their potential implications of Willis and the brokerage market, Moody’s may take further rating action,” the agency said in a note about Willis. Last year, incentive commissions from favoured insurers accounted for $80m in revenue for the London-based broker.
“If contingent (incentive) commissions were suspended, this could result in a material decline in the cash flow of insurance brokerages in the short run, and that will be a key driver in any rating adjustments,” said Thomas Upton, insurance analyst at S&P, in a note on Friday.
Commissions, paid to brokers by insurers based on the amount of business done, are accepted practice in the industry but have been attacked as compromising a broker’s obligation to deliver the best value.
On Friday, S&P assigned a negative outlook to US property and casualty insurers’ commercial credit lines in general as a result of its expectations that downgrades in the sector will outnumber upgrades over the next year.
Earlier this week, S&P handed the company at the heart of Mr Spitzer’s investigations, Marsh McLennan, a savage three-notch downgrade to BBB-plus, leaving it three steps above “junk” status. Marsh was the first to announce the suspension of incentive commissions. Moody’s has also downgraded Marsh, leaving it four notches above junk. Aon was this week downgraded by S&P by one notch to BBB-plus.
S&P analysts said on Friday that the charges of bid-rigging levelled by Mr Spitzer were the most serious.
“In the long run, the damage to a broker’s reputation by any proven allegations of bid rigging could compromise its competitive position,” said S&P’s Mr Upton.