Ronald Gift Mullins outlines the recent reorganisation at Aon to produce what is claimed to be the largest reinsurance broker in the world.
After decades of acquiring various brokers and intermediaries in the US and other countries, Aon has created Aon Re Global to coalesce all its reinsurance broking operations into a single, efficient global organisation. The decision to combine Aon's reinsurance operations around the world into one entity was described by Aon as a transition from a "global practice group" to a "truly singular global entity", and reflects its desire to be seen as a single business rather than a conglomeration of the various acquisitions made over the past 20 years or so.Aon's growth began in earnest in 1982 when the Ryan Insurance Group merged with Combined International Corp. Throughout the 1980s and 1990s, Aon expanded in the global re/insurance broker marketplace by acquiring a number of brokers and intermediaries, ultimately leading to its current spread of offices in over 40 countries. Commenting on the formation of Aon Global Re in September 2003, Patrick G Ryan, chairman and CEO of Aon Corp, said in a statement: "This team, under the leadership of Dennis Mahoney and Mike Bungert, uniquely positions us to anticipate the needs of our clients.""The world of risk is becoming ever more complex," continued Michael D O'Halleran, President and COO of Aon Corp. "Our clients and markets are quite rightly demanding ever more sophisticated services that must be consistently delivered where they operate." He said that the leadership of Paul Davies as chairman of Aon Re Worldwide over the past six years has built a foundation on which to transform the company's operations into a global entity.Paul Davies, now Senior Chairman of Aon Re Global, said the new entity's purpose is to promote more interdependence within the company. "We are striving to attain the meaning of Aon - 'oneness' in Gaelic. After acquiring various companies in different countries over the past decades, we now want to pull these units together to some degree. We want everyone to know that we are one." Mr Davies was one of the earlier entrants to the Aon fold, when he joined Aon in 1988.In addition to Mr Davies, the Aon Re Global executive board comprises Dennis Mahoney as Executive Chairman; Michael Bungert as President of Aon Re Global and CEO of Aon Re Americas; former Munich Re grandee Clement Booth as CEO of Aon Re International, who will also act as Chief Administrative Officer for Aon Re Global; Ross McKenzie as Vice Chairman of Aon Re Americas; and Colin Bryan who remains head of Aon Re UK and becomes Vice Chairman of Aon Re International. In addition Mike O'Halleran, Bryon Ehrhart, President of Aon Re Services; Paul Markey, Chairman of Aon (Bermuda) Ltd; and Olivier du Passage, Chairman of Aon Re Europe have joined Aon Re Global executive board.
Group financesPerhaps unsurprisingly in the current hard market climate, Aon as a whole is faring pretty well, with brokerage services making a substantial contribution to revenues, though not as substantial as the broker would like. In the third quarter results issued in early November, this segment produced about 60% of the operating revenue of Aon for the first nine months of 2003, and about 79% of the profits before income taxes and minority interest. The balance of revenues came from consulting, insurance underwriting and corporate activities. Of the overall brokerage revenues, the reinsurance and related services produced $700m in revenue - about 10% of Aon's revenue from operating segments. This was an increase of around 16% compared with the 2002 figure. For the first nine months of 2003, Aon Corp reported $413m in net profits, up 43% on the same period in 2002.Commenting on the financial results, Pat Ryan said: "Our international brokerage and US reinsurance businesses drove organic revenue growth in the quarter, which was tempered by lower than expected revenue in claims services and Americas brokerage. Overall brokerage results did not achieve our internal targets, and we will be implementing additional and more aggressive actions to improve both top and bottom line performance." The nine months pre-tax brokerage margin declined slightly, he observed, from a year previously (14.2% versus 14.3%), and the comparable full year margin may not exceed the 15.2% margin achieved in 2002. Mr Ryan added: "Seasonally, the fourth quarter is Aon's best, particularly in our brokerage and consulting businesses." But cautioned that "a dramatically increased level of discipline around our operations," will be imposed.In October 2003, news surfaced that about 2,000 Aon employees working in the company's managed solutions group in the London office could fall victim to the centralisation of back office services. An Aon spokesman said that it was too early to discuss what options were being considered, but admitted a review was in progress, with a final decision on the future of the managed solutions business being made by the end of the year. Parts of the business under review include Aon claims management, Aon health solutions, Aon property solutions, Aon IRISC, Aon motor solutions, Aon travel solutions and the claims office.How these changes may impact the new reinsurance set-up is too early to predict, though Aon Re Global's Mr Davies said that the new entity will centralise some of the back office functions to eliminate duplication. It has been traditional for international brokers, for instance, to have "two contract wording department, claims departments and so forth," he said, one in London and one in the US. "Aon Re Global will give us more consistency in what we do. Before it was done by geographic areas. Now, we can do more by having one unit serve a number of functions and operations."Consolidation of back office services will not add to profits because "these services are included in our contract with our clients," he said. "Thus it is not a big portion of our fees, but providing our clients with these services has been a major reason for our success in retaining clients and attracting new ones."Among the services Aon offers its clients are rating agency capital modeling assistance, capital allocation and optimisation services, catastrophe modeling, regulatory assistance, tax analysis, dynamic financial analysis, and capital markets structuring and placement services. With greater centralisation of the products and services offered by Aon, greater control and scrutinising of back office operations can be exercised."We want to make sure that we can bring these services to Canada, the UK, France, Germany and other parts of the world," he said. "Make them available to the people Aon serves."
More access by clients"I think clients will notice the improvements, especially on the services end," Mr Davies said. "We will be able to make services operate in a more efficient manner. We can bring the best talent to the table no matter where the client is. We can be more responsive to clients. This will help broking in the end by making the operation more efficient." There are no plans to name a CEO for Aon Re Global, according to Mr Davies. "When there is a CEO title, it denotes reporting responsibilities. There is an Aon Re Global management team and we report to CEO Pat Ryan and Mike O'Halleran, Aon's President. There will be no CEO of Global Re."Adding a layer of administration between the CEO and president and the operating units of Aon would appear to imply that Aon Re Global has no authority to make substantial decisions to direct change within the reinsurance broking entity. "Pat Ryan makes the overall broad decisions about the reinsurance brokerage operations," Mr Davies responded, "but he wouldn't make the day-to-day decisions concerning the operations. We have personnel within the group - CEOs of the individual broking companies - that make the day-to-day decisions. If it is a broad decision, such as an acquisition or merger, this would require the approval and investigation by the Aon Re Global management team along with Pat Ryan and Mike O'Halleran."There are no plans to generate a new brand for Aon Re Global. "The creation of Aon Re Global is not an attempt to rebrand anything," Mr Davies affirmed. "It's simply the name of a management group within Aon."Aon has been on a branding campaign for more than five years,"explained Mr Davies. "Today, the Aon brand is on most companies that have been acquired. But where a broker's name has historic value in a given area, we try as much as possible to continue with that name, bringing in Aon only slightly. In the US, we have Aon on every operation on the reinsurance side which is part of Aon Re Americas."Along with the concept of branding has come a sweeping change in the reinsurance broking business, according to Mr Davies. "The game has changed so much in the last 20 years. One reason I sold to Aon was the company had the resources to bring these critical transformations about." Paul Davies sold his business, Reinsurance Agency, to Aon in 1988. But things have definitely changed. "In the old days, I operated with most of my business in my briefcase," he continued. "I knew all the important players well. Those days are disappearing fast. Relationships are still important, but now we are analysing financial statements, improving clients' ratings with the agencies and providing very complicated financial packages that sometimes bewilder me. But we have to supply these services and products to keep our clients up-to-date and us competitive."We have so many new things that are going on," Mr Davies continued. "Bryon Ehrhart and his team develop new products all the time. These guys amaze me. Take terrorism exposure. We have systems that can analyse the terrorist exposure of a company's book. Also, we are able to do an analysis of an insurer's exposure in homeowners coverage and determine where they are underpriced and areas where they could be too concentrated, and why they are losing money in certain localities."In October 2003, Aon Re Global announced that Ellsworth P Whiteman III had joined the firm to lead the global accident, health and life reinsurance operation. According to a statement, his mandate is "build the premier accident, health, life and annuity brokerage capability in the world."Michael G Bungert, president, Aon Re Global, said that the initiative represents an integration of top broker talent, sophisticated technical and cutting-edge analytical resources in accident, health and life reinsurance. "Our goal," he continued, "is to assemble all the resources necessary to deliver" accident, health and life reinsurance products, solutions and services to Aon's clients.With reinsurance companies either leaving the field or merging with other players, the choice of reinsurers has narrowed considerably in the last ten years and brought a flight to security within the reinsurance industry."Today, financial strength of reinsurers is highly important," Mr Davies said. "It has had a major effect on our placement of business. Most of our clients will not accept reinsurance unless there is an 'A' in the rating of the reinsurer. AM Best is most careful in keeping its eye on a reinsurer's financial health. Security of a reinsurer is top priority right now, especially with the long-tail lines. We do a lot of business in that area. Also, we are looking closely at the exit strategy of some of the Bermuda operations. We don't want to put our clients with people who aren't going to be around in a few years."I think a big victory for Aon in the last five years," Mr Davies said, "has been that most of the direct reinsurers, except Gen Re, are realising that the intermediary branches make sense. Simply, intermediaries can provide more services than the direct writers."
Reinsurance marketThe reinsurance market now and into 2004 is seeing some softening, "about 20% in the property lines," Mr Davies said. "The normal casualty market is flat, but niche markets are still tight, such as aviation, marine and energy, but specialty lines such as professional liability, errors and omissions, and excess and surplus lines are still profitable. Overall, terms and pricing and conditions are still tight."Commenting on the overall philosophy of Aon Re Global, Mr Davies said: "We went out and hired the best people available. And putting them all together is going to produce a superteam. I am the only old guy in it and I am learning every day about new products and services. Stay tuned."By Ronald Gift MullinsRonald Gift Mullins is an insurance journalist based in New York City.