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Use and Misuse of Research Data on News Sites

On your lunch break, you surf Internet news sites and read articles on the following topic to prompt a discussion on the relevance of data analysis.

After reading these articles, you have become interested on researching additional resources on the data analysis using the Internet, and all other resources that are linked to this case and you want to propose the following issues for your steering committee to consider:

How did the company in question use or misuse data to support their decisions?

What were the results?

What are the limitations and significance of the data?

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Aon Sets Up $50M Settlement Fund
In spite of stock-price rise, broker future remains rocky, analyst says

By Mark E. Ruquet

Aon Corporation said it has set up a $50 million fund to settle allegations stemming from the multistate probe of contingency fees, driving net income down 12 percent for the fourth quarter.

In its year-end financial report, the Chicago- based insurance broker said it was setting up the fund to settle any allegations from the investigation begun by New York Attorney General Eliot Spitzerà­s office late last year and now pursued by other states. Of the $50 million liability reserve, $43 million is being allocated to the Risk and Insurance Brokerage Service segment, and the balance to its consulting arm.

The fund pales in comparison to the more than $230 million Marsh & McLennan set up after a suit was filed by Mr. Spitzer over allegations that its New York-based insurance brokerage subsidiary, Marsh, performed bid-rigging and other abuses in the placement of insurance in return for lucrative volume-based contingency fees from carriers. Marsh eventually settled for $850 million with Mr. Spitzerà­s office to compensate clients harmed by the alleged illegitimate deal-making.

During a conference call last week, Patrick Ryan, Aonà­s chair and chief executive officer, said Aon reached a point with New York and other states where it felt it was time to create the fund, but that it has not reached any settlements. He added that the company is continuing to cooperate in the investigation.

During questioning, Mr. Ryan said Aon has not engaged in any bid-rigging or solicitation of false quotes. However, he did not say what the firm had done that it would need the settlement for.

He said Aonà­s fund is smaller than the one set up by Marsh because it did not engage in the more egregious violations Marsh was accused of. Aonà­s share of contingent commission was significantly less than Marshà­s, he added.

For the fourth quarter, Aonà­s net income dropped 12 percent to $189 million, or 56 cents per share. Without the reserve charge, net income would have increased 11 percent. Total revenue in the quarter rose 3 percent to nearly $2.7 billion.

For the year, net income rose 4 percent to $654 million, or $1.95 a share. Revenues were up 5 percent, rising to $10.2 billion.

Mr. Ryan said that Aon is continuing to control expenses through a hiring freeze, through "aggressive pursuit" of new business, and by taking advantage of new technologies.

On the day of its announcement, Aon's stock rose $1.97, just under 9 percent, to close at $24.52. Cliff Gallant, an analyst for Keefe, Bruyette & Woods Inc. in New York, said the stock performance was spurred by a good fourth quarter after a poor third. "It was expected to be a bad quarter and it ended up being better than everyone feared," he said.

Mr. Gallant does not have a financial relationship with Aon.

He noted that if Aon hadn't taken the $50 million charge, net income per share would have increased by around 15 cents.

But the broker still faces challenges in controlling expenses and the effects of the continued soft market on earnings, he said, noting that Aon has displayed inconsistency in the past, which he suspects will continue. Aon must manage its business and hold onto customers if it is to see continued improvement, he said.

"My concern with brokers generally is that the macro environment is not good because prices are softening. That makes it...difficult for any broker," he observed. "We are definitely in a period of turmoil for the insurance brokerage business and I think the two major brokers, Marsh and Aon, are susceptible to losing shares as some of their bigger clients begin to diversify a bit in terms of which brokers they use."

He said his firm surveyed risk managers, who indicate they now feel it is their fiduciary duty to spread out accounts among brokers instead of keeping them with one.

Flag: We're Clean

Willis CEO: No Fund Needed

A day after Aon's announcement that it would establish a $50 million settlement fund; the CEO of Willis Group Holdings told analysts his company has not been tarred by the fee scandal surrounding other brokers and will not reserve funds to settle illegal conduct charges.

"We have not put up a reserve," said Joe Plumeri, chair and chief executive of the London-headquartered insurance brokerage firm. "We found no reason to put up a reserve. We haven't had discussions with the attorney general that would suggest that we should put up a reserve."

He did note, however, that there was the possibility someone within the organization may have acted improperly, outside of the knowledge of Willis, but insisted that there was no institutional misconduct.

Willis net income rose more than 3 percent in 2004 to $427 million, or $2.54 a share, while revenues jumped roughly 10 percent to $2.3 billion.

Aon Settles Probe For $190M; CEO Apologizes For Conflicts

By Michael Ha

and Mark E. Ruquet

Aon Corp., the world's second-largest insurance brokerage, will repay injured clients $190 million and adopt a number of major operational reforms to resolve probes by three states into alleged fraud and anti-competitive practices.

The agreement resolves investigations in New York, Connecticut and Illinois into incentive payments the broker accepted from insurers.

The deal also resolves a suit filed by New York Attorney General Eliot Spitzer in State Supreme Court in Manhattan on the day the settlement was announced, as well as a citation issued by the New York Insurance Department, which alleged that for years Aon received special payments from insurers to the detriment of its clients. The payments were described as "above and beyond normal sales commissions."

These payments, known as "contingent commissions," were billed as compensation for "services to underwriters," but Mr. Spitzer's complaint said they were actually "rewards" for business Aon steered and allocated to insurers. Aon announced last year that it would stop accepting such payments from insurers

Under the settlement's provisions, Aon will provide $190 million over a three-year period as restitution for policyholders.

Among the reforms adopted by Aon is a new policy that will see the broker accepting only a specific fee from the client and a specific commission from the insurer, which is set at the time of purchase. Any commissions paid by an insurer will be fully disclosed at the time of placement and must be approved by Aon customers.

Aon Chairman and Chief Executive Officer Patrick Ryan issued a public statement apologizing for Aon's conduct. He said Aon had made contingent agreements with carriers that "created conflicts of interest," adding: "I deeply regret we took advantage of those conflicts. Such conduct was improper and I apologize for it."

In a March 4 conference call, Mr. Ryan said he believes there will be no criminal charges filed against any Aon executives.

"I believe that the business reforms emerging from these investigations provide a foundation for a new model that must be embraced by the whole industry," Mr. Ryan said. "We are now moving to an even higher level of transparency, also ensuring that every client transaction is free of even the appearance of conflict of interest. We are absolutely committed to this and will not rest until every one of our clients is clear on the terms of our relationship."

Mr. Ryan went on to say that there remained disagreements between the New York attorney general's office and Aon over "a number" of the allegations and conclusions laid out in the civil suit, but a settlement was reached in the interest of "putting this behind us." He said he would not comment on the differences.

"I don't believe these allegations are indicative of common Aon practice," said Mr. Ryan. "Forty-eight thousand employees across the globe work hard every day to meet and exceed the expectations of our clients. I would be remiss if I did not recognize their commitment and their contribution. This has been a difficult process for our industry, Aon and for our employees, and we must now look to the future."

The settlement is expected to be tax deductible, Mr. Ryan continued, and will not result in layoffs.

The agreement with Aon was modeled after a Jan. 31 settlement for $850 million that was reached with Marsh & McLennan Companies, the parent of Marsh, according to Mr. Spitzer.

"The underlying complaint in this case shows that improper conduct was pervasive at Aon," he said, announcing the settlement together with Acting New York State Insurance Superintendent Howard Mills, Connecticut Attorney General Richard Blumenthal, Illinois Attorney General Lisa Madigan, and Illinois Acting Director of Insurance Deirdre Manna.

Mr. Spitzer noted that to Aon's credit, "the company has acknowledged the problems, has agreed to compensate policyholders, and has adopted reforms that will provide greater accountability..."

The complaint against Aon acknowledged that industry representatives have defended the longstanding contingency fee practice as acceptable and even beneficial to clients. However, Mr. Spitzer's office and the New York Insurance Department said they have uncovered "extensive evidence" showing that the practice distorts and corrupts the insurance marketplace and cheats insurance customers.

The suit also alleged that Aon, in addition to promising to send business to insurance company partners in exchange for extra cash payments, promised to place business with insurers who agreed to use Aon's reinsurance brokerage services. Mr. Ryan, it was charged, as CEO was involved in efforts to boost placements with an insurer in exchange for that company's use of Aon Re for reinsurance brokering.

The complaint against Aon cites various internal communications in which "top executives openly discussed these efforts to maximize Aon's revenue and insurance companies' revenues," without regard to Aon clients' interests.

It was also charged in the complaint that Michael O'Halleran-Aon's chief operating officer and the broker's second-in-command-personally negotiated "claw back" 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.

In response to the settlement, Standard & Poor's Rating Services said it removed Aon's financial strength rating from CreditWatch, where they had been placed on Oct. 21, 2004, when New York's investigation into misconduct by brokerages surfaced. S&P also said it affirmed its "triple-B-plus/A-2" counterparty credit and financial strength ratings of Aon, with a "Negative" outlook.

S&P credit analyst Steven Ader explained that S&P's "Negative" outlook reflects "ongoing competitive and financial uncertainties" resulting from possible damage to Aon's reputation and the implementation of a new business model.

Fitch Ratings announced it is cutting Aon's long-term issuer rating and related senior debt ratings to "triple-B-plus" from "A-minus." Gretchen Roetzer, the lead analyst for Aon at Fitch, told National Underwriter that the $190 million settlement amount was generally what has been expected since it is roughly what Aon took in from contingency fees in 2003.

The ratings firm said that while the settlement agreement "favorably eliminates one major uncertainty for Aon," it is outweighed by other near-term challenges including the broker's susceptibility to a decline in franchise value and the possible drop in revenues if clients leave the firm.

Ms. Roetzer also speculated that there may very well be more allegations and charges brought against other brokerage firms. "I think it's inevitable that there will be additional findings, but I would expect the magnitude to be less," she said.

"[Aon made contingent agreements with carriers] that created conflicts of interest. I deeply regret we took advantage of those conflicts. Such conduct was improper and I apologize for it."

Patrick Ryan, Chairman & CEO
Aon

"Improper conduct was pervasive at Aon...The company has acknowledged the problems, agreed to compensate policyholders, and adopted reforms that will provide greater accountability
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As I understand, the student is requesting aid with establishing an outline/presentation/proposal based on the three posted questions.

The first question directs the tone of your response. Often when one asks if someone or something (mis)used data (or other object), misuse exists either objectively or subjectively (objectively = everyone can see the misuse; subjectively = an individual can interpret misuse from the data). According to the attached file, a file that appears to focus on settlements and trading/shares/ratings/etc., your direction should focus on three points: (1) the manner (which includes the timing of) in which the company handled the settlements. Note, for instance, the first ...

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