CHICAGO—Aon Corp. last week ended its silence on whether it would collect contingent commissions, saying it would again accept the controversial payments in some cases.

The decision immediately was criticized by the Risk & Insurance Management Society Inc., but analysts say the move makes good business sense for the brokerage.

The announcement by Chicago-based Aon means that all of the world's three largest brokers have now staked out their positions on contingents after the ban on them accepting the incentive payments was lifted this year.

Aon said it will again accept all forms of compensation, including contingent and supplemental commissions, for its brokerage business where such pay is “appropriate and legally permissible.”

The brokerage said it decided to accept the insurer-paid contingent commissions—which are tied to the volume or profitability of business placed—after a worldwide review of payment practices.

“We have conducted a great deal of research around broker compensation across the globe with a focus on serving the needs of our clients and competing on a level playing field in the marketplace,” said Steve McGill, chairman and CEO of Aon Risk Solutions.

Mr. McGill declined to provide specifics about which geographical areas or market segments would be included in the compensation structure. In addition, he said there is no timeline for rolling out the change, saying that Aon is working with insurers and clients “to start bringing this strategy to life,” he said.

The announcement sets out Aon's stance on the controversial commissions for the first time since officials this year lifted a five-year old ban that barred Aon and its biggest rivals—Marsh Inc. and Willis Group Holdings P.L.C.—from collecting such pay.

In 2005, amid a probe by then-New York Attorney General Eliot Spitzer, the world's largest brokers agreed to give up contingents, change their business practices and pay more than $1 billion in total client restitution to settle allegations that they steered business to insurers that paid the highest contingent commissions. However, the ban was never extended to smaller brokers, so the “big three” argued the restrictions created an unlevel playing field.

In February, Marsh, Aon and Willis reached agreements with state authorities to lift the ban and the rigorous disclosure requirements contained in their 2005 settlement agreements.

Willis quickly responded to the amendment, saying it would not resume collecting contingents on its core retail brokerage business worldwide, citing an inherent conflict of interest in the compensation practice. But Willis is receiving contingent commissions tied to business acquired in its 2008 acquisition of Hilb Rogal & Hobbs Co. Under previous terms of the ban, brokers were given a three-year grace period after completing a takeover to take contingent commissions on business generated by the acquired company. In the first quarter of 2010, Willis reported $8 million in contingent commissions related to HRH, down 60% from the previous year. Willis said it has converted more than 90% of HRH's legacy contingents into upfront commissions and aims to complete the conversion this year.

In March, Marsh said it would not accept contingent commissions within its core brokerage operations for large account and middle-market business in the United States and Canada. However, Marsh said it will accept contingents within its Marsh & McLennan Agency L.L.C. subsidiary and within its U.S. and Canadian consumer business, which includes affinity, sponsored program and personal lines businesses.

Mr. McGill, estimating that contingents made up roughly 2% of Aon's revenue prior to the ban, said “it was not a significant portion of our revenue previously, and we don't expect it to be a significant portion moving forward.”

In 2003, prior to the ban, Aon collected $169 million in contingent commissions; its total brokerage revenues for that year were around $6.73 billion.

RIMS said it is “disappointed” by Aon's decision to again accept contingent commissions. In a statement, RIMS reiterated its position that contingent commissions should be universally banned and called Aon's move “a step backwards with regard to the level of service it provides to its clients.”

New York-based RIMS said it will continue to call on all brokers to forgo contingents, which it said “pose an inherent conflict of interest and interfere with the relationship of trust between the broker and insurance consumer, regardless of the nature of the client or the intermediary.”

A recent Business Insurance survey indicated many commercial insurance buyers—70.1%—believe contingent commissions represent a conflict of interest (BI, July 19).

But Aon said it believes it can “manage” any such potential conflicts through transparency and “comprehensive disclosures” that meet or exceed all legal requirements. “Based on the feedback we had from clients, we think appropriate disclosures will help to ease any (buyer) concerns,” Mr. McGill said.

U.S.-based clients will be provided a “quote disclosure report,” which includes comprehensive disclosures that detail all carrier responses, including quotes and declinations, gross premiums and expected total commissions on placements. In other jurisdictions, disclosures will meet or exceed all legal requirements, he said.

Michael Harrington, senior risk manager for EMC Corp. in Hopkinton, Mass., said he was “OK” with Aon's position, as long as disclosures are provided up front. Mr. Harrington, who uses Aon for some placements, said he would expect to be informed about “what percentage of spend—on a line-by-line basis on my account—goes to contingent commissions; and in the aggregate, what percentage of the broker's business comes from contingents.” he said.

Analysts welcomed the move.

Meyer Shields of Stifel, Nicolaus & Co. Inc. in Baltimore said, “we think this is absolutely the right decision,” noting his firm does not believe that fully disclosed contingent commissions represent a conflict of interest for brokers. Because negotiations will start now for 2011 contracts, Mr. Shields said he expects Aon to realize the revenue gains related to contingent commissions in 2012, estimating additional revenues “north of $50 million” annually based on current premium volume. However, “they will get some client opposition and pushback,” he said.

For brokers, part of the appeal of contingents is that there are few expenses associated with them, and they are generally viewed as “high-margin profits,” said Mr. Shields. The payments “make up a small percentage of revenue, but a high percentage of profit,” he said.

For Aon, taking contingent commissions is another potential source of revenue, and should help offset current conditions, said Paul Newsome, an analyst with Sandler O'Neill & Partners L.P. in Chicago. He said he expects Aon's revenue gains to be “meaningful,” but said soft market conditions likely will prevent it from reaching previous levels.