Aon to cut staff pay, reflecting the Covid-19 pain facing brokers

Insurance and reinsurance broker Aon has revealed a raft of pay cuts affecting its staff around the globe, as well as other expense saving initiatives, all of which reflects the expectation that the broking industry may face particularly acute pain as a result of the Covid-19 economic slowdown.

While insurance and reinsurance underwriting companies face the threat of claims due to the coronavirus pandemic, as well as the economic hit to their investments and the potential down-turn in demand for protection.

The broking community seem particularly exposed to the economic and demand-side factors, which we believe could also be exacerbated by litigation surrounding claims disputes we suspect.

Aon’s move today is perhaps an acknowledgement of the magnitude of the potential pain the broking community may face, with the giant looking to get ahead of the market in being the first to announce some significant moves to save costs in the face of the pandemic.

In a letter to all staff, Aon CEO Greg Case explained the extremely challenging situation that the broker faces as a result of the Covid-19 coronavirus pandemic.

“While we hold on to glimmers of hope that the worst of the human impact may have passed, the economic consequences are likely to play out for months, or even years to come. Which presents us with difficult decisions in the near term,” Case explained.

Adding, “As we have previously discussed, we have adopted a set of principles to help us navigate this unprecedented global economic lockdown. Guided by those principles, we are now prepared to share the actions we will take to preserve our operational flexibility and ensure we emerge from this uncertainty a stronger and more capable firm.”

He went on to discuss the expected economic impacts of the coronavirus and the downturn in global activity and demand we can expect to see as a result.

“The economic analysis is daunting, but if it were simply a case of marginal revenue declines, we could counter with further expense discipline. Those are fundamentals that we know how to manage. Unfortunately, this downturn is not that simple. This is an immediate, global lockdown of major segments of our economy.

“These trends point to a significant and sustained economic downturn. It’s possible that we’re wrong about the gathering financial storm, but our analysis tells us that we need to act and that presents us with a choice: do we eliminate jobs, or do we find an alternative that protects our colleagues and serves our clients?” Case said.

Aon is moving to preserve jobs, with a pledge not to lay-off any employees at this time.

These actions include a move to reduce senior executive pay by 50%, with named executive officers NEOs Gregory Case, Chief Executive Officer, Christa Davies, Chief Financial Officer, Eric Andersen, President, and John Bruno, Chief Operating Officer, as well as Tony Goland, the Company’s Chief Innovation Officer, all agreeing to a temporary 50% reduction in base salary from May 1st 2020 through December 31st 2020, or until another date decided by Aon.

Aon’s non-executive directors have also agreed to a temporary 50% reduction cash compensation for the same period.

More broadly though, Aon is cutting salaries for its global workforce, with around 70% expected to be affected by this move.

“We are working with local leaders and planning for the remaining 70% of our colleagues to take a reduction of approximately 20% of salary, which will be implemented in accordance with local practices,” Case explained, saying this will also begin to take effect from May 1st.

Case further stated, “Our objective is that everyone emerges from this challenging period in as good a place as possible; unfortunately, it is too early in this economic crisis to determine how we ultimately mitigate these actions.

“Our commitment is that we will act with integrity to protect our colleagues and our firm. We will continue to apply our principles-based approach to how we manage through this crisis and review these actions monthly.”

Aon has not taken the step seen in many industries of immediately laying off a percentage of its workforce, with Case saying that such a move would “put our ability to serve clients at risk.”

Case said, “We are taking a more complex and difficult step because we believe that all of us are critical to delivering on the full potential of Aon. At a time when our clients need us most, we need the full force of Aon United behind them.

“We have spent the last month carefully studying our options and know these proactive steps are the right decision for our firm. We are going on offense to both protect our firm and prepare for the opportunity that lays ahead.

“Because as much as these actions reflect a principled decision consistent with our values, it is also a business decision based squarely on client need. We are witnessing a global shift in client priorities not seen in recent history and we must be ready to answer that call.

“For that reason, we expect to emerge from this crisis a stronger and more capable firm that is essential to our client’s success and best positioned to capitalize on that opportunity.”

In addition to the staff pay cuts, Aon has also cut its spending on contractors and third-party vendors as well, which will have ramifications across the insurance and reinsurance servicing industry as well.

There is no denying the importance of this announcement by Aon today, nor the severity with which the company expects its revenues to be hit by the pandemic related slowdown in economic activity and markets.

This move could be the trigger that sets off a wave of similar announcements, as one company taking a significant step to reduce its costs in a challenging time can push others to do similar, as they face the same pressures in general.

The broking community is under intense pressure, as it is integral to the ability of the insurance and reinsurance industry to continue business as usual, but at the same time it thrives best in a periuod of strong economic growth.

With little chance of economic growth re-emerging any time particularly soon, Aon is taking a step to make itself leaner, at least in terms of costs, in the hope that this will prevent it having to downsize its workforce at all.

However, some may question whether brokers are making too high a margin in less troubled times and any suggestion of lay-offs becoming necessary further down the line could raise questions about whether this was the correct move at this time.

There’s also a question worth raising, of whether the litigation related to business interruption claims from the pandemic shutdown could come back to haunt the broking community in time.

With many complaints focused on insurance and reinsurance wordings and contract certainty, it seems likely that brokers may face lawsuits in time once claims are denied by the carriers.

How big a threat this could be remains to be seen, but broker’s E&O policies may come into focus in time and the overhead this causes in terms of time and costs could be a significant future issue for some in the broking community to face.