The Power of One:

In most of the extended warranty business, a chain of players stands behind a service contract, beginning with the seller and ending with the insurer. At Aon Corp., most of those functions are concentrated into a single company. For most of the service contracts Aon sells, one company is the administrator, the marketing company, and the insurance company.

More precisely, it's probably three companies performing these functions -- all owned by Aon. David Cole, who's chairman, president and CEO of several of them -- including the Aon Warranty Group Inc., the Virginia Surety Company Inc., and London General Insurance Company Ltd. -- sees this as a strategic advantage for the parent company.

"It's a significant advantage," he said. "First, we are the underwriter, the administrator, the claims payer, and the marketer and trainer. So it puts us in a position to be as concerned about risk and making sure the product is priced right, as it does to make sure that all the other services are provided for a fee basis. Secondly, it puts us in a position instead of having to have three or four people involved in the product offering that you might take to a prospective client -- a retailer or dealer -- and having three of four people that need to make a margin off of it, we're only one company.

"So instead of having a third-party insurance company that has to make a certain margin, and then a third-party administrator that has to make a certain margin, and a third-party training and consulting company that has to make a certain margin, we can operate more efficiently being one company than several companies can because we don't have the same redundancies that would exist in many different companies. Thereby, we can provide the product at a more competitive price and still make the margin we need to," Cole told Warranty Week.

The Power of One

Aon, whose Gaelic-derived name literally translates to the English word "one," uses as its company slogan the phrases "One Company, One Source, One Vision," and "The Power of One." In the extended warranty business, at least, Aon is the only one able to act as an administrator in consumer electronics, home appliances, and automobiles, and is the only one able to act as an administrator and underwriter in all three sectors. You get the idea. This is an all-in-one company whose very name means one. Were we in charge of Aon's advertising strategy, we'd try to best General Motors' employment of Aerosmith and Led Zeppelin jingles by pitching a licensing deal to U2's Bono for the use of the group's 1991 hit "One."

Cole noted that when the seller of extended warranties has a problem, there's only one person they need to go to, for insurance questions, administrative questions, claims questions, training questions, marketing questions, product development, or compliance/regulatory questions. "Every issue that revolves around warranty, they only have to go to that one single source to get the answer or get the problem solved," he said.

If the retailer/dealer is using another company for administration, that company may need to check with their underwriter before agreeing to make changes. In some cases, the administrator may even bring their underwriter along to meetings with clients to speed up this process. But the point is, it's two people who work for different companies, as opposed to one if it's Aon.

Ironically, Aon sometimes acts as an underwriter alone for an outside administrator. For instance, Aon underwrite a good portion of NEW Customer Services Companies' business. Cole conceded that it gets a little tricky when Aon and its clients end up competing for the same administrative accounts. But at the same time, the fact that Aon provides underwriting services to clients such as NEW does not give it a window into what price NEW will bid in terms of training or administration services. And if Aon's price to NEW is too high, then NEW is free to go with another underwriter. If NEW wins such a bid, then Aon loses both the administrative and the underwriting fee.

In other words, Aon has several ways to win, either in cooperation or in competition with its clients. It's not an all or nothing choice. And it's already common practice for administrators to spread their business among two or more underwriters, so Aon has no monopoly power at either the underwriter-only or underwriter/administrator level. There's always someplace else to go.

Cole added that Aon is actually transitioning away from these underwriter-only types of roles and is favoring the bundled underwriter/administrator role. One reason the NEW business continues is because they've been working together for more than 11 years, and neither side wants to end it. But going forward, Aon is going to emphasize the all-in-one advantage of its business.

Corporate Structure

The underwriting business unit to which Aon Warranty Group belongs is one of the three primary divisions within Aon Corp. The others are Aon Risk Services and Aon Consulting Worldwide. There are three main business units within the Aon Warranty Group, aligned according to products and markets. These business units operate with autonomy and have their own sales and marketing functions.

• Aon Innovative Solutions Inc. is a direct marketing, call center, customer relationship management, and claims administration company within the Aon Warranty Group. It is primarily focused on the consumer electronics and home appliance ends of the business.
  
  
• Aon Home Warranty Services Inc., as its name implies, is focused on the home warranty industry, which as an Oct. 13 article explained, is not so much covering the structure of a home as its contents: the major appliances and heating/cooling systems.
  
  
• Resource Automotive Inc., including the Resource Dealer Group, is focused on the auto extended warranty business, as is the First Extended Service Corp., an administrator founded in 1974 and acquired in 2001 by Aon.

All of these companies operate at the administrator level of the extended warranty industry. In front of them are the actual sellers of the extended warranties, usually independent retailers and auto dealers. In back of them are the insurance underwriters, which in Aon's case are sister companies.

The Virginia Surety Company is the underwriter of most of the service contracts sold in the U.S. by the Aon Warranty Group. London General is the underwriter of most of the contracts sold in Europe. They divide up the rest of the world more or less geographically, with London General getting most of Asia and Australia, and Virginia Surety getting most of the Americas. Both are wholly-owned subsidiaries of Aon. Cole is CEO of both.

In numerous countries, Aon Warranty Group operates geographically-based subsidiaries, including Aon Warranty Group Benelux, Aon Warranty Group France, Aon Warranty Group Germany, Aon Warranty Group The Netherlands, Aon Warranty Group Spain, Aon Warranty Group United Kingdom, Aon Warranty Services of Argentina Inc., Aon Warranty Services do Brasil, Ltda., Aon Warranty Services of Japan Inc., and Aon Warranty Services Australasia Pty. Ltd.

Far-Reaching History

The Combined Insurance Company of America is an insurance company originally founded by W. Clement Stone in 1922. Back then it was called the Combined Registry Company. Stone, then 19 years old, had already been selling insurance for three years out of an office in Detroit.

In 1964, Patrick Ryan founded Pat Ryan & Associates Co., a company initially specializing in automotive credit insurance sold through car dealerships. Over the next several decades it changed its name to the Ryan Insurance Group while expanding through both mergers and organic growth. One of those mergers was with Combined Insurance, in 1982, under which Stone became chairman and Ryan became president and CEO.

In 1987 the name of the merged companies was changed to Aon Corp. What started out as Pat Ryan & Associates continues today as the Resource Dealer Group within the Aon Warranty Group. Meanwhile, Combined Insurance also is still operating, underwriting supplemental life insurance and health insurance policies.

Some of the other business units Aon acquired over the decades go back even further than its own 40 years. Virginia Surety was founded 77 years ago, and as mentioned Combined Insurance was founded 82 years ago. In the UK, Howden and Balleny goes back to 1821 and Leslie & Godwin goes back to 1885. But the grand prize winner in terms of longevity is a Dutch insurance company called the Hudig-Langeveldt Groep, a provider of insurance protection for cargo ships. It was founded in 1680, at a time when the Netherlands were at the center of world trade.

Encyclopedia of Product Failures

Cole is himself something of an extended warranty industry veteran, getting his start in 1976 when he joined what was still Pat Ryan's company after having worked for a Ford Motor Co. dealership for several years after college. "Other than the car manufacturers, we're the only independent that is still in the business since those days," he noted.

"The fact that we've been doing it for 40 years -- longer than anybody else -- and have written more warranties than anybody else on the globe, helps us in many ways. It helps us from a reputation standpoint and an acceptance standpoint. It also means we have more data than anybody else in our databank, which allows us do a much better job of pricing."

The operations of that databank of product failure rates and repair costs, and the contract prices derived from it, is probably one of Aon's greatest strengths, Cole said. Because the company's been in the business so long it has more data. But it's equally true that because the company has more data it's been in the business longer. Especially in the auto extended warranty business, the underpricing of risk has doomed several of his competitors, because they don't know they've underpriced it for several years, by which time it's too late to fix.

Cole said he sees extended warranties being something of "a hobby" for several other major underwriters. They'll enter the business, they'll dabble, and then a few years later they'll lose their shirts and head for the exits. Then they'll return to their main lines of life insurance, property and casualty insurance, or health insurance.

"Many of the very large companies, in both Europe and the U.S., come in the business for three or four years, then they get out of the business for four or five years, then come back in the business for three or four years, purely from an underwriting standpoint," Cole said.

Retaining Warranty Risk

For Aon, however, extended warranty is the core business, Cole said. Virginia Surety, Aon's underwriting subsidiary, also engages in commercial property and casualty lines of business, but it reinsures most of that business with other carriers. As far as the actual risk that Virginia Surety retains, more than 80% of it is extended warranty-related, he said.

For the first nine months of 2004, Aon Corp. has reported $7.5 billion in revenue, of which insurance underwriting is roughly 30% of the total. Of that insurance underwriting slice, roughly 45% is comprised of warranty, credit, and property & casualty underwriting. Aon doesn't officially break out that amount further, but Cole offers some clues.

"I'm responsible for both our property and casualty and our warranty business globally," Cole added. "And I spend at least 80% to 90% of my time on the warranty sector." It's the same rough proportion for the 3,000 or so people who work under him, he said.

Company-wide, 68% of Aon's revenue is U.S., 13-16% is UK, 7-10% is continental Europe, and 9% is rest of world. Cole said he wasn't immediately certain if those proportions also crossed over into the warranty sector, but he said that currently, the U.S. accounts for the vast majority of the business, followed by Europe, within which the UK leads, and then followed by Brazil and Japan. Cole added that he sees the biggest future opportunities for growth within continental Europe, where competitors haven't yet saturated the market with extended warranty offerings, as well as outside of Europe, which are still almost untouched green fields when it comes to extended warranties.

Insurance Investigations

The picture isn't entirely rosy for Aon as a company, although its warranty house seems to be in order. Between investigations launched by the U.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer, the insurance industry is now paying for past sins in the form of record fines and lowered credit ratings.

On October 21, 2004, Standard & Poor�s (S&P) lowered its rating on Aon's senior long-term debt from A- to BBB+. In addition, S&P placed all their ratings for Aon on credit watch with negative implications. On October 22, 2004, Moody�s Investor Services and Fitch Inc. placed both Aon's senior long-term debt and commercial paper ratings on negative outlook and credit watch with negative implications, respectively.

In May 2004, A.M. Best, a major rating agency for Aon's insurance company subsidiaries, lowered its ratings for the company's two major insurance subsidiaries. Combined went from "A" stable outlook to "A" negative outlook, and Virginia Surety went from "A" stable outlook to "A-" stable outlook. In October 2004, Fitch Inc. lowered its rating for Combined from "A-" stable outlook to "A-" negative outlook. However, in August 2004, Moody�s Investor Services raised its rating for Combined from "Baa1" stable outlook to "A3" stable outlook.

Registration is now open for the WCM Conference 2005 and registration forms may be downloaded via the following link: www.warrantyconference.com/previous-conferences/wcm-2005.html . The WCM website has been updated to acknowledge both Hewlett Packard Co. and the SAS Institute Inc. as sponsors of the conference.

The conference agenda also is now available on the Web page: www.warrantyconference.com/previous-conferences/wcm-2005.html. Most of the people whose presentations were approved by the selection committee should by now have been notified by conference organizer Alison Griffiths of ALG Associates LLC.

The next step is to begin planning the trip. Discount conference rates are available for hotel rooms between Feb. 27 and March 4, 2005, for a conference scheduled to take place on March 2 and 3. Registrants who need overnight accommodations are strongly urged to make their hotel reservations with the Hyatt at Fisherman�s Wharf, the conference venue, as soon as possible via the following link: fishermanswharf.hyatt.com/groupbooking/alga. Reservations are subject to availability and will be secured on a first-come, first-served basis.