Spitzer probes insurer/broker relationship.
New York Attorney General Eliot Spitzer's fraud and antitrust charges against Marsh & McClennan Cos. have spawned a myriad of similar investigations in various states, not to mention Congressional and regulatory hearings. While subpoenas continue to fly--and it could be years before all investigations are resolved--there's no doubt that the investigations have already impacted how commercial insurers do business.What remains to be seen is if the investigations will broaden into other areas of insurance, which could potentially change how reinsurance, health, life and personal lines are sold.
Citing what he called "widespread corruption in the insurance industry," Spitzer rattled the insurance industry with a lawsuit filed against Marsh & McLennan Cos., the world's largest insurance broker. In the lawsuit, filed in State Supreme Court in New York City in October, Spitzer alleged that Marsh steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.
The complaint alleges that Marsh collected special payments from insurers "that were above and beyond normal sales commissions." Spitzer alleged that such "contingent commissions" were characterized as compensation for market services--but were actually "rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies." Spitzer's lawsuit also names some of the industry's biggest insurers--American International Group Inc., Ace Ltd., Hartford Financial Services Group Inc., and Munich American Risk Partners, an affiliate of American Re-Insurance Co. and ultimately of Munich Reinsurance Co. Several insurance companies' employees have already pleaded guilty to criminal charges related to the case. Spitzer said the investigation is continuing with other insurers.
Similar investigations have popped up in several states, including New York, Florida, California, Connecticut, New Jersey, Pennsylvania, Massachusetts, Minnesota, Illinois, North Carolina and Ohio. Plus, Congressional hearings on the subject are under way, along with hearings by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators.
The Spitzer case involves two major accusations: first, that brokers and insurers fixed prices and rigged bids--which is illegal; and that insurers inappropriately offered brokers contingent commissions based on the quality or volume of the business they produce without proper disclosure to their clients.
"We need to differentiate between the contingent commission vs. the bid rigging," said Bob Zeman, senior vice president for the Property Casualty Insurers Association of America. "If cases of bid-rigging are proven, that is criminal conduct and should be prosecuted. But we don't think contingent commissions are inherently illegal or wrong."
While the investigations will not materially affect the insurance industry, Adam Klauber, director of research for Cochran, Caronia & Co., said Spitzer's case "has already had significant impact because contingent fees are being eliminated or reduced, and that is reducing the earnings for these companies."
Some of the world's largest brokers--Marsh, Aon, Willis, Arthur J. Gallagher and Jardine Lloyd Thompson Group--have already said they will not accept contingency commissions. Marsh alone earned $800 million in contingency commission last year, according to Spitzer.
"It's not going to change the practice of commercial insurance, who bears the risk and how much they pay for it," Klauber said. "It's really a matter of changing the allocation of who's going to get more risk and who's not going to get risk."
He explained contingent fees were originally offered to brokers as a way of sharing the risk. Brokers received contingent commissions if the business they passed to carriers was profitable. "It was a way for underwriters to guide the profitability trend of the business" Klauber said.
In the soft market, however, when many companies were chasing volume, commissions were offered more to reward brokers for the volume of business they sent to a carrier, rather than the profitability of that business.
"We need to let cooler heads prevail before there's a rush to regulatory action" Zeman said. "It's a controversy that we are dealing with, but in the end, it does not present irreparable harm to the industry."
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| Author: | Green, Meg |
|---|---|
| Publication: | Best's Review |
| Geographic Code: | 1USA |
| Date: | Jan 1, 2005 |
| Words: | 654 |
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