United Press International
WASHINGTON, Oct. 22 (UPI) — The lawsuit filed earlier this week by New York Attorney General Eliot Spitzer alleging anti-competitive practices such as bid-rigging and the solicitation of fake bids by the world’s largest insurance broker, Marsh & McLennan, is causing repercussions throughout the U.S. and European insurance industries.
Spitzer is alleging that Marsh steered business toward insurers in exchange for generous commissions. The broker would then conduct a phony bidding session with artificially high fake bids from other insurers to make it look like customers were getting the best price.
With heightened attention on the business model of insurance brokers, especially on the “contingent commission” fees — legally permissible fees that critics say corrupt the relationship between broker and insurer by reducing competition and driving up prices for consumers — shares on Wall Street and in London plummeted as it became apparent that more brokers and insurers would be drawn into the scope of Spitzer’s crackdown.
Marsh’s top executive, Jeffrey Greenberg, seems poised to step down amidst the growing clout of Spitzer’s attacks. Shares of Marsh & McLennan Cos. rose $7.81 to close at $26.79 Friday afternoon when the Financial Times and the Wall Street Journal reported that Greenberg would offer his resignation on Friday.
Spitzer already has confessions from two unnamed executives of American International Group Inc.; has named Hartford Financial Services, ACE Ltd. and Munich Risk Partners as possible co-conspirators; and has subpoenaed Dutch bank ING, Cigna Corp., Aetna Inc., MetLife Inc., the largest U.S. insurer, and Unum Provident Corp.
Concurrently, AIG announced it “is the target of a federal grand jury investigation” by the District Attorney of Southern Indiana. The investigation is trying to unearth “non-traditional insurance” strategies, specifically the contract between AIG and Brightpoint Inc., which was investigated by the U.S. Securities and Exchange Commission in 2003 and ended in a settlement. That
investigation aimed to expose insurance practices that appeared to sell insurance, but really served as a blanket for covering up Brightpoint’s losses. What puzzles officials further is that “Hank” Greenberg, CEO of AIG, is also the father of Jeffrey Greenberg, CEO of Marsh & McLennan Cos.
The attack on contingent commissions and the claim that industry corruption is ubiquitous does spark some cautious criticism from insurance industry insiders, however.
For instance, Robert Hartwig, chief economist at Insurance Information Institute, argues that Spitzer has “no authority to ban what are legally permissible” fees to brokers. Hartwig stressed the fundamental differences between the existence of well-known commission fees, which he said if “properly structured produce good outcomes,” and the illegal actions of some that clearly “stepped over a bright line.”
The differences between Spitzer and Hartwig’s views are clearly drawn on the fault lines of how the industry should confront contingent commissions. Because of his strong supposition of a wider systemic problem, Spitzer is aiming for both punitive action and industry reform. Hartwig and like-minded insiders, on the other hand, argue that the structures to regulate and distinguish between permissible commissions and illegal broker-insurer relationships are already in place and need only minor revisions.
Chris Woodburn, chief executive of the General Insurance Standards Council (GISC) in London, an independent organization set up to “make sure that general insurance customers are treated fairly,” echoes Hartwig’s position.
In Britain, contingent commissions or Placement Service Agreements (PSAs), have clearly defined regulations. As in the United States, brokers who receive a PSA must plainly disclose how those commissions affect the pricing of insurance quotes.
Attempts to investigate member insurers and brokers of the GISC this summer stopped short of an official investigation after sources, claiming that use of contingent commissions was crossing the limitations of permissible business, denied to be publicly mentioned in the inquiry.
Spitzer hauled Benfield Inc., a subsidiary of the London-based Benfield Group, into the insurance scandal after a subpoena was issued, requesting the reinsurance firm assist the attorney general in its investigation.
Benfield, which is listed on the London stock exchange, released a statement saying, “Although Premium Service Agreements (PSAs) are understood to have been common in the insurance market, as a reinsurance intermediary, it has been and remains Benfield policy not to engage in such practices.”
Benfield’s attempts to disassociate its business from Marsh & McLennan, AIG and other firms currently under investigation, did little to protect its shares from the similar fate befalling U.S. insurance brokers.
A day after Benfield announced it would be providing Spitzer with assistance, its stock fell 7.5 points, as investors feared a ripple effect throughout the industry.
Investors’ concerns in Britain and in the United States are twofold: on one hand they are concerned that irregular bid-rigging and kickbacks to brokers might lead to large fines, as state regulatory agencies race to eliminate corrupt practices, and huge payouts to individual and commercial clients seeking reparations for inflated prices.
On the other hand, investors are worried that contingent commissions, which provide a large percentage of revenue for these firms, will be eliminated, deflating the profitability of these firms.
Even though Woodburn “certainly wouldn’t speculate that what is going on in United States is going on in Britain,” he did mention the watchdog group was keeping a “watching brief” on the developments and the possible consequences in Britain.
The GISC is set to relinquish its authority over the practices of its members to the Financial Services Authority on January 14, 2005, decreasing the probability of a full- scale investigation until the transfer of power.
Woodburn did express the GISC’s readiness to investigate any claims of fraudulent behavior, but a spokesperson for the Financial Services Authority said the absence of any “retrospective regulatory powers” would inhibit the regulatory agency from acting upon any GISC investigation.
In the United States, consumer advocacy groups are pushing hard to see contingent commissions eliminated, or at least more thoroughly regulated. Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights (FTCR) agrees with Spitzer’s analysis of a more pervasive corruption of the broker-insurer relationship.
To Heller, the collusion between brokers and insurers is similar to a “doctor prescribing a drug because he gets kickbacks from the drug company.”
The answer, Heller believes, is a mixture of unequivocal disclosure of business ties, strengthened regulatory capacity of each state insurance commissioner, and educating consumers — a view shared by Hartwig and Woodward.
Ultimately, Heller said, “investigative actions will tell us if we need better policing or better laws.”