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Marsh Bars Special Commissions From Insurers

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Times Staff Writer

Beleaguered insurance broker Marsh & McLennan Cos. unveiled a reform package backed by New York Atty. Gen. Eliot Spitzer on Tuesday that could be a template for an industry under fire.

Marsh said it would end questionable special fees it had been receiving from insurers, give its clients more information about all fees and commissions and create a new oversight unit to keep an eye on its insurance-brokerage operations.

Michael G. Cherkasky, Marsh’s new chief executive, said in a telephone interview that the changes, effective Jan. 1, were meant to satisfy not just Spitzer but other regulators around the country, “including a notable regulator in California.”

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California Insurance Commissioner John Garamendi last week proposed state regulations requiring brokers to disclose all the fees they receive from insurers and to provide customers with the “best available” coverage, under penalty of fines, loss of license or both.

Brokers are hired by clients, such as large companies, to negotiate rates with insurance companies. Spitzer and Garamendi contend that many clients are being improperly steered to insurers that make payments to the brokerage companies, and say industry-wide investigations are continuing.

Investors greeted the Marsh reforms -- and Spitzer’s announcement late Monday that he wouldn’t charge the company criminally -- by bidding up shares of Marsh and other insurers, leading the way to a broad stock-market gain. Marsh shares closed at $28.87 on Tuesday on the New York Stock Exchange, up $2.45.

However, analysts said the reforms and the turmoil caused by Spitzer’s ongoing investigation would hurt the industry’s bottom line, at least in the near term. Indeed, bond-rating agencies that recently had downgraded Marsh’s debt said they were considering further downgrades.

Under the package unveiled Tuesday, Marsh said it would:

* Permanently ban the practice of accepting “contingent commissions” or special fees from insurers based on the volume or profitability of the business that Marsh brought them. The company initially suspended the practice Oct. 15, a day after Spitzer announced his lawsuit targeting the fees as an improper conflict of interest.

* Give clients a full accounting of all commissions and fees it receives and require insurers to make similar disclosures on all policy statements.

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* Require “consistent commission rates for competing quotes” so that there would be no incentive for a broker to choose the insurer that offered Marsh the highest fee.

* Tape phone calls and preserve e-mails of employees at its centralized brokerage facility to create an “audit trail” for regulators or investigators in case of future improprieties.

* Create a compliance unit to monitor its insurance-brokerage operations worldwide to enforce the reforms. The new unit would report to Cherkasky and to the audit committee of the board of directors.

Because of Marsh’s position as the largest U.S. brokerage, its action “will force other brokers that have not already renounced contingent commissions to follow suit,” Fitch Ratings, the New York-based bond-rating agency, said in a statement Tuesday. “This change could have a significant adverse effect on insurance broker revenue growth and operating profitability going forward.”

Cherkasky, 54, who once served as Spitzer’s boss in the Manhattan district attorney’s office, replaced Chairman and CEO Jeffrey W. Greenberg, who resigned Monday under pressure from Spitzer.

On Tuesday, Cherkasky said he had “every intention” to continue in his role as court-appointed monitor of reforms for the Los Angeles Police Department, subject to the court’s approval.

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Despite endorsing the reforms, Cherkasky refused to acknowledge that Marsh customers were overcharged or otherwise harmed by contingent-fee arrangements, which were a widespread industry practice. Marsh already has been hit with private lawsuits and probably will face others.

“We argue that our clients got the best deal of anyone in the industry,” he said. But faced with Spitzer’s lawsuit contending that the fees were improper, the company’s reaction was, “OK, we’re not going to hit our heads against the wall,” Cherkasky added.

Adding to the pressure to accommodate Spitzer, rather than fight him, was that Marsh’s stock lost half its value in the week after the suit was filed, shedding $12 billion in market capitalization. Even after Tuesday’s rally, the shares remained 37% below their pre-lawsuit level.

The most serious of Spitzer’s charges is that Marsh engaged in bid rigging, enlisting insurers to submit phony high bids to make its clients think the policy they bought was the lowest priced.

Marsh hopes to complete its own investigation within 30 days.

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