States Ask for U.S. Help in Insurer Probes

State regulators on Tuesday urged the federal government to take a stronger hand in investigating and ending cartel-like behavior in the insurance industry, but to do so without reducing the states’ traditional authority over insurance.

New York Atty. Gen. Eliot Spitzer said his continuing probe of suspected improper practices by commercial insurance brokers has convinced him that federal help was needed to examine the industry’s offshore operations and interlocking relationships and to hold wrongdoers accountable.

“There’s a Pandora’s box that should be opened,” Spitzer told a Senate Governmental Affairs subcommittee.

Spitzer and Connecticut Atty. Gen. Richard Blumenthal said Congress should consider repealing the industry’s antitrust exemption under the 1945 McCarran-Ferguson Act, which also gave the states responsibility for insurance regulation.

But Blumenthal warned that the states “would fiercely fight any preemption” of their authority. In fact, he said, state laws need to be strengthened and enforcement stepped up.

California Insurance Commissioner John Garamendi decried what he called “flat-out greed” exhibited by some insurance industry players. He said he would bring a number of lawsuits in California in coordination with Spitzer’s office.

Tuesday’s hearing was called in response to a scandal that exploded with Spitzer’s Oct. 14 lawsuit against giant insurance broker Marsh & McLennan Cos. Spitzer accused Marsh of rigging bids for commercial insurance contracts and taking kickbacks in exchange for steering business to favored insurers. Marsh’s chairman and several other executives have resigned and several people have pleaded guilty to criminal charges as a result of the probe.

Spitzer said some insurers have sought to evade state regulation by locating operations outside the U.S. in such places as Bermuda, a development that warranted federal scrutiny. He said federal antitrust investigators should examine the interlocking relationships among brokers, primary insurers and reinsurance firms to see whether price fixing or other forms of collusion existed.

Sen. Peter Fitzgerald (R-Ill.), chairman of the subcommittee on financial management, said it wasn’t clear that the antitrust exemption applied to brokers or only to insurance underwriters, but he said there was a federal role to be played in fighting “the mischief of undue market concentration.” He noted that Marsh and its biggest rival, Aon Corp., together controlled 70% of the market for large corporate insurance buyers.

Much of Spitzer’s complaint against Marsh focused on “contingent commissions,” fees that insurers pay brokers based on the volume or profitability of business they bring. Spitzer said the commissions amounted to kickbacks and posed an obvious conflict of interest for brokers, whose loyalty is supposed to be to the customer.

Garamendi noted that he had proposed changes to the California insurance code to address such concerns. His proposals would prohibit brokers from putting their own financial interest ahead of a client’s and would require disclosure of all compensation a broker receives in connection with placing an insurance policy.

In response to the scandal, Marsh, Aon and other brokers already have announced that they would no longer accept contingent commissions.

However, representatives of broker trade groups testified Tuesday that such fees, which they agreed should be disclosed to insurance customers, can be beneficial. Albert R. Counselman, past chairman of the Council of Insurance Agents and Brokers, said contingent commis- sions could help lower insurance rates if they gave brokers an incentive to find buyers who would cooperate in controlling risks.

Alex Soto, president of the Independent Insurance Agents and Brokers of America, said Marsh and Aon’s dominance of the market for big commercial customers was unusual in an industry rife with competition. Soto, who runs an independent insurance agency in Miami, said he had so many rivals that he couldn’t stay in business if he didn’t find his customers the best coverage at the best price.

J. Robert Hunter, insurance director at the Consumer Federation of America, countered that insurance is so complex that most consumers aren’t able to shop for the best price and thus don’t know when they have overpaid.

Spitzer testified at the hearing that he was expecting more guilty pleas, and in fact, his office announced later Tuesday that two senior underwriters at Zurich American Insurance Co. had pleaded guilty to criminal charges in connection with a bid-rigging scheme.

The underwriters admitted that at the behest of a broker, they submitted bids that were designed to lose so that the broker could steer the business to a predetermined “winner,” a Spitzer aide said.