Insurance Broker Scandal Alleged
Launching a new assault on the financial services industry, New York Atty. Gen. Eliot Spitzer filed a lawsuit Thursday claiming that the world’s largest insurance broker, Marsh & McLennan Cos., conspired to cheat business clients out of hundreds of millions of dollars.
The suit said that Marsh, which was hired to find the best deals for its mostly corporate customers, instead steered clients to major insurance companies that made backdoor payments to the broker.
As part of the scheme, Marsh had insurers fabricate bids to deceive clients into thinking they were getting the lowest-priced policies, Spitzer alleged.
The practices, he said, hurt businesses of all sizes, as well as local governments, school districts and some individuals.
“It is disappointing for what it once again reveals about the craven disregard for ethics and the law by some of our largest corporations,” the attorney general said at a Manhattan news conference.
In connection with the probe, two executives of insurance behemoth American International Group Inc. pleaded guilty in New York state court Thursday to one felony count of scheming to defraud. Both are cooperating in the investigation.
Marsh and other companies named in the probe said they were reviewing the allegations. Marsh, which boasts about 60,000 employees and annual revenue of more than $11 billion, said it was “committed to serving its clients to the highest professional and ethical standards.”
Critics paint Spitzer as a political grandstander, courting media attention to snare headlines as he prepares to run for governor of New York. But others say he is a much-needed champion of the little guy and note that his earlier investigations of Wall Street brokerages and the mutual fund industry have led to huge settlements and far-reaching reforms.
News of the latest investigation sent shock waves across Wall Street. Shares in Marsh & McLennan plunged 25% to $34.85, and AIG shares tumbled 10% to $60, both on the New York Stock Exchange. Other insurance companies also saw their stock prices sink.
Though charges were filed only against Marsh, Spitzer said other insurance companies remained under investigation.
Improper practices appear to be rife throughout the industry, he said, and the inquiry is expanding into lines of insurance that are sold to individuals.
“They have participated in a massive bid-rigging scheme that has cost the American consumer -- in auto insurance, life insurance, health insurance, every insurance market -- untold sums of money,” Spitzer said. “And they have, meanwhile, been blaming everybody else for the rise in insurance premiums.”
Spitzer said he was not ready to offer evidence to back up this claim of widespread fraud.
David Brown, who heads Spitzer’s investor-protection unit, said in an interview later that investigators were examining whether independent insurance agents who sell policies to individuals receive undisclosed payments from insurers for directing business to them.
Though the probe is in its early stages, Brown said, “there are some indications” that such payments are made.
For their part, industry officials say it’s no secret that brokers receive payments from insurance companies, but they maintain that these “contingent commissions” are legitimate compensation for the services they provide.
“These commissions are ubiquitous in the industry and are known to all parties -- the brokers, the insurers and the buyers,” said Robert Hartwig, chief economist with the Insurance Information Institute, an industry trade group. “The element that is new is that there are some criminal acts alleged in how the bids were handled. That was surprising to all parties, and, I think, unrepresentative of how business is done in this industry.”
The complaint filed against Marsh alleged that the firm “solicited -- and obtained -- fictitious high quotes from insurance companies in order to deceive its clients into believing that true competition had taken place.”
According to the complaint, the manipulation corrupted “the price of insurance for every policyholder” and victimized shareholders “who have never been told that hundreds of millions of dollars of Marsh’s profits derive from illegal activities.”
Although Spitzer’s suit focused on Marsh’s alleged deception, he raised larger questions about contingent commissions. It seems as if “the industry’s fundamental business model needs major corrective action and reform,” Spitzer said, adding that the use of contingent commissions “distorts and corrupts the insurance marketplace.”
In 2003 alone, the complaint said, such commissions are believed to have added about $800 million to Marsh’s earnings, which totaled $1.5 billion.
Several major insurance companies -- AIG, Hartford Financial Services Group, ACE Ltd. and Munich American Risk Partners -- are named in the complaint as participating in the scheme.
There are family ties among three of the companies. Marsh is headed by Jeffrey Greenberg, 52. His father, 78-year-old Maurice “Hank” Greenberg, is the chairman and chief executive of AIG. Another Greenberg son, 49-year-old Evan Greenberg, heads ACE.
None of the Greenbergs was named in the suit.
Marsh & McLennan, ACE and Hartford Financial all said they were cooperating with Spitzer’s probe. Hartford Financial “does not condone bid rigging or any other illegal activity,” said company spokeswoman Cynthia Michener. “Our corporate policy is very clear.”
AIG and Munich American did not return phone calls seeking comment.
The complaint cites internal e-mails and other documents in which executives appear to be discussing actions to maximize revenue for Marsh and its partners.
In one e-mail, a senior Marsh executive sent a message to colleagues saying, “We need to place our business in 2004 with those [insurance companies] that have superior financials, broad coverage and pay us the most.”
In another instance, an executive at Munich American asked his regional managers for their opinions about Marsh’s practices.
“The idea of ‘throwing the quote’ by quoting artificially high numbers in some predetermined arrangement for us to lose is repugnant to me, not so much because I hate to lose, but because it is basically dishonest,” one manager responded, according to the complaint.
Fortune Brands Inc., a Chicago-area consumer products company that was an alleged victim in the scheme, said it was looking into the allegations as a result of the complaint.
“Fortune Brands works hard to keep insurance costs, and all expenses as low as possible, so we are obviously concerned about what we have learned today,” said spokesman Clarkson Hine.
California Insurance Commissioner John Garamendi said he also was concerned about the use of contingent commissions.
He said he planned to propose regulations within the next two weeks that would require full disclosure of the financial relationship between insurance companies and brokers.
“I have a very long record as a critic of the insurance industry and an even longer record of forcing the industry to treat consumers in a legal, ethical and proper manner,” Garamendi said. “Many insurance companies and brokers are saying the right things. We will see to it that they do the right things.”
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Excerpts from the Spitzer complaint
The following comments, from e-mails and other documents, were included in the complaint filed Thursday by New York Atty. Gen. Eliot Spitzer.
“The idea of ‘throwing the quote’ by quoting artificially high numbers in some predetermined arrangement for us to lose is repugnant to me ... because it is basically dishonest.” -- An insurance company manager, said to be resisting efforts to generate bogus bids
“I want to present a CNA program that is reasonably competitive but will not be a winner.” -- A Marsh & McLennan executive allegedly seeking a CNA insurance bid that would be too high to be accepted
“We need to place our business in 2004 with those [insurance companies] that ... pay us the most.” -- A Marsh executive
Los Angeles Times
