Spitzer Probes Rock Industry To Its Core

Top brokers offer restitution, give up fees, disclose more and offer apologies

While there are no sure things in life, you could pretty much bet the farm that probes by New York Attorney General Eliot Spitzer into insurer and broker misdeeds–last year’s number-one story in NU’s top 10–would continue to rock the industry in 2005.

In late January, the crusading attorney general announced a settlement of bid-rigging and contingency fee abuse allegations with the new head of Marsh, Michael Cherkasky–who used to be Mr. Spitzer’s boss when both were at the New York District Attorney’s Office.

The deal–in which Marsh did not admit guilt–called on the world’s biggest brokerage to pay $850 million into a policyholder restitution fund. More importantly, Marsh said it would make substantial changes in its standard operating procedure–no longer accepting contingency fees, offering fuller disclosure to clients and issuing a letter of apology.

(Nine months later, about half of the 140,000 or so eligible policyholders opted into the Marsh fund, with those on board representing 90 percent of the broker’s biggest clients.)

The next two biggest brokerages settled shortly after Marsh. In March, Aon agreed to pay $190 million, with then-CEO Pat Ryan apologizing for deals that “created conflicts of interest.” The second-biggest broker also gave up the contingency fees at the heart of the controversy, while agreeing to disclose more information to clients.

(In April, Mr. Ryan was replaced after four decades at the helm by Gregory Case, formerly of McKinsey & Company, in a move unrelated to the probes–unlike at rival Marsh & McLennan, which saw its CEO, Jeff Greenberg, forced out last year after pressure from Mr. Spitzer.)

Also in April, Willis Group agreed to pay $51 million to clear up any questions. The third-biggest brokerage adopted a new business model “designed to avoid conflicts of interest” and offer greater transparency.

Meanwhile, in May, Mr. Spitzer and New York Insurance Superintendent Howard Mills filed a civil suit against AIG and some leading officers–including then-chairman and CEO Maurice Greenberg–over allegations of financial statement manipulation using finite reinsurance deals.

The controversy over the probes had already forced Mr. Greenberg from his posts, although Mr. Spitzer recently said the industry titan will not face criminal charges–at least not from his office. Negotiations to settle the civil action against AIG was proceeding as this story went to press. (See page 22 for more on this story.)

Mr. Spitzer indicted eight former Marsh officials in September on charges of bid-rigging and fraud. Seventeen executives at five companies had already pleaded guilty by that time.

In January, Mr. Spitzer–who will run for governor of New York next year, which would give him the power to appoint the state’s insurance commissioner–said his office was investigating personal lines sales, but nothing has come of that yet. In August, he attacked the industry’s federal antitrust exemption, calling for its repeal to open up more avenues of federal oversight.

The industry’s conflict with the attorney general took an ugly turn in May, when Ernst Csiszar–who became president of the Property Casualty Insurers Association of America last year after resigning as president of the National Association of Insurance Commissioners, one of NU’s top 10 stories of 2004–accused Mr. Spitzer of “corporate terrorism,” charging his methods “smack of McCarthyism.” Mr. Spitzer had no comment on the remarks.

Anyone want to bet against Mr. Spitzer making NU’s top 10 again in 2006?

Caption for shot with Cherkasky and Spitzer:

After forcing CEO Jeff Greenberg from office, Mr. Spitzer was able to settle with MMC’s new top dog, Michael Cherkasky, who used to be his boss.

Caption for McCarthy shot:

PCI President Ernst Csiszar said Mr. Spitzer’s methods amounted to “corporate terrorism” and were reminiscent of “McCarthyism.”