Spitzer To Congress: Watch Offshore Insurers

Mr. Spitzer said his investigation had determined that areas of particular concern that the federal government should focus on are offshore insurers?many created by two broker targets of his investigation, Marsh and Aon?the exemption of insurers from antitrust laws, and disclosure of premiums.

Mr. Spitzer has named Marsh in a suit against its parent Marsh & McLennan Companies which charges the broker combined with big insurers to rig bids and inflate prices and took payoffs disguised as fees and commissions to steer unwitting customers to carriers.

Brokers, he said, should be "called to account for their steering activities." He asked, "How has the culture of favoritism and payoffs distorted their basic fiduciary duty to serve the customer?" More importantly, he added, "how can we take steps to reform this culture by requiring appropriate disclosure to ensure the markets are operating properly?"

In his testimony, Mr. Spitzer supported state regulation of insurance, but added, "Nonetheless, I do believe there is a role for the federal government, especially in the areas of offshore capitalization and investment by insurance companies."

At a minimum, Mr. Spitzer said, "federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals."

Mr. Spitzer was on the first of two panels that testified on "Insurance Brokerage Practices, Including Potential Conflicts of Interest and the Adequacy of the Current Regulatory Framework" before a subcommittee of the Senate Governmental Affairs panel.

The oversight hearing was convened by the Committee's Subcommittee on Financial Management, the Budget and International Security. The chairman of the subcommittee is Sen. Peter Fitzgerald, R-Ill.

Elaborating on the offshore havens, Mr. Spitzer contended that insurers have sought to evade state regulation by locating their operations in Bermuda and other offshore havens. "This makes the states' job of supervising these companies far more difficult and creates numerous opportunities for secrecy and insider dealings," Mr. Spitzer said.

He noted that since 2001, probably referring to since 9/11/2001, "there has been a reported huge transfer of insurance capital and underwriting activity to Bermuda, and more recently the Cayman Islands."

Mr. Spitzer noted that many of these off-shore entities are either owned in part or operated by the insurance brokers themselves, saying that Marsh, the main target of his probe, "helped to create the Bermuda-based Ace Ltd., XL Capital Ltd., Mid Ocean Re and Axis, while Aon has sponsored LaSalle Re and Endurance." Mr. Spitzer testified, "This sets the stage for conflicts of interest, steering and self-dealing in insurance and reinsurance markets that we are just beginning to understand.

"And this is not to mention the numerous and profound tax implications of permitting U.S. insurers to accrue investment earnings in favorable offshore havens."