Hurricane Spitzer Hammers Brokers, Carriers

Hurricane Spitzer Hammers Brokers, Carriers

Allegations of bid-rigging, fee abuse undermine p-c industry, spurs reforms

Natural catastrophes can be devastating, but insurers generally pay off their claims and move on. However, one man-made disaster has shaken the property-casualty industry to its core, undermined its credibility and prompted calls for fundamental changes in the way brokers and insurers do business.

When New York Attorney General Eliot Spitzer announced that he was examining the p-c insurance industry last spring, the top dogs in the business were skeptical. Most felt the politically-ambitious attorney general was on a fishing expedition that would not result in any substantial findings of wrongdoing. Boy, were they wrong.

Following on the heels of four major hurricanes hitting the U.S. mainland in late summer, Mr. Spitzer rocked the industry by charging that brokers at industry leader Marsh, in cahoots with several major carriers, had committed fraud in an elaborate scheme to rig bids and thus keep premiums artificially high, while triggering lucrative contingency fee payments along the way.

The evidence, while limited thus far, is damning, including revealing e-mails in which carriers were told what to charge (with some instructed to submit intentionally higher bids to give the appearance of real competition), while others were told in no uncertain terms that bonus fees were expected for delivering business to a particular carrier. A few executives pled guilty right off the battwo with AIG and one with ACEas part of a plea bargain deal that includes their cooperation in the investigation.

The fallout was swift, with the biggest casualty being the resignation of Marsh & McLennan Companies Chairman and CEO Jeffrey Greenbergwho had already crossed swords with Mr. Spitzer during the attorney generals probe of abuses in the mutual fund industry. Other key officials at Marsh and elsewhere around the industry have left their posts, by choice or by being told, “Youre fired!”

In addition, the top brokerages have sworn off contingent compensation, which at Marsh alone topped $800 million a year. It is unclear how, or even if, they will make up this loss of revenue. However, MMC took immediate steps to compensate for the financial setback by announcing the layoff of some 3,000 people.

At press time, Marsh was reportedly continuing negotiations with Mr. Spitzer, hoping to secure a settlement to civil charges by years end or soon thereafter. It cant hurt that the person on the other side of the bargaining table is a formerly close associate of the attorney general. Michael Cherkasky, who replaced Mr. Greenberg, was actually Mr. Spitzers boss when the new MMC leader was chief of the investigation division for Manhattan District Attorney Robert Morgenthau.

Industry leaders insist the problems exposed by Mr. Spitzer and others investigating the industry do not represent standard operating procedure. They maintain that only a few bad actors were involved and are battling to keep regulators from overreacting in response.

However, the National Association of Insurance Commissioners appears determined to force substantially stiffer disclosure requirements onto brokers, at least in part because they feel the heat from Washington, where federal lawmakers had already been making noise all year about taking a bigger hand in the industrys oversight.

I suspect we still havent heard the last from Mr. Spitzer, who has already announced his candidacy for governor of New York in 2006. For one, more evidence is being examined, and more subpoenas issuedmost recently probing professional liability insurance sales for law firms. I have a feeling were going to see another wave of charges emerge early on in the new year.

In any case, the investigations have left the industry with an ugly black eye that is going to take quite some time to heal. I have no doubt that this story will remain high on the “NU Top 10″ list next year as the various probes and reform efforts play out in 2005.

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.