Nightmares Not Over
The announcement by Marsh & McLennan Companies that it has cut a deal with New York's crusading attorney general, Eliot Spitzer, resolving a civil suit alleging bid-rigging and contingency fee abuse, is undoubtedly a relief for the beleaguered firm's top managers, employees and stockholders.
However, I think Marsh got off relatively easy with Mr. Spitzer. The really hard work is still ahead for the world's biggest insurance broker, and the full repercussions have yet to be felt by the rest of the industry.
I know it's hard to imagine that paying out $850 million would be "easy" for any firm to swallow. But MMC is huge this essentially represents just one year's worth of contingency fee income and compensation to clients will be spread over four years. Marsh also got off "easy" because the firm did not have to admit to any wrongdoing and will not face any criminal charges.
That's the good news. The bad news is that Marsh as well as the rest of the industry tainted either directly or indirectly by the market manipulations exposed by Mr. Spitzer and his "Untouchables" crew still faces major challenges in recovering from this fiasco, such as:
- Replacing the hundreds of millions in income lost after Marsh and its mega-broker competitors abandoned controversial but lucrative market placement agreements in the name of reform.
- Fighting off non-Spitzer attacks. Marsh is not exactly off the hook, with other state probes and private class-action lawsuits still very much alive (although accepting restitution would force buyers to drop any personal litigation).
- Surviving the backlash, as Marsh strives to restore its reputation as a fair broker and keep other firms from stealing its best clients.
- Implementing tough disclosure policies to satisfy new internal standards and clear hurdles set by regulators across the country.
In addition, Mr. Spitzer is still on the warpath. Just because he has Marsh in his trophy case does not mean he is done with the industry. Indeed, MMC said the firm "will continue to cooperate in the attorney general's ongoing investigation of the insurance industry and individuals."
Mr. Spitzer, who is running for governor, might stay in the spotlight by twisting the arms of other major brokers, and he has already warned that even personal lines agents are not in the clear. So this nightmare is far from over.
The industry is also likely to start feeling some heat from buyers. After reacting timidly at first to the Spitzer probe's revelations, risk management groups are taking steps to help members protect themselves.
This week's issue, for example, features a story on page 21 about a seminar held by the Public Risk Management Association, citing red flags buyers should look for to keep brokers honest. On page 22, Nancy Chambers, president of the Risk and Insurance Management Society, notes that among other actions, RIMS will offer courses during its conference this April in Philadelphia on "Broker Contingency FeesWhat You Should Know."
The result, hopefully, will be a better educated and far more diligent buyer community. 'Fool me once, shame on you, but fool me twice, shame on me,' will be the guiding principle going forward.
Risk managers are on the spot to prove to skeptical CFOs they are holding brokers accountable for delivering the best coverage at the best price. The burden of proof will be on agents and brokers to show they are not hiding anything from clients, or cheating them by steering business to the carrier paying the biggest bounty.
Welcome to the brave, new world of insurance!
Sam Friedman
Editor-In-Chief
Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 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.
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