Chubb Corp. and the attorneys general of New York, Connecticut and Illinois announced last month that the company would pay $17 million to resolve an investigation of alleged customer steering, improper finite reinsurance transactions and other illegal industry practices.
Under the settlement, Chubb will pay $15 million to its excess-casualty policyholders who bought policies through Marsh & McLennan Companies, as well as $2 million in costs, according to a release issued by the office of then-New York Attorney General Eliot Spitzer, who begins his first term as governor this week.
The Warren, N.J.-based insurer also agreed to adopt business reforms, including ending payment of contingent commissions for its insurance products as of Jan. 1, 2007.
"With this settlement, Chubb has stepped up and taken the lead in adopting reforms designed to improve transparency concerning compensation of brokers and agents," said David Brown, investment protection bureau chief with the New York AG's office.
"Contingent commissions, and the conflict of interest such commissions create, need not be a part of the insurance business," he added. "We appreciate Chubb's leadership in finding better ways to compensate agents and brokers."
Mr. Spitzer's office said their investigation found Chubb had made undisclosed payments to insurance brokers and agents that encouraged them to steer business to the carrier.
Included in the settlement documents are descriptions of loans Chubb made to brokers and agents, where the loan interest and the principal would be forgiven if the broker or agent delivered an agreed-upon increase in business to Chubb. The company said it has ended these practices.
According to the AG's office, these arrangements "created a conflict of interest for brokers and agents who owed their clients fiduciary duties of care, full disclosure and loyalty."
The AG's office noted that the Chubb settlement is the latest resulting from its probe of the insurance industry, which began in the fall of 2004.
To date, the investigation has resulted in guilty pleas by 20 insurance company executives and officers, as well as the recovery of approximately $3 billion for commercial consumers and workers' compensation plans, the AG's office noted.
Chubb said it cooperated fully in the investigations–which were augmented by its own independent inquiry.
Although Mr. Spitzer's office said it found evidence of steering, Chubb said it was "pleased' the investigation did not conclude the company participated in a pattern or practice of illegal bid-rigging in the excess-casualty insurance market.
Chubb added that the payments it would make were not a "fine or penalty." Chubb said it was making the payment because it acknowledges the company "appears to have unknowingly benefited from the bid-rigging activities of others in the excess-casualty market, which may have provided Chubb with an advantage in retaining certain renewal business."
The company said it would replace contingent commissions with a supplemental compensation program "that will reward Chubb's agents and brokers for superior performance in a manner consistent with evolving marketplace standards and reforms urged by the attorneys general."
John D. Finnegan, chairman and chief executive officer of Chubb, said "the attorneys general are to be commended for raising important questions regarding a number of insurance industry practices."
Mr. Finnegan noted the company has voluntarily "undertaken substantial business reforms over the past two years, culminating with today's announcement of a new producer compensation model that recognizes the important services provided by independent agents and brokers."
Chubb said the investigation had done a service by identifying and "detailing a corrupt scheme of collusive bid-rigging in excess-casualty insurance placed by one national broker," and had prompted a "healthy re-examination of some of the industry's long-standing compensation practices, which created potential conflicts of interest, if not disclosed or properly managed."
The insurer said a summary of its independent inquiry, conducted by Stier Anderson LLC, is available online at www.chubb.com.
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