Congress Probes Insurance Industry ScandalNov 16, 2004 | AP
Congress is examining the scandal rippling through the insurance industry, with its largest brokerage accused of bid rigging and price fixing amid high-level resignations, employee layoffs and guilty pleas by some executives.
New York Attorney General Eliot Spitzer launched an investigation on Oct. 14, the latest in a series of high-profile probes he conducted of key financial industries, including Wall Street investment firms and mutual fund companies.
Spitzer, in a civil lawsuit, maintains that Marsh & McLennan Companies Inc. took payoffs from insurance companies, resulting in businesses being forced to pay more than necessary for property and casualty policies.
He has accused the nation's biggest insurance brokerage of bid rigging, price fixing and heavy use of incentive fees, sometimes called marketing service agreements or placement service agreements. They are fees paid to brokers over and above regular commissions by insurance companies in exchange for getting more business.
Some of the largest insurers, including American International Group Inc., ACE Insurance Co. of North America, The Hartford and Munich American Risk Partners are named in Spitzer's suit. Others are said to be under investigation. Two executives of AIG and an official of ACE have pleaded guilty to participating in illegal conduct.
"The damages are vast, the corruption is remarkable," Spitzer said at a news conference last month.
A number of insurance companies, including Marsh & McLennan, have announced changes in business practices and commissions since the inquiry began.
Spitzer was testifying at a hearing Tuesday by the Senate Governmental Affairs subcommittee. Also appearing before the panel was Connecticut Attorney General Richard Blumenthal, who recently expanded his investigation into allegations that insurance bids were rigged by examining whether unlawful practices have affected municipalities in the state.
Blumenthal is insisting that state insurance laws, including Connecticut's, should be "reinvigorated and reinvented" to combat fraud, illegal steering and bid-rigging, according to a copy of his prepared testimony released Monday.
New York-based Marsh & McLennan, whose share value has dropped nearly 42 percent since Spitzer announced his investigation, ousted two top executives of Marsh Inc., its risk and insurance services unit. The parent company's senior vice president and general counsel also stepped down. The company also said it will lay off 3,000 employees, or about 5 percent of its work force, because of fallout from the probe.
In another suit, Spitzer has accused Universal Life Resources, a California-based company that brokers life, accident and disability policies for leading U.S. companies, of pocketing millions of dollars a year in hidden payments from insurers and from charges on clients' unsuspecting workers. He contends that the company's activities raised the cost of insurance for workers who contributed to coverage they secured through employers.
ULR has brokered coverage since 1999 for 4 million employees of companies including Intel Corp., Eastman Kodak Co., Colgate-Palmolive Co., Marriott International Inc., UPS Inc., Viacom Inc., Brinker International Inc. and Dell Inc., according to Spitzer's office.
The second-largest U.S. insurance broker, Aon Inc., is being investigated by Spitzer's office for allegedly "tying" coverage to limit competition, according to a source close to the investigation. Tying is the practice in which brokers require insurance companies to hire them to handle their reinsurance needs in exchange for steering more customers their way.