NEW YORK, Oct. 14 -- The nation's largest insurance broker, Marsh & McLennan Cos., took kickbacks and colluded with leading insurance firms to rig bids, artificially jacking up the premiums companies pay for liability insurance, New York Attorney General Eliot L. Spitzer alleged Thursday.
The civil fraud complaint also names American International Group Inc., Hartford Financial Services Group Inc., ACE Ltd. and a division of Munich Re as active participants in the scheme but includes no charges against them. Two senior AIG executives pleaded guilty to criminal fraud, acknowledging that they schemed with Marsh and submitted uncompetitive bids to help the broker steer clients to other companies.
Spitzer describes the investigation as "disappointing for what it reveals."
(Gregory Bull -- AP)
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Thursday's actions are the first shots in what Spitzer called an investigation of widespread corruption in the insurance industry. While the complaint focuses on the sale of casualty insurance to businesses and government, Spitzer said his office has evidence that kickbacks and rigged bidding raised costs to buyers of auto, life and health insurance. "This investigation is broad, deep and disappointing for what it reveals," Spitzer said. More than a dozen companies are under investigation, and Spitzer promised that his office plans to bring more civil and criminal charges. "Trust me. This is day one," Spitzer said.
Spitzer usually files only civil charges against companies in such probes, reserving criminal charges for individuals, because criminal charges might lead to a corporate shutdown that would hurt workers and investors. New York-based Marsh & McLennan's stock price fell $11.28, or nearly 25 percent, to close at $34.85 Thursday on the New York Stock Exchange, and the prices of the three U.S. insurance companies named in the complaint fell between 6 and 11 percent each, helping drag down the broader market indexes. AIG, a component of the Dow Jones industrial average, accounted for almost half of its 107.88 point decline to 9894.45.
Several of the key executives in the implicated companies are closely related. AIG Chairman Maurice R. Greenberg is the father of Marsh & McLennan chief executive Jeffrey W. Greenberg, and another son, Evan G. Greenberg, is president and chief executive of ACE.
This investigation marks the third time in as many years that the New York regulator, who is expected to run for governor in 2006, has uncovered serious conflicts of interest in the financial services industry. Spitzer revealed in 2002 that stock analysts were pumping out biased research to win investment banking business for their firms. Last year, he blew the whistle on mutual fund firms for improperly letting favored customers engage in predatory short-term trading. In this latest probe, like the other two, Spitzer is using company documents and e-mails to allege that practices the industry takes for granted can lead to corruption that harms clients.
Companies and individuals hire insurance brokers -- and pay them commissions -- to solicit quotes and help find the best policies. It has become common practice in recent years for brokers to receive additional payments from insurance companies, based on the volume and quality of the policies they sell. But brokers are not supposed to let the insurance company payments interfere with their legal duty to find clients the best coverage at the best price.
"The gravity of the accusations takes the industry by surprise," said Robert Hartwig, chief economist for the Insurance Information Institute, a trade association. "Commissions and fees are commonplace in the industry and are well known to all parties."
Spitzer said Marsh collected $800 million last year in payments from insurance companies. That money not only affected its brokers' recommendations to clients but also led at least some employees to cross the line into illegal collusion, the complaint said.
"There is overwhelming evidence that brokers steered business based on the amount paid [by the insurance companies] not on what was good for the client," Spitzer said.
