Marsh to Make Payments More Transparent

Marsh & McLennan's new chief executive said he expects other insurance brokers to follow its lead. (Daniel Acker -- Bloomberg News)

NEW YORK, Oct. 26 -- One day after Marsh & McLennan Cos. ousted its chief executive, the nation's largest insurance broker said it will tell its clients exactly how much they are paying for its services and renounce back-door payments from carriers.

The move, prompted by an investigation by New York Attorney General Eliot L. Spitzer, could help spark massive changes in the notoriously opaque insurance market. The key questions now become how far the scandal will spread, whether it will touch ordinary consumers, and who will benefit if it inspires new regulations or changing business practices.

Two weeks ago, Spitzer launched a national reevaluation of the way insurance brokers are paid when he charged Marsh with civil fraud, alleging that its brokers took kickbacks and rigged bids for corporate liability insurance.

Now he and regulators in other states are investigating whether improper steering and inflated bids also distorted the markets for group health, life and disability insurance, as well as personal property and automobile insurance. California regulators have already proposed new disclosure requirements, and other states say they won't be far behind.

"The middlemen and the insurance companies are going to be swept by a wave of transparency that is going to be dramatic in its scope," said University of North Carolina accounting professor Robert M. Bushman.

All of the insurance markets are affected, to different degrees, by a long-standing industry practice that Spitzer alleges causes a fundamental conflict of interest for the middlemen who sell insurance to large segments of the market.

Companies and individuals who buy insurance through brokers, independent agents or consultants ask them to solicit and evaluate bids from several insurance carriers. The broker or agent is then given a percentage of the premium paid by the client, while a consultant is often paid a specific fee. But there is also a decades-old industry practice of insurance carriers rewarding the middlemen with additional "contingency commissions" for sending them high-volume or high-quality business.

Spitzer alleges that Marsh brokers were soliciting false bids and steering particular clients to particular carriers in exchange for particularly large contingent commissions, known as market services agreements.

Clients in many states are often completely ignorant of these arrangements and may not even know how much of their premium goes to their broker, consumer advocates said.

"We've been calling for disclosure for 20 years. . . . The brokers have fought it to the death," said J. Robert Hunter, who follows the insurance industry for the Consumer Federation of America. "I think now we're going to get somewhere."