Preliminary investigations in New York, Connecticut and California suggest that insurance companies frequently pay insurance brokers and agents undisclosed compensation -- including cash, loans, stock and exotic trips -- for steering health, automobile and other retail insurance business to them, state officials told Congress yesterday.
The practice may have cost insurance customers hundreds of millions of dollars in overpayments in recent years and caused them to purchase inappropriate coverage, Connecticut Attorney General Richard Blumenthal said after testifying to a Senate subcommittee.
"There is credible evidence of illegal activity," Blumenthal said.
The Senate Governmental Affairs Committee's subcommittee on financial management, the budget and international security is studying allegations of widespread conflicts of interest, fraud and kickbacks in the insurance brokerage business that surfaced last month when New York Attorney General Eliot L. Spitzer sued Marsh & McLennan Cos., the world's largest insurance broker, for allegedly rigging bids.
Yesterday, in addition to testifying, Spitzer announced that two executives at Zurich Financial Services AG, the third-biggest U.S. commercial insurer, pleaded guilty to criminal charges related to their dealings with a Marsh subsidiary. In their guilty pleas, according to Spitzer's office, the two admitted to submitting phony bids to a broker to allow another company to win the supposed competition for the business.
Last week Spitzer filed a civil complaint against Universal Life Resources Inc., a San Diego firm that helps Fortune 1000 companies -- including Bethesda-based Marriott International Inc. and supermarket giant Safeway Inc. -- choose insurance coverage for employees.
California Insurance Commissioner John Garamendi, who also testified at the hearing, and Blumenthal also have opened investigations into the insurance industry's practices. Blumenthal and Spitzer told the subcommittee that problems they have found with fees paid to brokers and consultants who serve large corporations also appear to be a factor among those who serve individual buyers of insurance.
Sen. Peter Fitzgerald (R-Ill.), chairman of the subcommittee, said more federal oversight may be needed to ensure that fees intended to influence brokers and agents are clearly disclosed to customers -- both individuals and corporations -- and that Congress may need to clarify that brokers are subject to federal antitrust law even though insurance underwriters are exempt.
Blumenthal and Spitzer said they believe they could use federal antitrust law to sue brokers for some of their practices, but that, in any case, brokers are clearly subject to state antitrust laws.
Spokesmen for a trade group that represents insurance brokers and agents said insurers routinely offer bonuses, including cash and trips, that are paid only if brokers and agents meet targets such as recruiting a certain number of customers or referring customers whose claims, as a group, are generally low. They defended such fees and said most brokers and agents put customer needs ahead of any temptation to earn extra money.
They also said they were unaware of insurance companies routinely offering stock or loans as incentives.
"The vast majority of insurance brokers are ethical, honest, upstanding citizens who have built their businesses on a bond of trust with their customers that they take very seriously," said Ken A. Crerar, president of the Council of Insurance Agents & Brokers. "We categorically challenge assertions that fraud, bid rigging and kickbacks are commonplace in the insurance brokerage industry. It is wrong to translate a handful of isolated charges into an indictment of an entire industry."