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|  | OCTOBER 15, 2004
By Marcia Vickers Insurers' New Risk: Eliot Spitzer The New York AG's suit against insurance broker Marsh & McLennan and other heavyweights may change the way the industry does business America's biggest insurers have found themselves in the midst of a scandal that could change the very nature of the business. On Thursday, Oct. 14, New York Attorney General Eliot Spitzer charged Marsh & McLennan (MMC ), the huge financial-services firm and world's largest insurance broker, with fraud. In a civil complaint filed in New York State Supreme Court, Spitzer alleges that the firm engaged in bid-rigging, price-fixing, and accepted payoffs from insurers. Marsh's stock has plummeted -- it opened on Oct.14 at $46.01 but is trading on Oct. 15 at around $28.20, a drop of roughly 38%. The move is part of Spitzer's blitz against such insurance practices. He has also charged heavyweights like American International Group (AIG ), ACE Ltd. (ACE ), Munich American Risk Partners, and The Hartford Insurance Group (HIG ) of participating in the alleged frauds. The Attorney General said other insurers are being investigated as well. As of late Oct. 15, stocks of both AIG and ACE have tumbled about 13% from their opening levels on Oct. 14, while HIG slid some 9% over the same period. "BEST ADVOCATE"? The lawsuit against Marsh alleges that it steered clients to favored insurers and worked with them to rig bids for property-casualty insurance coverage. At the heart of the matter are so-called contingency fees -- lucrative payoffs Marsh receives for steering unsuspecting clients to certain insurers. Marsh discloses such fees. But Spitzer has a problem with the way it portrays them -- as service fees for handling premiums and creating customized policies, among other things. The Attorney General alleges that this is "false and misleading" and that the additional services Marsh claims it provides to insurers are "illusory" since, as a broker, Marsh is already compensated for such services by way of legitimate commissions. Contingency fees are passed on to clients who, according to the complaint, range from wealthy individuals and school districts to huge corporations. Spitzer's office says that Marsh, by accepting and even demanding such fees, is breaching its fiduciary duty to its clients. The complaint says, "Marsh falsely tells its clients that it is their "best advocate" and its "guiding principle" is "our client's best interest." UNCERTAINTY OVER COMPENSATION. Separately, Spitzer announced that two AIG executives had pleaded guilty on criminal charges for their involvement in the alleged manipulation of insurance bids. In a conference call held Friday morning, AIG Chairman and CEO Maurice "Hank" Greenberg said the company would stop paying contingency fees and pay only straight commissions from here on out. "We're sickened by this action that took place and are doing everything to root this out promptly,'' said Greenberg. "As CEO of AIG I take responsibility for everything that goes on within the company.'' He added that while the impact on AIG would be limited, the outfit is taking the charges very seriously and cooperating with investigators. On Friday, Oct. 15, Marsh & McLennan said it had voluntarily suspended the contingency-fee arrangements. "We're greatly disturbed by the allegations of wrongdoing," said Jeffrey Greenberg, Marsh's chairman and CEO, in a press release. "We take them very seriously, and we're conducting a thorough investigation of these allegations.'' Ronald Frank, an insurance industry analyst with Salomon Smith Barney in New York says, "Clearly the whole contingency-fee structure is on the table." Analysts have estimated that contingency fees make up anywhere from 5% to 10% of Marsh & McLennan's overall annual profits. Adds Frank: "One of the risks to Marsh isn't just possible fines, but the fact that a significant component of its compensation is being brought into question."  Vickers is a senior writer for BusinessWeek in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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