Spitzer Inquiry Expands to Employee-Benefits Insurance
By JOSEPH B. TREASTER
The New York Times
June 12, 2004
Three big insurance companies, Aetna, Cigna and MetLife, said yesterday that they had received subpoenas from the New York attorney general as an investigation widened into the field of employee benefits -- health, disability and group life insurance.
Hartford, which operates a substantial business in group life and disability insurance as well as in commercial and personal lines of insurance, said late Thursday that it, too, had received a subpoena.
Until now, the insurance investigations by the attorney general, Eliot Spitzer, have centered on potential conflicts of interest among commercial insurance brokers and suspected improper sales and trading of variable annuities, which are a combination of insurance and mutual funds.
Investigators have been concerned that payments from insurance companies to the brokers for exceeding sales goals and keeping down claims costs may undermine the brokers' loyalty to their customers -- the American corporations that pay them fees and commissions to arrange coverage.
Industry executives said similar fees, often referred to as contingency payments, were widely paid to brokers and consultants by the employee benefits companies.
"It's no surprise that Mr. Spitzer is pursuing these contingency payments in the employee benefits area," said Terry Havens, the chief executive of Havensure, a small employee benefits consulting firm in Cincinnati. "Employers will likely be surprised to find out that their intermediaries -- brokers and consultants -- are negotiating financial agreements for themselves that raise the cost of corporate insurance."
None of the employee benefits insurers would discuss the investigations, and a spokesman for Mr. Spitzer did not return a call.
Several insurance brokers disclosed in late April that they had received subpoenas from Mr. Spitzer, including Marsh and Aon, the two largest in the world, and Willis Group Holdings. In mid-May, the Chubb Group, a leader in commercial insurance, said that it, too, had received a subpoena for documents dealing with compensation to brokers. Hartford said in late May that it had received instructions from the New York Department of Insurance not to destroy any documents related to its dealings with brokers. The brokers have also refused to discuss the investigations.
Industry executives said that most of the midsize and smaller companies in the country bought health insurance and other employee benefits through the big insurance brokers. But many of the biggest corporations rely, instead, on consulting firms that specialize in employee benefits and often work for negotiated fees, they said.
Executives said they thought that the consultants often received payments on both ends of transactions just as the brokers have acknowledged they do. But so far none of the consulting firms have reported receiving subpoenas.
Tom Beauregard, a senior executive at Hewitt Associates, one of the nation's largest consultants on employee benefits, said that his firm received payments exclusively from its clients except in cases where the client negotiated for an insurance company to share the costs of the consultant. When clients ask for those kinds of payments, he said, they are fully disclosed and included in estimates of all companies bidding for the coverage.
The question of disclosure has been at the heart of Mr. Spitzer's investigations of the brokers so far. The brokers often report on Web sites and in regulatory documents that they receive compensation from the insurance companies. But the corporate insurance buyers, known as risk managers, say the brokers do not routinely disclose the details of the payments.
Risk managers -- who often feel dependent on brokers to get coverage, which since the Sept. 11, 2001, attacks has been costly and scarce -- say they do not press for details. But even when the risk managers raise questions, some of them say, the brokers can be evasive.
Joe Conway, a spokesman for Towers Perrin, another big consultant on employee benefits, said that compensation agreements at his firm were reached in advance by clients and that the full amount of the compensation was disclosed.
Mr. Havens, who has been an employee benefits consultant for 25 years, said that in addition to bonuses for exceeding sales goals, some brokers and consultants receive extra payments from insurers for the many employees who buy life insurance or disability insurance to supplement the coverage provided by their companies. The cost of these payments, which often average $10 to $15 for each employee, are passed on directly to the employees, he said, increasing the price of the coverage they buy.
In the employee benefits field, Mr. Havens said, the sales bonuses and the extra payments for individual employees are in many cases done without the knowledge of the employers or the employees.
"The employers and the employees don't know the payments are in there," Mr. Havens said. "At the initiative of the brokers, the insurers provide a quote with the costs of these payment included."
Mr. Havens said his practice was to report to clients all payments he receives from all sources. But he said he had lost business to some brokers and consultants who, as a result of hidden payments from insurers, were willing to charge clients less for their services.
"Carriers have complained to me that they have to make these payments," Mr. Havens said. "They don't think they are appropriate. But if they don't pay, they don't get to play in the game. They don't get the business."
Brokers and consultants began demanding payments from the insurance companies about 10 years ago when they began to receive complaints from clients that their fees and commissions were too high, Mr. Havens said. While the amount that consultants and brokers received stayed at 1 percent to 5 percent of the premium, Mr. Havens said, the visible portion that employers paid to them declined.