Execs Tell Congress of More Insurance Woes

Devlin Barrett
Associated Press
Nov 16, 2004

WASHINGTON - Revelations of bid-rigging within the insurance industry may lead Congress to a "Pandora's box" of unethical conduct, a top investigator told Congress on Tuesday, just before two more executives pleaded guilty.

New York Attorney General Eliot Spitzer, who launched an investigation Oct. 14 into major insurance brokerages suspected of price-fixing, told the Senate Governmental Affairs Committee that more disclosures of bad practices were coming.

"There have been criminal pleas entered, there will be more criminal pleas entered very shortly," said Spitzer. There have also been high-level resignations and employee layoffs.

Hours after he spoke, two executives at Zurich American Insurance Co. pleaded guilty in New York to criminal charges, adding another major insurance company to the list of those implicated.

Senior underwriters John Keenan and Edward Coughlin pleaded guilty to misdemeanors for helping submit losing bids in order to steer business to a predetermined favorite. Both are cooperating with investigators.

Connecticut Attorney General Richard Blumenthal told the committee that small cities and towns may have been socked with excessive charges for property casualty, health and workmen's compensation insurance that municipalities felt powerless to challenge. Those costs, he said, would ultimately be borne by taxpayers. His office is now culling information from local officials about their dealings with insurance companies.

Blumenthal insisted that state insurance laws, including Connecticut's, should be "reinvigorated and reinvented" to combat fraud, illegal steering and bid-rigging. Specifically, he called for a new state code of ethics for both insurance brokers and agents, requiring them to tell clients about special compensation arrangements.

He said any changes in federal regulations should not weaken the historic role of states in regulating the industry.

Insurance companies are supporting legislation that they say would create uniform, nationwide standards for the industry. State officials have expressed fear that whatever legislation Congress writes will pre-empt, and may be weaker than, state regulation

Spitzer, who has also conducted high-profile probes of Wall Street investment firms and mutual fund companies, said Congress must take a harder look at the insurance industry. The recent movement of insurance capital to offshore entities is a worrying sign, he said.

"These are issues that Congress must begin to inquire into," said Spitzer. "There is, I suspect, a Pandora's box that should be opened."

In a civil lawsuit, Spitzer maintains that Marsh & McLennan Companies Inc. took payoffs from insurance companies, resulting in businesses being forced to pay more than necessary for property and casualty policies.

He has accused the nation's biggest insurance brokerage of bid rigging, price fixing and heavy use of incentive fees - fees paid to brokers over and above regular commissions by insurance companies in exchange for getting more business. These are sometimes called marketing service agreements or placement service agreements.

Some of the largest insurers, including American International Group Inc., ACE Insurance Co. of North America, The Hartford and Munich American Risk Partners are named in Spitzer's suit. Others are said to be under investigation. Two AIG executives and an ACE official have pleaded guilty to illegal conduct.

A number of insurance companies, including Marsh & McLennan, have announced changes in business practices and commissions since the inquiry began.

Marsh & McLennan, which has seen its share value drop nearly 42 percent since Spitzer announced his investigation, ousted two top executives of Marsh Inc., its risk and insurance services unit. The parent company's senior vice president and general counsel also stepped down. The company also said it will lay off 3,000 employees, or about 5 percent of its work force, because of fallout from the probe.

(Associated Press reporter Marcy Gordon contributed to this story.)

Copyright 2004 KansasCity.com
Copyright 2004 Knight Ridder

Click here to return to our homepage