Regulatory Settlements Prompt Changes In U.S. Property-Casualty Insurance Industry
By EILEEN ALT POWELL, AP Business Writer
February 20, 2006
NEW YORK - A little more than a year ago, executives at insurance brokerage Marsh & McLennan Companies Inc. were forced to make a public apology for bid rigging, price fixing and using hidden commissions to pump up sales.
This month, it was American International Group Inc.'s turn. AIG, one of the world's largest insurance companies, admitted to its part in the price-fixing scams as well as accounting trickery to boost its earnings.
Clients and investors who were hurt by those practices will get compensation under the record settlements extracted by federal and state regulators $850 million (euro712.4 million) from Marsh and $1.64 billion (euro1.4 billion) from AIG.
But probably more importantly, experts say, is that the U.S. insurance business already has become more open and more competitive, benefiting the companies and consumers who buy property and casualty insurance.
"There's an awareness that full disclosure disclosure that informs the consumer and educates the consumer is the business model for the insurance community," said Michael T. McRaith, director of the Illinois Division of Insurance.
And while there had been concerns that the regulatory settlements would drive up the prices of policies, especially for smaller businesses, that doesn't appear to be happening.
"We have not seen an uptick in costs for commercial general liability policies," McRaith said. He credits that in part to increased competition.
"As long as there's money to be made, insurance will be available for manufacturers, small businesses in the same way it was before these settlements," he said.
This is not to say that the big insurance companies at the center of the scandals aren't scrambling to regain their footing.
Central to the settlements with New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and the U.S. Justice Department was the elimination of so-called contingent commissions, also known in the industry as marketing service agreements. These commissions, which were upfront payments from insurance companies in exchange for having business steered their way, had been major contributors to the brokers' profitability. The industry's failure to disclose the contingent commissions has led regulators to move to ban them outright.
For New York-based Marsh, the largest brokerage in the U.S., the loss of commissions that once accounted for more than $840 million (euro704 million) a year in revenue has forced a painful restructuring. The company has had to refinance its debt, sharply cut costs and lay off some 5,000 workers.
Chip Law, an insurance analyst with the research firm SNL Financial in Charlottesville, Virginia, said that the defections of high-powered Marsh salesmen could be the most painful result of the scandal.
"They've been losing tons of executives who are starting new companies or are picked up by other companies," Law said. "I think that has hurt some of the relationships Marsh had, because these guys were in with the CEOs and CFOs who need the insurance."
Marsh's president and chief executive, Michael G. Cherkasky, told The Associated Press that replacing those lost commissions with well-disclosed fees "has been a challenge ... that's coming along more slowly than we had hoped."
The company Feb. 14 reported fourth quarter earnings of $35 million (euro29 million), or 6 cents (5 euro cents) a share, as revenue in its risk and insurance services division the unit rocked by the scandal fell 7 percent from a year earlier to $1.3 billion (euro1.1 billion).
Still, Cherkasky said he believed 2006 will be a better year, following "our first bump up in new sales" in January.
"Now we're all going to compete for value who can provide value in the areas of advice and solutions to companies on a global basis and I think we're well-positioned to do that," Cherkasky said.
New York-based AIG, meanwhile, has joined other insurance companies in eschewing contingent commissions and promised Spitzer it would support legislation to ban them.
The settlement with AIG, the largest ever concluded by regulators with a single company, not only commits the company to accounting and corporate governance reforms but also installs an independent consultant to oversee its financial practices for the next three years.
In agreeing to the deal, AIG Chief Executive Martin Sullivan said the company has "committed to business practices that provide transparency and fairness in the insurance market."
Ernst Csiszar, president and chief executive of the Property Casualty Insurers Association of America trade group in Des Plaines, Illinois, said that with the end of contingent commissions, there's more disclosure up front about the costs of policies and associated fees.
"When clients have that kind of information, it opens it up to competition" because they can comparison shop, he said.
On the industry side, he said, companies will have to be more mindful about the profitability of their customers.
"In the past, companies could take advantage of what I call 'peanut-buttering,' which is spreading the cost of handling a specific client over others," Csiszar said. "Now you have to be much more aware of whether you're getting margins from a particular client and which clients don't provide you with the margins you need.
"You have to look more closely at the quality of the business you take on."
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