| Eliot Spitzer attacks insurance broker
By Paul Cummins FCCA AITI MSc.Multimedia Systems 22 October 2004
Financial Services Regulation- Insurance Industry
It was reported in the Financial Times on 19 October that Eliot Spitzer, the New York state attorney general, in week ending 15 October accused the world's largest insurance broker , Marsh McLennan of cheating customers by rigging prices and steering business to insurers in exchange for millions of dollars in kickbacks.
It was reported on msnbc.com http://www.msnbc.msn.com in June of this year that insurance companies received subpoenas from New York State Attorney General Eliot Spitzer seeking information on the way brokers are paid; that Hartford, Conn.-based Aetna Inc., Philadelphia-based Cigna Corp. and MetLife Inc., of New York, announced had received the subpoenas and intended to cooperate with Spitzer's industrywide probe.
This attack is sending shockwaves through the entire insurance market world wide.
It was reported on http://www.money.telegraph.co.uk that a British insurance watchdog admitted that it had received complaints about brokers receiving kickbacks for placing business with insurers. Following the assault launched by New York attorney general Eliot Spitzer However, the General Insurance Standards Council said it had not taken the matter further because no one had been willing to table a formal complaint. The GISC's job is due to be taken over by the UK 's Financial Services Authority in January 2005. The FSA's insurance chief David Strachan said the regulator was "monitoring" the New York investigation.
The Financial Times commented on the 19 October that what ought to be a number one priority for the FSA, when it starts regulating general insurers on January14 2005: the use of “placement service agreements”. These deals are additional fees paid by underwriters to insurance brokers over and above normal commissions, depending on the volume and profitability of the business placed. They, according to the FT are at the heart of the lawsuit launched last week by Eliot Spitzer, against broker Marsh & McLennan and they are a feature of the London market as of the US .
There is a new graphic on the website http://www.metaphorbusinessgraphics.com in the Financial Services Regulation section,depicting Eliot Spitzer reprimanding Marsh & McLennan.
The following is a quote from Spitzers own website: http://www.oag.state.ny.us/press/2004/oct/oct14a_04.html
Attorney General Eliot Spitzer today 14 October sued the nation's leading insurance brokerage firm, alleging that it steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.
Simultaneously, Spitzer announced that two insurance company executives have pleaded guilty to criminal charges in connection with the scheme.
The actions against the brokerage firm, Marsh & McLennan Companies, and the two executives stem from a widening investigation of fraud and anti-competitive practices in the insurance industry. Evidence revealed in today's lawsuit also implicates other major insurance carriers.
"The insurance industry needs to take a long, hard look at itself," Spitzer said. "If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."
"There is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers," he added.
Eliot Spitzer was joined at news conference announcing the actions by New York State Insurance Superintendent Gregory V. Serio, who said: "This has gone from an inquiry into failure to disclose compensation to an active investigation of bid rigging and improper steering. This certainly proves the adage that where there is smoke, there is fire."
The Eliot Spitzer attack on the insurance industry will send shockwaves around the financial services world.