Financial Markets and Institutions (2-downloads)

Insurance Behemoth Charged with Conflicts of

Interest Violations

In October 2004, New York Attorney General Eliot

Spitzer charged Marsh & McLennan Cos. (MMC), a

$12 billion financial-services company, with fraud

related to its insurance brokerage business. This initial

attack is likely to have far-reaching effects on an indus-

try that has so far remained removed from the scandals

that have plagued other financial service firms.

Companies hire insurance brokers to help them con-

trol risk in a cost-effective manner. An insurance bro-

ker is hired to use its expertise and influence to search

for the best possible prices from the insurance industry.

The broker receives a fee for providing this service.

In the complaint filed against MMC, Spitzer charges

that the insurance firm engaged in bid-rigging and

accepted payoffs from insurance companies in

exchange for directing business their way. In practicing

bid-rigging, MMC required some insurance companies

to submit abnormally high bids. This allowed another

favored insurer to receive the business at a price fixed

by MMC. The insurance companies were told by MCC

that if they did not follow MMC’s directions they would

lose future business.

MMC also required insurers to pay contingent com-

missions—payments to MMC for steering clients to them.

These pay-to-play revenues amounted to $800 million per

year to MMC, or about half of the firm’s 2003 net

income. An e-mail Spitzer obtained from a senior MMC

executive reads, “We need to place our business in 2004

with those that . . . pay us the most.” MMC, along with

other major insurance brokerage firms Aon and Willis

Group Holdings, has halted all contingent commissions.

In the aftermath of these conflicts of interest scandals,

Chairman and CEO Jeffery Greenberg and four other

top executives left the firm. A number of other insurance

firms and insurance brokerage companies have come

under further scrutiny. In the past, the insurance indus-

try has been largely self-regulated. It is likely that the

abuses uncovered by the attorney general and their

clear costs to consumers will result in additional regu-

lation and oversight.

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