New York State Attorney General Eliot Spitzer has filed suit against the nation's top insurance brokerage firm for allegedly directing clients to insurers that paid Marsh & McLennan Cos. handsomely for the business.
Spitzer told Dow Jones Newswires that an investigation by his office revealed that Marsh & McLennan made it look as if the marketplace was competitive by soliciting fake bids. Businesses needing insurance coverage were therefore misled into thinking they were getting the best price.
The lawsuit centers on market service agreements, which involve brokerages steering business to insurance companies in return for healthy commissions. Spitzer said during a press conference that he has accepted guilty pleas from two executives from American International Group Inc. who provided evidence that the market service agreements create an improper incentive for Marsh and basically amount to price fixing.
Spitzer alleges that that if insurers wanted to continue getting business from Marsh, the brokerage would demand a certain amount of fees to keep the relationship going.
In the complaint, Spitzer said one Marsh executive told his subordinates that the size of the contingent commission determines who Marsh will steer business toward. Another example taken from an insurance company's executive record showed that Marsh threatened to "kill" its business with the company if it didn't "get to (the) right number" on the contingent commission agreement.
In a statement, Marsh & McLennan said the company is cooperating with the attorney general's investigation and takes the allegations seriously.
Goldman Sachs analyst Thomas Cholnoky said in a research note that if contingency agreements are limited, money could be lost. He added, however, that "we are having trouble figuring out how insurance companies could be at fault for participating in what the AG's office describes as 'bid-rigging,' given a free market that allows insurers to charge what they believe is a fair price."
Donald Light, senior analyst at research and consulting firm Celent, said the issue of bid-rigging is much more serious than contingency commissions.
"The fundamental idea of brokers being rewarded for the quality of business they send to insurance industry is OK," he said. "But if Spitzer can prove that bid-rigging is a common practice and widespread, then that will be quite devastating for the industry."
Spitzer said the evidence also implicates other insurance companies such as AIG, Hartford Financial Services Group Inc. and ACE Ltd. and that he is pursuing cases against the other brokers.