Insurance crackdown impacts

BY PRADNYA JOSHISTAFF WRITEROctober 29, 2004

Insurance isn't supposed to be this exciting.On Oct. 14, New York Attorney General Eliot Spitzer unveiled a major investigation of routine insurance industry practices and declared them to be nothing short of illegal payoffs and bid-rigging schemes. Spitzer sued insurance broker Marsh & McLennan Cos., alleging that the company steered business to insurance carriers that paid the company the most in extra commissions rather than to the carrier that offered clients the best rate or coverage. The investigation also concluded several prominent insurance companies, including American International Group and Ace Ltd., participated in a scheme to submit fake insurance quotes so that Marsh could be sure a selected insurer got the business.So how widespread is this scandal and how will it affect your pocketbook? Here are some answers:

Q: Is there more to come out of the Marsh & McLennan case?

A: The three major insurance brokers say the contingent payments were widespread and well-known to the companies that buy casualty insurance. Since the scandal, Marsh, Aon Corp. and Willis Group Ltd. have announced that they will stop collecting them. Marsh executives said the company is investigating the allegations of price-fixing but believes the cases were "limited." However, Marsh has not reached a settlement with Spitzer's office and additional criminal prosecutions of individuals could be in the works.

Q: Could the same problems be affecting my company health insurance plans?

A: Marsh said the company received most of these payments for placing corporate - not consumer - casualty insurance. However, Marsh said the company did receive about $10 million in such payments for placing employee-benefits plans with companies. New York State insurance laws limit broker commissions to 4 percent of the policy, but private lawsuits filed in California allege that other brokers received special payments for placing employee-benefits plans.

Q: How is consumer insurance sold?

A: About 66 percent of all auto insurance and 69 percent of homeowner insurance is sold through a "direct" channel rather than an outside broker or agent, according to the industry trade group. That means most consumers are buying insurance directly through companies such as Geico or an exclusive agent of companies like State Farm Insurance, who sells only one company's insurance. You don't have a choice, so steering to one insurer over another isn't an issue. Independent brokers do sell many different brands of insurance from different insurers, which looks similar to the commercial brokers. But independents still have to compete with the direct-sales companies, said Bob Hartwig, chief economist for the Insurance Information Institute. That keeps a lid on prices, especially if you shop around.

Q: Do contingent payments exist for my home, auto or personal life insurance?

A: Yes. Insurance brokers or agents get a commission, a normal and legal practice. What makes it tricky is that they also get incentives for hitting volume targets or keeping claims low, noted Bob Hunter of the Consumer Federation of America. So by definition, there are other "contingent" payments that could influence what policy you are offered."I think contingency arrangements are egregious because they set up conflicts between the agents and their brokers," Hunter said. "The most important lesson of the Spitzer thing is very sophisticated companies and buyers of insurance got duped."

Q: What will this scandal mean for employment in the metro area?A: More than 56,500 people work at insurance companies, brokers and related firms. The end of contingent commissions at Marsh and Aon will hurt their bottom line, and Marsh has vowed to cut costs, without specifically mentioning people. The companies say they will find ways to replace the revenue. Analysts say mergers and losses from huge catastrophes have had more of an impact on employment. For property and casualty insurers, "this is going to be one of the worst hurricane seasons ever," said Chip Law, an insurance analyst with SNL Financial.