VideoAIG has also been battered. The scandal comes on top of investigations by both the Securities and Exchange Commission and the Justice Department for work it did structuring off-balance-sheet entities for PNC Bank and possibly other companies as well. In a conference call with analysts, Mr. Greenberg said the loss of contingent commissions would have no business consequences, but that seems naive coming from one so experienced. Losing access to a price-rigging cartel can surely only increase competition.
Inevitably, this will affect other insurers, putting structural pressure on prices just as cyclical factors suggest rates are softening. And still unclear is what sort of broad resolution Mr. Spitzer might seek. In prior investigations, his style has been to use the threat of litigation to force through agreements that include lots of money, carefully scripted non-confessions of guilt, and widely trumpeted vows of reform. The results have often been disappointing. It is probably no coincidence that agreements with investment banks and mutual funds have resulted in money moving to less-regulated areas, namely private equity and hedge funds. Insurance more than perhaps any other industry is global, so an inappropriate move by Mr. Spitzer would surely send business overseas.
Europe Looks On
But might the rot have already spread overseas? For the moment European insurers are on the periphery of the American scandal. Only Germany's Munich Re, the world's biggest reinsurer, and Zurich Financial Services, a Swiss insurer, were mentioned in Mr. Spitzer's complaint and neither is accused of any wrongdoing.
Further, Europe does not have an equivalent of Mr. Spitzer, and regulators in Europe are not currently intending to investigate relations between insurers and brokers. So only European insurers with a presence in America risk being directly involved in the scandal for the moment. Swiss Re writes 40 percent of its property and casualty business in America, although only 20 percent of these contracts are done via brokers. A similar portion of Zurich Financial Services' non-life policies are written in America, mostly directed through brokers.
All the same, European financial markets reacted nervously, and shares in Munich Re, Allianz and AXA all fell. The unknown factor is whether Europeans have also been corrupt. After all, the temptation facing brokers is the same everywhere. Like their American counterparts, European insurers pay brokers contingent commissions. Brokers also demand that insurers provide reinsurance work in exchange for referrals. Criticisms of these practices used to fall on deaf ears. "We consider contingency fees an aberration and we have been asking brokers since 1998 to abolish them," says Thierry van Santen, head of the Federation of European Risk Management Associations in Brussels.
German insurers claim they are not aware of any unsavory practices at home. For one thing, the use of intermediaries is less common. In many cases Allianz, Europe's biggest insurer, and Munich Re deal directly with clients. Moreover, Lufthansa, Siemens and other big firms have in-house brokers, which are not conflicted. Even so, American brokers have made inroads in the German market in recent years. Today the country's biggest broker is Aon Jauch & Hübener, a subsidiary of Aon. It is followed by Marsh, which expanded in 1999 when it took over Gradmann & Holler, a broker in Stuttgart.
German brokers are not regulated by BaFin, the country's financial regulator, but rely on a consensus-based system of self-regulation. The VDVM, an association of German insurance brokers, recently developed an ethics code for its more than 570 members. It now wants to speed up the implementation of these guidelines.
In France insurers and brokers profess to be shocked by Mr. Spitzer's discoveries. Leading French brokers such as Fimat claim they are more transparent about their fees than rivals in other countries. They are, at least in theory, regulated by an agency under the wings of the economics ministry. According to French insurance legislation, the agency "can" oversee brokers. In reality they look after themselves, much like their German colleagues. In 2001 they agreed their own code of conduct when one of their main trade unions jointly developed new guidelines with France's association of risk managers.
But brokers in France and Germany will soon lose some of their independence. The European Union's Insurance Mediation Directive aims to bring all parties involved in the sale of insurance under the jurisdiction of one national regulator. The directive comes into effect next January, although it is being resisted fiercely by insurance lobbyists, so it will take even longer than usual for member states to implement the law. One obvious hurdle is that France and Italy, among others, do not have a single financial regulator.
A British Disease?
Mr. Spitzer's charges have raised most alarm in Britain. As in America, the business there is dominated by a handful of brokers. Aon has 25 percent of the British market, and Marsh is also a leading broker. Britain has several good-sized insurance brokers of its own. Willis is headquartered in London; others include Jardine Lloyd Thompson (JLT) and Benfield, a reinsurance broker. Benfield does about 40 percent of its business in America and has been contacted by Mr. Spitzer, but says it does not accept contingent commissions. JLT says such commissions account for just 2 percent of revenue. Though share prices in both companies dropped in the wake of Mr. Spitzer's announcement, researchers at UBS, an investment bank, say that Marsh's stumble could mean more business for them. Justin Bates of Numis, an institutional broker, says Mr. Spitzer's charges may stop both firms from being snapped up by the big three as insurance pricing softens.
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