Risk & Compliance

Spitzer Subpoenas Biggest Insurance Brokerages

New York State attorney general seeking facts about fees insurers pay brokers as incentives to push certain products.
Stephen TaubApril 26, 2004

Following his investigation of conflicts of interest on Wall Street, New York State Attorney General Eliot Spitzer’s seems to zeroing in on the insurance industry.

Late last week, Marsh & McLennan, Aon Corp., and Willis Group Holdings, the three largest insurance brokers, all reported that they received subpoenas from Spitzer’s office asking for information about compensation agreements between brokers and insurance companies.

At issue is whether paying fees and commissions to brokers as incentives to sell particular insurers’ products is a conflict of interest for brokers, who commonly claim to represent the interests of corporate insurance buyers. Such compensation accounts for nearly 20 percent of brokerages’ profits on average, according to Reuters, which cited a January study by J.P. Morgan.

The Washington Legal Foundation, a public watchdog group, wrote to New York’s insurance superintendent asking for an investigation in February, Reuters reported. The group claims that such agreements “can create an unavoidable conflict of interest for the insurance broker,” the wire service also noted.

For its part, Aon asserted in a press release that such agreements are a long-standing, common practice within the insurance industry. “Aon discloses such arrangements in fee agreements with clients, invoices to clients, and its Web site,” the brokerage stated, adding that it will fully cooperate with the inquiry.

A Marsh representative told the wire service it is also cooperating with the probe.

Spitzer’s investigation of conflicts of interest between Wall Street firms’ investment banking and research operations led to a $1.4 billion settlement.

The New York Times reported that John Garamendi, California’s insurance commissioner, has also announced that he is looking into potential conflicts of interest at insurance brokerages, though he did not name specific companies.

“The broker is presumed to work on behalf of the customer,” said Garamendi. “The bonuses or commissions for volume sales, especially, can be a conflict in that they may cause the broker to divert business to an insurance company that may not provide the best deal for the insurance customer,” he added.

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