First came investment banking; then mutual funds; now the insurance industry is mired in scandal, the latest target of Eliot Spitzer, New York’s formidable attorney general. On October 14th he filed civil charges against Marsh & McLennan, the world’s biggest insurance broker, and announced settlements of criminal charges with two employees at AIG, the world’s biggest insurer, and one at ACE, a big property-casualty insurer.
The charges are part of an ongoing investigation into industry practices that suggest insurers and brokers have acted collectively (and secretly) to betray customers. An added twist is that the three main companies so far involved are led by members of the Greenberg family: Hank Greenberg is the legendary boss of AIG; his eldest son Jeffrey runs Marsh; and his younger son Evan is in charge at ACE. A business often thought to lack personality and drama is now suffering from an abundance of both.
Mr. Spitzer’s civil complaint against Marsh, filed in New York state’s Supreme Court, alleges much misbehavior, including fake bids, collusion, improper steering of business, payments by insurers to avoid solicitation of competing quotes, and outright threats against those resisting participation in the fraudulent schemes. Marsh acted, in short, less like a broker with a fiduciary obligation to its clients than as the linchpin of a racket. Proof for the existing charges, Mr. Spitzer contends, is “rock solid”. Given the strength of the evidence and the seriousness of the infractions, the main legal conundrum he faced was whether he should file criminal rather than civil charges.
His leniency will be of only marginal solace for the industry. Mr. Spitzer says his investigation into insurance continues to expand, with the only certainty being that he will bring more charges against more people and more companies. So far only two segments of the vast insurance industry have been implicated — the mid-sized sector and so-called excess liability insurance (i.e., the umbrella policies companies buy to top off their core coverage), both prime territory for brokers.
But that looks certain to change. Mr. Spitzer is said to like cases that champion the average person, and he is going after general insurers too. Subpoenas from his office demanding information were reported to have been received this week by Aetna and Cigna (health insurance), MetLife (life insurance), and UnumProvident (disability). Shortly after the complaint against Marsh was disclosed, Aon, the second-largest brokerage firm, put out a statement that only a lawyer could find reassuring: the actions described in the complaint would have violated its own policies and “to the best of our knowledge” were not present at Aon. Mr. Spitzer’s office quickly indicated that Aon is being examined with particular interest. (For more, read “The Insurance Industry: Just How Rotten?” from our sister publication The Economist.)