Marsh & McLennan Cos. Inc. announced on Friday that its risk and insurance services subsidiary will immediately suspend its practice of market services agreements (MSAs) with insurance carriers, in light of the allegations and questions raised by New York State Attorney General Eliot Spitzer, who accused the company of soliciting “rigged bids for insurance contracts.”
“We are greatly disturbed by the allegations of wrongdoing,” said chairman and chief executive officer Jeffrey W. Greenberg in a statement. “We believe it is in the best interest of our clients to suspend MSAs immediately.” The fees, which brokers receive from insurance companies for steering business their way, are in addition to the more typical commissions and were a major focus of Spitzer’s investigation.
“The insurance industry needs to take a long, hard look at itself,” Spitzer said in a statement Thursday. “If the practices identified in our suit are as widespread as they appear to be, then the industry’s fundamental business model needs major corrective action and reform.”
The civil complaint filed in State Supreme Court in Manhattan alleged that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments — known as “contingent commissions” — were characterized as compensation for “market services” but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies, according to Spitzer’s press release.
Spitzer’s statement added that industry representatives defend this long-standing practice as acceptable and even beneficial to clients, but that his office had uncovered extensive evidence showing that it distorts and corrupts the insurance marketplace and cheats insurance customers. Spitzer also accused Marsh of soliciting fake bids, which deceived its customers into thinking that true competition had taken place, even though Marsh’s public statements claimed that its “guiding principle” was to always consider its client’s best interests.
Insurance giants ACE, AIG, The Hartford, and Munich American Risk Partners were also named in the complaint as participants in steering and bid rigging. The attorney general’s office said other insurance companies are still under investigation.
On Thursday, two executives of American International Group Inc. — Karen Radke and Jean-Baptist Tateossian — pleaded guilty to bid rigging and agreed to cooperate with the investigation, according to Bloomberg. Friday, an ACE Ltd. vice president, Patricia Abrams, pleaded guilty to attempted restraint of trade and competition, the wire service added.
Spitzer also played a major role in uncovering the mutual-fund scandal, which resulted in about $3 billion in fines, and he obtained settlements worth about $1.4 billion from his investigation into alleged bias within the research departments of the major brokerage firms. Marsh’s money-management arm, Putnam, was implicated in the scandal.