Risk Management

Zurich Settles with Spitzer

Insurance firm is the latest in New York State-led probe to settle charges of bid-rigging and improper use of finite-risk contracts.
Stephen TaubMarch 28, 2006

Zurich Financial Services agreed to pay $153 million and adopt a series of sweeping reforms to settle charges of bid-rigging and improper “finite reinsurance” transactions brought by New York, Connecticut, and Illinois, according to a joint announcement by New York State Attorney General Eliot Spitzer and State Insurance Department Superintendent Howard Mills.

Under the agreement, $88 million will be paid to Zurich policyholders harmed by bid-rigging activities. Zurich also will pay penalties of $39 million to New York and $13 million each to Connecticut and Illinois.

The settlement will also increase by $29.9 million the recovery consumers will receive as part of a separate multistate settlement, announced last week, which arose out of New York’s insurance probe, according to the announcement.

“Zurich’s willingness to acknowledge problems, adopt reforms and provide appropriate compensation to customers will help the company move forward and will help promote full and fair competition in the insurance industry,” said Spitzer, in a statement.

The settlement follows agreements previously reached with Marsh & McLennan Cos., the world’s biggest insurance broker, and American International Group Inc., the largest insurer, over accounting and sales practices, Bloomberg pointed out.

According to regulators, Zurich participated in a scheme to fix excess-casualty insurance prices. They cited an e-mail from a Marsh & McLennan broker to a Zurich underwriter seeking a phony bid for an insurance contract that was being steered to one of Zurich’s competitors, AIG: “Can you give me a protective indication on this. It is an AIG renewal and AIG already quoted it so just give me a bad price with higher per occ. attachment and then we can be done with this.” According to the announcement, Zurich complied with the request and sent Marsh a non-competitive bid to be used to deceive Marsh’s client.

Regulators also detailed Zurich’s use of improper “finite reinsurance” to bolster its financial results and those of its clients, For example, Zurich entered into a 1998 agreement with insurer MBIA Inc. to provide risk-free “reinsurance” for a known $70 million loss. In exchange, Zurich received a separate risk-free insurance contract that returned the “reinsurance” payment to Zurich with a profit.

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