Spitzer Probe Expands To Life Insurers

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Life and health insurers are being pulled into the mushrooming investigation first launched by New York Attorney General Eliot Spitzer into the practices of commercial insurance brokers and insurers.

The attorney generals office is investigating the practice of how brokers award clients contracts to insurance companies and whether bid rigging is practiced by brokers and insurers.

That investigation is spreading to include inquiries from other attorneys general, including Connecticuts Richard Blumenthal. State insurance regulators also are starting collaborative investigations.

Life and health insurers that participate in the group benefits market are facing the same scrutiny as companies that are a core part of the original Spitzer investigation, which include American International Group, New York, and Ace Limited, Hamilton, Bermuda, who provide commercial insurance, and brokerage firms Marsh & McLennan, New York, and AON, Chicago.

Spitzers investigation into insurance brokerage practices culminated with a civil suit against Marsh & McLennan on Oct. 14. The civil complaint also names insurers including ACE, AIG, The Hartford and Munich American Risk Partners, a unit of Munich Re in Princeton, N.J.

Connecticut AG Blumenthal is requesting information from 20 insurers in connection with an investigation of price fixing and bid rigging in the insurance brokerage market. Letters of inquiry were issued in July and subpoenas were issued in the last few days to property-casualty, health, auto and employee benefits insurers, Blumenthal said in an interview with National Underwriter.

Blumenthal said the investigation is “active and ongoing.” He declined comment on potential action until the investigation is concluded. There may well be coordination of work with other attorneys general, he added.

On Oct. 19, MetLife, Inc., New York, and UnumProvident Corporation, Chattanooga, Tenn., said they received requests for information from Spitzers office.

MetLife said that given its size and position in the group marketplace, it is among a number of companies receiving inquiries from Spitzers office. MetLife said it conducts business directly and through brokers and consultants, and pays both commissions and other contingent payments. Contingent payments totaled approximately $25 million in 2003 on $9 billion in premiums and fees, MetLife said. Additionally, MetLife said, third parties also may be compensated for administrative services they perform.

The company said it advised Spitzers office on Oct. 1, 2004, that MetLife was not aware of any instance in which it or any other company had provided a “fictitious” quote.

UnumProvident President and CEO Tom Watjen, stated, “In addition to full disclosure, we will further review our compensation policies and procedures to be sure that we appropriately compensate our brokers but do not create any actual or perceived conflict between the broker and the customer.”

As the review at UnumProvident continues, Watjen said, it will not enter into any new compensation agreements until it is completed.

In addition to MetLife and UnumProvident, CIGNA, Philadelphia, and Aetna Inc., Hartford, Conn., have stated previously in filings with the Securities and Exchange Commission that they have received requests from Spitzers office for information.

CIGNA reported in June that it had received requests for information, and additional requests pertaining to relationships with brokers and consultants have been received, according to Wendell Potter, a CIGNA spokesman.

The investigations and the suit also are prompting action from state insurance regulators. Individual state insurance regulators have been seeking to strengthen regulation in their states and now the National Association of Insurance Commissioners, Kansas City, Mo., also is initiating a coordinated response, said Joel Ario, Oregon insurance administrator and NAIC vice president.

Ario said one of the steps regulators are taking is to see what existing authority they have to prevent abuses. For instance, he said that in Oregon, a proposed regulation was filed in mid-October and could be finalized in late November 2004 to ensure adequate disclosure of brokerage fees and any compensation from insurers. The pending regulation may be strengthened even further, he added.

Regulators at the NAIC will start an “aggressive fact-finding effort” to determine what problems exist, and will designate a representative in each department to field any inquiries and gather information from the public, he added. Regulators will be coordinating their efforts with attorneys general, Ario said.

Additionally, a committee of no more than 5 states will be created by the NAIC to oversee state regulatory action, Ario continued.

“It is my guess that there will be some [market conduct] exams” as a result of this new coordinated effort, he said, but declined to name specific companies that could be targeted.

Most states have some applicable laws and regulations that can be used now to help stop any abuses, according to Ario. While he says that any allegations of bid rigging probably would go beyond insurance codes, fees and commissions paid are under the purview of state insurance regulation.

States have been addressing the issue of commissions and fees and potential conflicts of interest for the last couple of years, as witnessed by a New York insurance department bulletin, he said. But, the issue of bid rigging is a new one for state insurance regulators, according to Ario. “To my knowledge, this is quite new.”

In response to reports of bid rigging by insurance brokers, the National Association of Insurance and Financial Advisors released this statement: “NAIFA condemns any illegal or unethical practices if they have indeed taken place, and encourages swift and appropriate punishment. We are deeply disappointed by the reports. If true, these brokers clearly were not acting in the best interests of their clients. Steering unsuspecting clients to certain insurers for their own profit is reprehensible and fundamentally contrary to the standards of most ethical and law-abiding brokers.

“Insurance companies, their representatives and independent brokers must work to restore confidence in the industry and the many people in it who put the interests of their clients before anything else,” NAIFA stated.

Responding to the Spitzer investigation, the National Association of Health Underwriters condemned any kind of inappropriate behavior, but defended broker compensation agreements as a “longstanding and standard practice within the insurance industry.”

NAHU Executive Vice President Kevin Corcoran said in a statement that “circumventing competition in the marketplace violates our basic free-market principles,” and urged carriers and NAHU members “to cooperate fully with ongoing investigations and to support regulations that promote ethical conduct within our industry.”

But, Corcoran said, “broker compensation agreements between insurance carriers and brokers are a longstanding and standard practice within the insurance industry.” He added that NAHU “supports disclosing such fee arrangements with clients and keeping them fully informed of all factors that will help them make the best possible insurance-purchasing decision.”

–Arthur D. Postal contributed to this article.


Reproduced from National Underwriter Edition, October 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.