N.Y. deputy superintendent says stakes higher, players bigger in finite re scandal
With the anniversary of Eliot Spitzer’s lawsuit against Marsh & McLennan Companies approaching, liability experts at a recent conference described revelations of broker bid-rigging activities as relatively minor events in the history of financial services scandals. However, one regulator warned of greater fallout ahead from ongoing probes into finite reinsurance.
The bid-rigging schemes came to light Oct. 14 last year–the day the New York attorney general’s office filed its complaint against MMC. Eventually, the top-three brokers–Marsh, Aon and Willis–swore off contingency fees as a result.
While the scandal was still fresh in the minds of those at an educational session last month sponsored by the Minneapolis-based Professional Liability Underwriting Society, broker and insurer wrongdoing need to be put into historical context compared with far worse scandals that have rocked the financial services world, speakers at the gathering said.
However, the allegations remain damaging in that they undermine the industry’s integrity and credibility, and shock waves will still reverberate from the second phase of the industry probes, warned Audrey Samers, deputy superintendent and general counsel for the New York Insurance Department. Phase two exposes the potential misuse of finite reinsurance to boost insurer financial results artificially.
During the PLUS meeting, a defense lawyer charged that regulatory levies against brokers tied to the bid-rigging probe were simply “revenue-raising” moves by government entities.
Samers refuted the charge–noting the levies took the form of policyholder restitution funds rather than the payment of fines. She also pointed out that larger monetary stakes and higher-level executives are involved in current investigations into finite reinsurance transactions than those targeted in the broker scandals.
Stephen Marcellino, a partner with the law firm Wilson, Elser, Moskowitz, Edelman & Dicker in New York, led off the session telling professional liability brokers and underwriters to keep the brokerage probes in “perspective.”
He said that junk bond trader Michael Milken paid an individual fine of $400 million “in 1988 dollars” to settle securities fraud charges, while MMC’s restitution fund related to its involvement in bid-rigging was $850 million for the entire firm.
Recalling names like Ivan Boesky and Charles Keating, who were involved in insider trading and savings and loan scandals in the 1980s, other panelists agreed.
Stephen Sills, chief executive of Darwin Professional Underwriters in Farmington, Conn., said: “I think it’s actually insulting” to the insurance business to make such comparisons, referring in particular to the collapse of banks in the 1980s–”banks that were looted, with millions of loans made to bogus organizations, some of which were represented on the boards of those institutions.”
He also noted that even while members of boards were arrested in those prior scandals, individuals being charged in insurance scandals “are overwhelmingly middle-management people.”
Marvin Picholz, a partner for the Picholz law firm, agreed. “I don’t think this ranks up with the…S&Ls or what went on with Worldcom,” said Picholz, a defense lawyer who represented Douglas Faneuil, a former assistant to Martha Stewart’s broker, who testified against Stewart. “Those were rank lootings…as opposed to a course of dealing that traditionally has been viewed as acceptable,” he said, referring to the practice of receiving contingent commissions.
Noting that he previously held positions with the Securities and Exchange Commission, Picholz continued, “If I were back in government, I’d be embarrassed to announce that I’m fining an institution $150 million, $400 million or $1.5 billion,” while admitting that no one “in senior management” could be found that had any responsibility, “so we went and got the guy who was the third-level manager.”
Then he suggested that regulators imposing “those kinds of fines” without findings of bad conduct at senior levels might simply be engaged in revenue-raising measures at entities involved.
Samers countered, noting that recent probes of finite re deals that have followed the broker investigations involve much bigger dollar impacts to the industry.
“Fundamentally, what we settled for with Marsh, Aon and Willis was returning money to policyholders. It clearly was not a revenue-raising measure,” since no money is going to the state, she said.
She added that findings of wrongdoing in investigations of finite re transactions (which are distinguished from traditional reinsurance deals by various types of limitations on the amount of risk transferred), including the investigation of American International Group, “are clearly at the senior management level.”
“They’re not middle managers,” she said, adding “failures–across the board–at the corporate board level” currently are being unearthed in finite re probes.
Operating In The New Environment
During the session, there were also discussions about definitions of fraud, contingent commission disclosures and whether carriers are obligated to monitor broker transparency. While the consensus was that there was no legal requirement for monitoring, Picholz advised that carriers should not assume that brokers have made full disclosure to clients.
“If you put yourself in a position where your defense is going to be, ‘Well, I assumed,’ you’re going to be in serious trouble, he said, recommending that insurers have procedures that ask brokers to tell the carriers about disclosure policies, and even to request copies of broker policies for their files as well as annual representations that the policies are being implemented.
Samers agreed that there’s no obligation for insurers to police disclosures. “But in many of the complaints out there, you had insurers entering arrangements with brokers or agents that clearly they knew, if disclosed, would not cut it,” she said.
“My personal view, and not that of the department, is that it would be a good thing at the end of the day, if insurance companies printed on your [declarations] page the percentage that you’re paying in commissions,” she added.
Later, an audience participant questioned why brokers should be obligated to reveal their income any more than clothing manufacturers or retailers are obligated to reveal their cut on the sale of a dress.
“I’ve heard that question so many times, [and] it’s such a disservice to the insurance industry,” she said, noting that most people argue that car salesmen don’t disclose commissions. “Brokers are out there saying, ‘I’m going to get you the best deal. I’m working with you. I have a relationship with you,’” she said, adding no one thinks a car salesman has his or her best interests at heart. “You guys sell trust and integrity,” she said, drawing applause from attendees.
Panelists seemed to agree that following the instructions of a client was key to judging whether broker activities were problematic and akin to bid-rigging, but there are still many unresolved situations, Sills suggested. “If a risk manager says, ‘The CFO wants to see other quotes, but I don’t want them to be real serious quotes,’ is that bid-rigging?” he asked.
Sills, referring to the title of the session, “The New Ethics of Insurance,” characterized it as a misnomer.
“The ethics that existed years ago still apply today. I don’t think there’s anything new here,” he said. “When you read about things that have been taking place, I don’t think anybody would suggest they were acceptable under the old ethics.”
Samers joined Sills in telling attendees that a career in insurance remains an honorable one in spite of the Spitzer revelations. New York Insurance Superintendent Howard Mills has been “very clear [in] making public statements that the whole industry is not corrupt,” she said, advising that the activities regulators are looking at involve conflicts of interest and failure to disclose information.
“If you enter a deal, and you think that if it saw the light it wouldn’t be consummated, or a regulator would be upset…you should think about what you’re doing,” she advised.
Although events of the past year have not introduced any new ethics, or even eliminated the practice of paying contingent commissions, Sills said they have brought subtle changes to the day-to-day dealings between brokers and insurers.
“There had been a kind of a relaxed informality that’s disappeared with some of the larger brokers now” when they are presenting risks to insurers other than the incumbent carriers, he said. “It was useful in the past when [a broker representative] said, ‘This is what these people are paying now. Is this something you can be helpful on?’”
Time and effort was saved when such information was available. If the carrier being approached was not interested in writing the risk given that information, then brokers didn’t have to bother sending submissions to the uninterested carriers, and the carriers didn’t have to spend days underwriting the risks, he said.
And brokers could honestly tell clients that they approached carriers, indicating which carriers might be interested in writing the coverage and which are not, when seeking client direction on how to proceed with the bidding process.
Samers disagreed. “I think what the insurance industry suffers from is this informality,” she said.
She reported that the current focus of the department–on probes into finite re transactions–highlights the lack of formality. “The majority of companies don’t have written policies on evaluating risk transfer in insurance contracts,” she said.
“Going back to the World Trade Center, there was never an insurance policy” in place, she added. “The insurance industry is notorious for its informality, and I think a little more formality would be helpful.”
Sills said more formality has “stifled the flow of the way things work”–particularly for larger brokers who “are playing much more to a script.” He added that “we’re not seeing much of a change from the smaller brokers. In fact, to listen to some of the smaller brokers, you would think they’re not reading the papers.”
As for the practice of paying contingent commissions, it is far from dead, he said. It still exists “beneath the upper tiers” of brokers, he noted. “Name-brand p-c companies are still very much paying contingent commissions.”
Samers confirmed that contingency fees are not prohibited in New York and stressed several times that no one has said they are illegal. “It’s the activity that resulted from contingent commissions that was the problem,” she noted.
Susanne Sclafane is managing editor of NU’s Property & Casualty edition.
One year after N.Y. Attorney General Eliot Spitzer turned the insurance industry upside down with his probes of broker bid-rigging and alleged misuse of finite reinsurance, some say it’s much ado about nothing–relatively speaking.
Flag: Fanning The Flames
Head: Is The Press To Blame?
Some liability experts launched criticism at the media for the reporting of the insurance industry scandals during a recent educational session for members of the Professional Liability Underwriting Society.
Among them was Ann Marie Marson, a senior vice president of claims at Richmond, Va.-based James River Insurance. She suggested that negative perceptions fueled by press reports have now effectively erased years of work among claims professionals aimed at changing public opinion of insurers by instilling best practices.
However, Stephen Sills, chief executive officer of Darwin Professional Underwriters in Farmington, Conn., said press accounts have been fair in reporting complex subjects.
“There are people that have done things they shouldn’t have done,” he said. “I think that the disinfectant of the sunlight from the front page of the newspaper wakes up a lot of people as to the way they should be doing things a lot better than a memo from the CEO,” he said.
Audrey Samers, deputy superintendent and general counsel for the New York Insurance Department, noted that competition between regulators is driving a lot of media reports.
The SEC and the New York attorney general’s office are “racing to get press coverage,” she said, noting that minutes after meeting with representatives from the SEC and AG’s office, she’s received cell phone calls from newspapers asking her to confirm that the attorney general has asked her to do something.
“We’re not used to doing our examinations in the press,” she said.
Some say negative media reports about the Spitzer probes unfairly negated years of work by claims pros to change public opinion of insurers.