Spitzer Takes On Contingent Commissions

October 15, 2004 (PLANSPONSOR.com) - Marsh & McLennan Cos. Inc. shares had their biggest drop in at least 24 years (shedding 24.45%, and another 2.5% after hours), leading a decline in insurance shares after New York Attorney General Eliot Spitzer sued the company.

The  suit was targeted at “contingent commissions,” in which insurance companies reward brokers for sending business their way, a practice that critics claim encourages brokers to sell policies from those insurance companies offering the highest commissions, rather than the ones most suited to their customers.

Executives Arrested

Two executives at American International Group Inc. (AIG) are the first charged in the probe. Karen Radke, 42, a senior vice president of an AIG division, and co-worker Jean-Baptist Tateossian pleaded guilty Thursday to felony charges of scheming to defraud in state Supreme Court in Manhattan. They face up to four years in prison, but their sentence will depend on how much more they cooperate, Spitzer said.    Spitzer said the fraud probe touches “virtually every line of insurance.”  

The victims were mostly large corporations who were deceived into buying property and casualty coverage that may have cost more, but also included small and mid-size businesses, municipal governments, school districts and individuals, Spitzer said.

Spitzer accused Marsh & McLennan of steering clients to insurers for lucrative payoffs under long-standing agreements. The firm collected $800 million in so-called contingent commissions in 2003 alone, investigators said. Spitzer also accuses the company of soliciting rigged bids for insurance contracts. The practices go back to at least the 1990s, he said.

Contingent Claims

Spitzer said that the “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. Industry representatives defend this long-standing practice as acceptable and even beneficial to clients, but Spitzer’s office said it has uncovered extensive evidence showing that it distorts and corrupts the insurance marketplace and cheats insurance customers.

In addition to steering business to its insurance company partners, Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place. Spitzer’s complaint against the company cites internal communications in which executives openly discuss actions that were aimed at maximizing Marsh’s revenue and insurance companies’ revenues — without regard to clients’ interests.   Cited were situations where:

  • one senior Marsh executive sent a message to colleagues saying: “We need to place our business in 2004 with those [insurance companies] that have superior financials, broad coverage and pay us the most.”
  • Another executive noted that the size of contingent commissions will determine “who [we] are steering business to and who we are steering business from.”

Major insurance companies — ACE, AIG, The Hartford and Munich American Risk Partners — are named in the complaint as participants in steering and bid rigging. Other insurance companies are still under investigation.

First Responses

Marsh issued a statement saying it is cooperating with Spitzer and was unaware of the charges until they were announced.   Spitzer said that when he first contacted Marsh executives they said, “don’t waste your time.”

“We are saddened by this news because we hold ourselves to the highest ethical standards,” AIG said in a statement. The company said it has sought guidance on the commissions from the state Insurance Department. “Any breach of those standards is unacceptable. We take these charges seriously and will continue to cooperate with the Attorney General’s office.”   The Hartford says it is cooperating fully with the investigation.

Spitzer said he has no intention to negotiate a settlement with Marsh & McLennan.   “The leadership of that company is not a leadership I will talk to and not a leadership I will negotiate with,” Spitzer said.