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Insurance brokers get Spitzer subpoenas

Marsh & McLennan Cos Inc. , the world's largest insurance broker, has received a subpoena from New York Attorney General Eliot Spitzer in connection with an inquiry involving brokers, a company spokeswoman said Friday.
/ Source: Reuters

New York Attorney General Eliot Spitzer, whose investigations of the mutual fund and stock research businesses led to industrywide reforms, is now investigating the fees earned by insurance brokerages.

At issue is whether the paying of fees and commissions to brokers as incentives to sell particular insurers’ products is a conflict of interest.

Marsh & McLennan Cos., Aon Corp. and Willis Group Holdings Ltd., the world’s three largest insurance brokers, said late Thursday and Friday they received subpoenas from Spitzer’s office asking for information about compensation arrangements made with the insurance companies whose policies they sell.

While the investigation is still in the early stages, increased regulation of such agreements could have a significant impact. Such compensation accounts for nearly 20 percent of brokerages’ profits on average, according to a study by J.P. Morgan in January.

Last February the Washington Legal Foundation, a public watchdog group, said such agreements “can create an unavoidable conflict of interest for the insurance broker.”

The foundation asked New York to investigate the practice last February in a letter sent to New York’s Superintendent of Insurance.

Aon and Willis Group said that such compensation agreements are a long-standing, common practice within the industry and are disclosed to clients.

A spokeswoman at Marsh said that the company had received a subpoena from Spitzer’s office and that it was cooperating with the requests.  A spokeswoman for Spitzer’s office had no comment.

Spitzer’s latest probe into the financial services industry comes as regulators investigate other aspects of the insurance business.

Both the U.S. Securities and Exchange Commission and Spitzer’s office began investigating improper trading of variable annuities sold by insurers last  year.

Insurer Conseco Inc. said earlier this month that it may face charges for allowing clients to “market time,” a practice where investors profit from swings in the market by rapidly buying and selling shares in variable annuities or mutual funds.

Compensation agreements between insurance brokers and insurers have similarities to arrangements that were at issue in the mutual fund industry investigations.

Last month mutual fund company Massachusetts Financial Services, a unit of Sun Life Financial Services of Canada Inc. , agreed to pay $50 million in a settlement with the SEC for compensation it had made to about 100 brokerage companies to sell its funds.

Last November Morgan Stanley agreed to pay $50 million to settle allegations of steering clients to mutual funds sold by companies it also had compensation agreements with.

Those cases centered around the failure to disclose the arrangements to investors who were buying the mutual funds.

Marsh, Willis and Aon all said they disclose the compensation agreements, either through fee agreements with clients, invoices to clients or on Web sites.

However, the Washington Legal Foundation argued in its letter to the New York state insurance department that the disclosures are “often so convoluted - and in some cases omitted altogether - that many companies are unaware their brokers have these side agreements in place.”