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Ace, AIG end commissions eyed in probe

The company at the center of a probe into insurance brokerage fees says it took in more than $1.2 billion in incentive payments over the past 18 months and that its decision to stop using such fees will reduce operating income.
/ Source: The Associated Press

The company at the center of a probe into insurance brokerage fees says it took in more than $1.2 billion in incentive payments over the past 18 months and that its decision to stop using such fees will reduce operating income.

Marsh & McLennan Companies Inc. disclosed late Monday that its Marsh Inc. insurance unit collected $845 million of such fees in 2003, and another $420 million through June 30 this year.

The fees, which are over and above ordinary commissions, have been paid by insurance companies to brokers, mainly for steering profitable clients the insurer's way. New York Attorney General Eliot Spitzer sued Marsh & McLennan last week over the fees, and said the investigation extends to several large insurers.

Spitzer's civil suit says the "placement service agreements," also known as contingent commissions or market service agreements, had led to corporate customers not getting the best prices on property and casualty policies.

New York-based Marsh & McLennan has since ended the practice, and this week two major insurance companies named in Spitzer's probe said they also have stopped using such incentives.

A spokesman for New York-based American International Group Inc., Joe Norton, said Monday that the company had stopped using incentive fees. AIG officials last week had said they were studying the issue. ACE Ltd., a Bermuda-based insurer, said in an announcement on its Web site late Sunday that it was halting such fees.

In a statement Monday, Marsh & McLennan said the $845 million in fees represented 12 percent of its risk and insurance services revenue of $6.9 billion and 7 percent of its $11.6 billion in overall revenue.

The company said its decision to stop collecting such fees will lower its operating income. Marsh had expenses of $340 million related to the activities, not counting local office expenses, but said it had not determined a specific operating margin for the fees.

Soon after Marsh & McLennan's announcement, Moody's Investors Service cut its ratings on Marsh & McLennan's senior debt and commercial paper. The debt remains on watch for possible further downgrades.

"If there are additional complaints against other insurance brokers, the impact on Marsh may be less severe. On the other hand, if Marsh is the only company against which a civil complaint is filed, there is the potential for significant adverse financial and business implications for Marsh," Moody's said in a statement.

Investors pulled back from Marsh & McLennan shares on Monday for a third consecutive trading day. They fell more than 12 percent, Monday on the New York Stock Exchange. The drop came atop a 37 percent plunge last week.

Besides ACE and AIG, Spitzer's probe also mentioned Hartford Financial Services Group Inc. and Munich-American Risk Partners, a division of the German-headquartered Munich Re Group. None of the insurers has been charged.

David Wood, a partner in the Los Angeles law firm of Wood & Bender LLP, which specializes in helping companies enforce their insurance policies, said he wasn't impressed with the insurance company announcements that they were halting contingent commissions.

"If I get caught going 100 miles an hour in a school zone, don't you think I'm going to tell the officer, I won't go 100 miles an hour in a school zone again?" Wood said. "That's what I'm hearing."

He added: "What I'd be more interested in hearing is how they (the insurance companies) plan to rebuild trust and confidence with their clients."

He said that after the regulatory action, he expects to start seeing private lawsuits as companies seek redress for overcharging on their property and casualty insurance policies.

In making its announcement on Monday, ACE also said "we have been cooperating with the New York attorney general's office since its investigation began several months ago. We will continue to cooperate fully."

It also said that it has hired a legal firm to conduct an independent investigation at ACE.

Both AIG and Marsh & McLennan have said they have hired outside experts to look into their operations.

All three of the firms are headed by members of an insurance dynasty. Maurice "Hank" Greenberg is chairman and chief executive of AIG. His son Jeffrey is chairman and CEO of Marsh & McLennan, while another son, Evan, is president and CEO of ACE.