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Spitzer urges deeper probe of insurance sector

Congress should dig deeper into the burgeoning scandal within the insurance industry, a top investigator said Tuesday, claiming lawmakers will find a “Pandora’s box” of unethical conduct.
/ Source: The Associated Press

Congress should dig deeper into the burgeoning scandal within the insurance industry, a top investigator said Tuesday, claiming lawmakers will find a “Pandora’s box” of unethical conduct.

New York Attorney General Eliot Spitzer, who launched an investigation Oct. 14 into major brokerages and raised accusations of bid rigging and price fixing, told the Senate Governmental Affairs Committee that more revelations about bad practices are coming.

The scandal has led already to high-level resignations, employee layoffs and guilty pleas by some executives.

“There have been criminal pleas entered, there will be more criminal pleas entered very shortly,” said Spitzer.

Connecticut Attorney General Richard Blumenthal told the committee that taxpayers may have paid excessive charges for property casualty, health and workmen’s compensation insurance that municipalities in his state felt powerless to challenge.

Blumenthal is insisting that state insurance laws, including Connecticut’s, should be “reinvigorated and reinvented” to combat fraud, illegal steering and bid-rigging. He said any changes in federal regulations should not weaken the historic role of states in regulating the industry.

Insurance companies are supporting legislation that they say would create uniform, nationwide standards for the industry. State officials have expressed fears that whatever Congress writes will pre-empt and may be weaker than state regulation

Spitzer, who has also conducted high-profile probes of Wall Street investment firms and mutual fund companies, said Congress needs to take a harder look at the insurance industry. The recent movement of insurance capital to offshore entities is a worrying sign, he said.

“These are issues that Congress must begin to inquire into,” said Spitzer. “There is, I suspect, a Pandora’s box that should be opened.”

Spitzer, in a civil lawsuit, maintains that Marsh & McLennan Companies Inc. took payoffs from insurance companies, resulting in businesses being forced to pay more than necessary for property and casualty policies.

He has accused March, the nation’s biggest insurance brokerage, of bid rigging, price fixing and heavy use of incentive fees, sometimes called marketing service agreements or placement service agreements. They are fees paid to brokers over and above regular commissions by insurance companies in exchange for getting more business.

Some of the largest insurers, including American International Group Inc., ACE Insurance Co. of North America, The Hartford and Munich American Risk Partners are named in Spitzer’s suit. Others are said to be under investigation. Two executives of AIG and an official of ACE have pleaded guilty to participating in illegal conduct.

“The damages are vast, the corruption is remarkable,” Spitzer said at a news conference last month.

A number of insurance companies, including Marsh & McLennan, have announced changes in business practices and commissions since the inquiry began.

New York-based Marsh & McLennan, whose share value has dropped nearly 42 percent since Spitzer announced his investigation, ousted two top executives of Marsh Inc., its risk and insurance services unit. The parent company’s senior vice president and general counsel also stepped down. The company also said it will lay off 3,000 employees, or about 5 percent of its work force, because of fallout from the probe.

In another suit, Spitzer has accused Universal Life Resources, a California-based company that brokers life, accident and disability policies for leading U.S. companies, of pocketing millions of dollars a year in hidden payments from insurers and from charges on clients’ unsuspecting workers. He contends that the company’s activities raised the cost of insurance for workers who contributed to coverage they secured through employers.

ULR has brokered coverage since 1999 for 4 million employees of companies including Intel Corp., Eastman Kodak Co., Colgate-Palmolive Co., Marriott International Inc., UPS Inc., Viacom Inc., Brinker International Inc. and Dell Inc., according to Spitzer’s office.

The second-largest U.S. insurance broker, Aon Inc., is being investigated by Spitzer’s office for allegedly “tying” coverage to limit competition, according to a source close to the investigation. Tying is the practice in which brokers require insurance companies to hire them to handle their reinsurance needs in exchange for steering more customers their way.