Published In:
Corporate Risk Date Published:
14th February 2005 Author:
George Lekakis
The regulatory crackdown on shonky sales practices in the United States insurance industry has spread beyond the State of New York, with Connecticut Attorney-General, Richard Blumenthal, threatening to unleash a wave of legal action against brokers and insurers.
On January 21, Mr. Blumenthal announced that his office had used insurance broker Marsh & McLennan Inc and insurance provider ACE Financial Solutions Inc for a scheme in which ACE allegedly paid March a secret commission of $US50,000 to steer an $US80 million state contract to the company.
In a media release, Mr. Blumenthal stated his office was investigating whether ACE may have paid additional illegal commissions to March in the deal.
The action follows the civil suit over contingent commission initiated by New York Attorney-General Eliot Spitzer last year, which triggered an overhaul of senior management and sales practices at Marsh & McLennan.
According to a report in the Wall Street Journal, Spitzer is seeking $US750 million from Marsh & McLennan as settlement and also wants a public apology from the firm.
As Corporate Risk went to print, neither the company nor Spitzer's office had confirmed details of the report.
However, Mr. Blumenthal signalled that more legal action was in the pipeline over insurance industry practices in Connecticut.
"This lawsuit - the first of a series anticipated against insurance abuses - shows particular arrogance and avarice in victimizing the state and its taxpayers," he said.
"Whatever name they are called - bonuses, commissions, overrides - the effect of these concealed kickbacks is to steer contracts, corrupt competitive bidding, inflate costs and deceive customers.
"Our investigation is active and ongoing, and additional legal action will be forthcoming shortly involving other companies and consumer victims."
In the formal civil complaint, Mr. Blumenthal alleges that Marsh falsely claimed that it considered only the state of Connecticut's best financial interests in arranging the contract, and that it also falsely claimed that it recommended ACE solely on ACE's qualifications.
The Australian Securities and Investments Commission is investigating whether the local insurance industry is exposed to anti-competitive sales practices, such as rigged bids and contingent commissions.
The inquiry was launched in December by ASIC's executive director of financial services regulation, Ian Johnston, and is expected to publish a report of its findings in Marsh.
Meanwhile, one of the world's largest cost and management consultancies, ERA Insurance Services Pty Ltd, has launched a new service aimed at shielding Australian corporates from these practices.
The company is advising Australian clients to audit the services provided by insurance brokers in recent years to establish whether brokers provided full disclosure on fees and commissions.
ERA director Ken Armstrong (pictured) believes that shonky sales arrangements and practices are present in the Australian market.
"There is absolutely no doubt that contingent commissions related to volume and profit bonuses are paid in Australia - they are normally paid under what are known as binder agreements," he said.
"I don't think brokers in Australia have declared to clients that they have been acting under binder agreements and that they have been acting on behalf of insurance companies, rather than in the interests of clients."
Mr. Armstrong said that in the last three months his firm had reviewed the insurance arrangements of six corporate clients and made savings of more than 26 per cent on premium costs without requiring the client to change insurers.
"I have evidence of a major broker using a binder agreement to place his client's business at rates that were fifty per cent more than that same broker was able to obtain on the open market."
