A lawsuit against a major reinsurance broker for alleged antitrust activity in Connecticut is being used to raise broader questions about the largely unregulated reinsurance business.
Connecticut Attorney General Richard Blumenthal has charged that international reinsurance intermediary Guy Carpenter & Co. violated his state’s antitrust laws. While Blumenthal’s complaint targets Guy Carpenter as its defendant, the elected official points an accusing finger at 20 reinsurers as co-conspirators and attacks some of the practices of the entire reinsurance industry.
On Monday, Blumenthal announced he was filing a suit in state Superior Court claiming that Guy Carpenter’s actions caused reinsurance costs for 170 primary insurers to escalate, which in turn caused the price of insurance for Connecticut insurance buyers rise as much as 40 percent.
The suit alleges that as part of the scheme, Guy Carpenter illegally funneled business to Excess Reinsurance Co., a company in which it owned interest.
The complaint cites nine other alleged co-conspirators, although they are not named as defendants. Blumenthal said the investigation is ongoing and further action is anticipated.
The suit seeks damages, restitution and civil penalties on behalf of Connecticut consumers.
Both Guy Carpenter and Excess Reinsurance say the allegations are groundless.
“Simply put, there is no basis for the attorney general’s lawsuit and we intend to defend ourselves vigorously,” Guy Carpenter said in a statement. Guy Carpenter is a subsidiary of New York-based Marsh & McLennan Companies.
According to Guy Carpenter, Blumenthal’s complaint is based on a “fundamental misunderstanding of reinsurance facilities. The broker maintains that many of its clients have confirmed during the investigation that “these facilities result in improved availability and terms of reinsurance and ultimately benefit insurance buyers.”
Excess Reinsurance Co., which stopped underwriting in 2003, said the antitrust allegations against it are without merit.
According to Blumenthal, what reinsurers and reinsurance brokers do affects insurance buyers everywhere.
“Thousands of consumers in Connecticut and many more in most states across the country paid premiums up to 40 percent higher, costing them potentially hundreds of millions of dollars,” Blumenthal said. “We are drawing back the cloak of secrecy on industry practices that inflated prices and profits at the expense of 170 insurance companies and their customers. Our investigation is active and ongoing.”
Blumenthal’s complaint discusses a series of alleged conspiracies, which it says were principally led by Guy Carpenter.
Guy Carpenter is accused of creating markets that – in its own words – were “insulated from competition,” according to Blumenthal. Blumenthal claims that Guy Carpenter “conspired with numerous reinsurers to exploit its position as a dominant reinsurance broker, … fixed prices, shut out competitors, manipulated the markets and substantially increased profits in the lucrative reinsurance market.”
He said his investigation has unveiled “pervasive anticompetitive and anti-consumer practices” within the reinsurance industry, citing “a shifting coterie of more than 20 coconspirators – reinsurers willing to play Guy Carpenter’s game of deceit, and damage consumers.”
He said the reinsurance broker and companies created an illusion of competition. “They raised costs for insurance companies, which ultimately were paid by businesses, homeowners and taxpayers – almost anyone or any entity that buys insurance,” he maintained.
Blumenthal said the investigation was prompted by primary insurers hiking prices especially for coastal property risks and citing their increased cost of reinsurance when doing so.
Blumenthal used the opportunity of the complaint filing to criticize the lack of regulation of the reinsurance industry.
“Reinsurance is essentially a completely unregulated business, where backroom deals abound. Guy Carpenter’s illegal agreements are akin to the illegal trusts that existed over 100 years ago – spurring enactment of our nation’s antitrust laws. We will fight vigorously for both court remedies and reforms in industry practices that have harmed consumers at every level,” he said.
Additional reinsurers – alleged co-conspirators in the schemes – identified in the lawsuit, include Arch Reinsurance Co. of Nebraska, Aspen Insurance UK Limited of Bermuda, Employers Mutual Casualty Co. of Iowa, Farmers Mutual Hail Insurance Co. of Iowa, Farm Mutual Reinsurance Plan of Canada, The Hartford Steam Boiler Inspection and Insurance Co. of Hartford, Conn., Swiss Reinsurance America Corp. of Armonk, N.Y., The Toa Reinsurance Co. of America of New Jersey and QBE Reinsurance Corp. of New York.
Guy Carpenter allegedly funneled lucrative business to select inner circles of reinsurers – or “facilities” – in exchange for excessive fees and other benefits from these reinsurers.
Reinsurers included in these facilities agreed not to compete against the prices and terms set by Guy Carpenter or another “lead reinsurer” and instead agreed to be bound by the same prices and terms as the other participants, according to the complaint.
If a reinsurer was unwilling to “play ball,” that reinsurer was foreclosed access to potential reinsurance business that it was otherwise willing to compete for and write, the complaint continues.
Blumenthal maintains that “[b]ecause of the unregulated nature of the reinsurance industry, Guy Carpenter’s dominant position in the market and the inertia inherent in the industry, Guy Carpenter maintained these conspiracies virtually undetected for almost 50 years. Guy Carpenter exploited a group of approximately 170 insurance companies – its clients – never disclosing its relationships with the reinsurers or the fact that it was often the entity setting the price and terms for the reinsurance contracts.”
The success of the price fixing schemes produced profits on the various lines of business as much as 40 percent higher than industry averages for decades, the suit claims. It further claims that during that period, more than $1 billion in premiums unlawfully flowed to the reinsurers as a result of the conspiracies, inflating insurance premium costs for consumers by as much as 10 to 40 percent.
The complaints alleges that Guy Carpenter received more than $80 million in fees, plus millions more in undisclosed contingent commissions as a result of the conspiracies. It quotes one reinsurer as stating, Guy Carpenter “has a sweeter deal through (these facilities) and would obviously like to funnel more premium through it.”
The scheme also made it easier to place business because – unbeknownst to its clients – Guy Carpenter did not have to seek competitive bids or quotes on behalf of each client, according to the attorney general. The complaint cites a lead reinsurer in describing the scheme:
“The facility structure continues to hold potential for outside perception of conflict of interest, since the (facility) business is placed at brokerage terms that are more lucrative for Carpenter than normal placements, and open market competition is eliminated on over 150 individual ceding company programs.”
The suit alleges that Guy Carpenter also steered hundreds of millions of dollars of business over a 50-year period to a company in which Guy Carpenter had a direct ownership interest and management role – Excess Reinsurance, whose office was located physically within Guy Carpenter’s Philadelphia office.
Blumenthal said his ongoing investigation has also “revealed several other problematic practices in the reinsurance industry.”
As one example he cited the industry practice involving “best available terms” that requires all reinsurers bidding on a contract to receive the same price and terms, resulting in an “alignment of premiums” – even if one or more reinsurers quoted a lower price or better terms for the client.
Thus if one reinsurer included in the contract negotiates a higher price or more restrictive conditions, then all other reinsurers – including the lower bidders – receive the same higher price and restrictive conditions. Blumenthal said his investigation has found that this practice is anticompetitive. He said the European Commission on Competition echoed his belief in a recent report, finding these agreements were anticompetitive and led to higher prices.
View the entire complaint – (PDF-293KB)