AIG’s Greenberg Expects More Transparency, Not Material Impact from Brokerage Charges

October 15, 2004

AIG Chairman Maurice Greenberg today said he does not think the charges brought by New York Attorney General Eliot Spitzer against giant insurance broker Marsh McLennan will hurt his company’s business but that they could lead to more disclosure and even changes in the way brokers are paid.

He suggested that American International Group (AIG) might stop agreeing to pay brokers contingent commissions.

Greenberg spoke at a morning conference call the day after Spitzer filed a complaint against Marsh that implicated but did not charge AIG and several other large insurers in an alleged scheme of account steering and bid rigging.

He said his company had been “proactive” in the matter of so-called placement service agreements (PSAs) that set forth contingency payments by seeking guidance from the New York State Insurance Department (NYSID) on one drawn up by Marsh prior to the charges being leveled but had not received a response from state officials.

He said AIG also began an internal investigation immediately after receiving a subpoena from Attorney General Spitzer in September. This internal investigation turned up two executives at the AIG excess casualty unit, American Home Assurance Company, who admitted to participating in bid rigging. He said AIG brought the matter to the attention of the attorney general and is continuing its internal investigation while also cooperating with the attorney general.

AIG is cited in the complaint as one of the insurers that allegedly agreed to submit fake bids on accounts as part of a scheme to help Marsh win and retain accounts.

“We have a highest standards at AIG and we are sickened by this action,” he told analysts. “We will do everything we need to do to weed it out entirely. We are not excusing it. I take responsibility for what goes on in this company.”

He said he did not think the controversy would seriously impact the property/casualty industry’s operating environment, predicting that hurricanes and other losses will have more effect on pricing.

“I don’t think it’s going to have a material impact on pricing in the insurance industry…it won’t make rates go up or down,” Greenberg said.

He also said he does not think that contingent arrangements add to the overall costs of an insurance package for clients. On accounts where PSAs are in effect, the fees paid to brokers would be lower than straight commissions paid to brokers without a PSA so that “in the aggregate” the final price does not differ much, he explained.

The AIG executive suggested it is possible his firm will no longer work with PSAs but will just pay straight commissions.

He estimated that about 15 percent of AIG’s commercial lines business comes from Marsh, the largest insurance brokerage.

As for the amount of bid-rigging taking place, he offered that AIG’s own investigation was still going on but that overall what had been uncovered at American Home was not “huge within the context of AIG.” Thus halting the improper practices should not hurt AIG’s business much.

Going forward, Greenberg said he thinks the controversy will lead to more transparency over PSAs and clarification from state officials over what is proper. He added that he believes that in many cases, clients were informed of the arrangements.

Concern over Spitzer’s charges was felt on Wall Street. AIG shares fell 10 percent by close yesterday, while Marsh & McLennan shares declined 24 percent; Chubb was down 5.9 percent and The Hartford, down 6.1 percent.

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