N.Y. AG Suggests Off-Shore Insurers, Rating Organizations, Insurer Investments Next Targets

November 16, 2004

New York Attorney General Eliot Spitzer signaled today he believes investigations of the insurance industry have only “scratched the surface” thus far of questionable activities and that additional probes are needed into off-shore insurers, insurance rating organizations and the investment activities of insurers.

Speaking before a Senate subcommittee, Spitzer said the existing relationships between certain large insurance brokers and insurance companies amounts to a “cartel based on hidden payments and preferential treatment.”

He argued that some problems within the industry go beyond the reach of what one state can do and require federal intervention, citing off-shore insurers sponsored by brokers and how insurance company investments affect costs.

Spitzer was a star witness before the Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security, which today opened hearings into insurance brokerage practices and the adequacy of the current insurance regulatory system.

Spitzer reviewed the history of his agency’s complaints against brokers Marsh & McLennan and Universal Life Resources, which have also implicated several large insurers including The Hartford, AIG, Metropolitan Life and Unum Provident.

He said his investigations of insurance brokerage practices found that “favoritism, secrecy and conflicts rule this market, and not open competition.”

The controversial official claimed that some in the industry are using Bermuda, the Cayman Islands and other offshore havens to evade state regulation. “This makes the states’ job of supervising these companies far more difficult and creates numerous opportunities for secrecy and insider dealings,” he stated.

He maintained that several of the offshore entities have been created by large insurance brokers themselves, citing Marsh’s involvement with Ace Ltd, XL Capital, Mid Ocean Re and Axis, and AON’s sponsorship of LaSalle Re and Endurance.

“This sets the stage for conflicts of interest, steering and self-dealing in insurance and reinsurance markets that we are just beginning to understand. And this is not to mention the numerous and profound tax implications of U.S. insurers to accrue investment earnings in favorable offshore havens,” he told federal lawmakers.

He maintained that alleged bid-rigging is only one way that brokers and insurers coordinate pricing, citing others “such as setting prices through rate service organizations and trade associations, which serve as clearing houses for setting and publishing of price information.”

He also said a third area should be of concern to lawmakers, that being the setting of premiums themselves, which he offered “remains a mysterious function.” He maintained buyers do not know what percent of their premiums goes to pay clams and what goes to be invested.

“With investments comprising the lion’s share of insurance company earnings, we need to ask ourselves to what extent are investment and interest rates driving premiums and what manner of disclosure is appropriate here.”

In his remarks, Spitzer concluded that the federal government’s “hands-off” policy on insurance regulation has not “entirely” worked and he suggested the federal government should step in, especially in the area of off-shore capitalization and insurer investments, as well as to set some minimum conduct standards for insurance professionals.

In discussing what he has learned from his own department’s probing, Spitzer maintained that many insurance lines function as “insiders’ clubs, where those with market clout and power pay for preferential treatment.”

He cited the consolidation in the industry at the top of the insurance brokerage market, where he said Marsh and AON together held 54 percent of the global brokerage market in 2002, with Willis holding an additional seven percent. He said these same firms dominate reinsurance brokerage markets.

“With so much power concentrated in two or three brokerage firms, the threat of collusion has become a reality,” he said. “We found that a small group of brokers and insurance companies essentially control the market, having created a network of interlocking connections and secret payments which ensure that the bulk of business goes to certain insurers and that profits remain high. The bottom line is that the consumer pays more for coverage.”

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