New York Times: Insurance Investigation Widens to Include a Look at Costs

Insurance Investigation Widens to Include a Look at Costs
By JOSEPH B. TREASTER
New York Times

An investigation into the insurance business is expanding, investigators said yesterday, as Eliot Spitzer, the New York attorney general, increasingly turns his attention to whether American corporations and their employees are paying more for life, disability and accident insurance than they should be.

In California, John Garamendi, the state insurance commissioner, said last night that he, too, was concerned about extra costs to individuals for life, disability and accident insurance and that he was considering legal action against at least one broker and several insurance companies that sell what are known as employee benefits.

While the current focus of the New York investigation is on bid-rigging and price-fixing among commercial insurance brokers and insurance companies, investigators say Mr. Spitzer is also pursuing reports of payoffs that may increase coverage costs for tens of millions of individuals.

"Eliot Spitzer's interest is in the retail stuff, the effect on regular people,'' said David D. Brown IV, the chief of the state attorney's investment protection bureau.

"Our investigation is broadening and deepening,'' Mr. Brown said. "We are going to look across product lines, across insurers and across brokers, the big and the little."

The insurance controversy became public last week, when Mr. Spitzer sued Marsh & McLennan, the world's biggest commercial insurance broker, accusing the broker of rigging bids from insurance companies and fixing prices for corporate customers in exchange for fees from the insurance companies.

Three insurance companies have entered guilty pleas to rigging bids, and more criminal charges are expected, perhaps as early as this week.

Such bid-rigging schemes, investigators contend, have indirectly increased the costs of everything from houses to toothpaste as corporations pass along the expense. The bid rigging was discovered, Mr. Spitzer said last week, during an investigation into incentive fees insurers pay to insurance brokers.

But there are other potential conflicts of interest in insurance that may have a more direct impact on consumers. Investigators in New York and California are now examining whether brokers and consultants are demanding extra fees for favored treatment in the sale of employee benefits like group life and disability coverage.

Like the investigation into commercial insurance brokers, this inquiry began when Mr. Spitzer's office received a tip. In this case, an industry executive, upset by deals involving brokers and employee benefits insurers, telephoned the attorney general.

In June, subpoenas were issued to Aetna, Cigna and MetLife, some of the biggest sellers of what the industry calls group benefits.

These include life, disability and accident insurance bought for workers by businesses and nonprofits, who often allow employees to add to their coverage if they dip into their own pockets.

"We're very interested in health-related lines and auto insurance,'' one investigator said, "because those are the ones that affect consumers the most.''

In California, Mr. Garamendi said he had been discussing with his staff and other California officials either filing a lawsuit or joining in with others in a lawsuit on employee benefits. He said he planned to announced his decision later this week.
"We are on the verge of taking legal action,'' he said.

The California commissioner said he also planned to draft new regulations that would require insurance brokers to disclose all compensation from insurance companies and explicitly prohibit brokers from steering business to insurers in exchange for payoffs.

The role of insurance brokers is to obtain the best coverage for corporate insurance clients at the best price in exchange for a fee. They are supposed to deal with insurance companies at arms length. Long ago, however, they began collecting fees from the other side of the deal, from the insurance companies, creating a conflict of interest, some industry experts said.

In the field of employment benefits, brokers and consultants often receive two kinds of special payments in their dealings with insurance companies, according to an executive who works in the field.

The most widespread form of payments is a reward to the broker or consultant from an insurance company for a certain volume of business and for business that is expected to have few claims and therefore be especially profitable. This kind of payment, investigators and industry executives said, is the same as the kind widely used in commercial property and casualty insurance; in property casualty insurance, it raises the cost of insurance generally.

These arrangements are known as contingency fees, placement service agreements and market service agreements, just as they are in property casualty insurance.

But an additional form of payment that is absent in property casualty transactions results in higher individual costs for corporate employees who choose to buy life, disability or accident coverage beyond the amount provided by employers.

In those transactions, the executive said, the insurance company tacks on an additional annual fee of perhaps $5 to $15 for every worker who increases coverage.

While the extra money is collected by the insurance companies, the executive said, it is passed on to the brokers. Sometimes, the executives said, employers are aware of the extra charge, sometimes not.

In any case, the executive said, because of the hidden fees on workers, the corporation gets the services of a broker for less in direct costs than otherwise.

The degree to which incentive fees were important to Marsh was illustrated late yesterday, when the company said that it took in $843 million in such fees last year, or about 12 percent of its brokerage revenue of $6.9 billion. The disclosure was the first time the company had outlined the financial impact of the payments.

Marsh said on Friday that it was halting the incentive payments. Yesterday, the company said that the decision would "negatively impact near-term operating income.'' The payments represent 7 percent of its overall revenue. (Marsh's other main businesses are Putnam Investments and Mercer Consulting.)

Mr. Spitzer said on Thursday that the incentive payments could represent more than 50 percent of the parent company's income of $1.5 billion last year.

But Marsh said last night that it could not be sure how much income it earned through the payments because it was unable to determine the expenses associated with them. Marsh said, however, that it paid at least $340 million in expenses in connection with the payments in 2003.

Jeffrey Greenberg, the chief executive of Marsh & McLennan, had previously said that it was company policy not to break out either the revenue or the profits from the payments in its financial statements.

Two rating agencies, Fitch Ratings and Moody's Investors Service, lowered their estimates of Marsh's ability to repay debt and said further downgrades were possible.

Earlier yesterday, shares of Marsh & McLennan fell for a third day. The stock closed down $3.63, at $25.57. Since Mr. Spitzer announced the lawsuit on Thursday, the shares have tumbled 45 percent.

And the investigation is gathering speed. Already, Mr. Spitzer has 20 lawyers investigating the insurance industry, or nearly double the number involved in the investigation into mutual funds.

"This is a much bigger team,'' Mr. Brown said, "and it's much more interdisciplinary. The other cases were largely investor protection. This one involves people from our consumer fraud unit and antitrust as well as from criminal prosecutions."

Referring to Marsh, Mr. Brown said, "The first place we looked, we found massive issues.

"We're going to keep pounding on this,'' he said.