Spitzer's probe meant brokers and insurers lost consumer confidence, says Ben Cook
When Elliot Spitzer’s investigation into contingent commissions and bid-rigging in the insurance industry was at its height in 2005, the then New York Attorney General assured the public that he was “establishing new ethical ground rules” for the sector. However, though Spitzer sought to ensure ethical standards of behaviour were adopted by brokers and insurers, his own attitude to ethics was rather more questionable. This was demonstrated by the recent resignation as New York governor of the so-called “Sheriff of Wall Street” following revelations about his involvement in a prostitution ring. As comeuppances go, Spitzer’s is surely one of the most spectacular.
A man who was tipped by some to be a future president, Spitzer was the scourge of the insurance industry two years ago. Determined to end practices such as the payment of contingent commissions, bid rigging and price fixing, he hit some of the world’s leading brokers with hefty fines. In March 2005, Marsh & McLennan paid $850m to settle charges that it conspired with insurance providers to rig the market. Though Marsh said it “neither admits nor denies the allegations”, the agreement with Spitzer meant the money would be paid back to affected policyholders over a period of four years.
In the same month, Aon agreed a $190m settlement following allegations of fraud and anti-competitive practices. The agreement stated that policyholders would be compensated over a 30-month period. Aon also agreed to make a number of reforms, including the adoption of a new policy in which the company accepted only one payment for an insurance contract at the time of placement – payments also had to be fully disclosed to, and approved by, its customers.
“Spitzer was the scourge of the insurance industry
Meanwhile, Willis agreed a $51m settlement with Spitzer in April 2005. Though Willis refused to acknowledge any wrongdoing, it agreed to compensate clients that had placed business with the broker between 2001 and 2004. Joe Plumeri, chairman and chief executive officer of Willis Group Holdings, said: “We welcome the Attorney General's conclusion that it was not appropriate to file a complaint against our company based on the findings of his investigation – we also are pleased that the investigation found no evidence of the practice of bid-rigging or tying.” Insurers also incurred the wrath of Spitzer. Notably, in April 2006, ACE announced it would pay $80m in restitution and penalties following allegations of bid-rigging.
So, what legacy did Spitzer leave the insurance industry? Aside from the financial penalties imposed on major brokers and insurers, perhaps more damaging was customers’ loss of trust in the sector. “Consumers must have faith in their ability to fairly participate in the market – the actions of a few large brokers and insurers have shaken that faith”, said Ernst Csiszar, president and chief executive officer of the Property Casualty Insurers Association of America, in 2005. As Spitzer seeks to rebuild his reputation, he may be able to learn some lessons from the insurance industry about how to regain trust.