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INSURANCE BROKER SUED BY NEW YORK ATTORNEY GENERAL
Business Owners Need To Avoid Insurance Traps

On October 14, 2004, New York Attorney General Eliot Spitzer sued the world's largest insurance broker. The suit charges Marsh, Inc. with fraud, antitrust violations, securities violations and "unjust enrichment." As a measure of the magnitude of the allegations, Marsh's stock price has fallen over 50% in one week.

The action is a wake up call to insurance buyers who have long been deluded by insurance brokers posturing as "advisors."

All of the passages in quotation marks and italics below are direct quotes from the complaint that was filed in the New York Supreme Court (email ckrug@LicataKelleher.com for a copy of the complaint). Keep in mind that the problems are much broader than just with this one broker and many of the practices are universal in the industry - more suits are to follow.

Advocacy? – Contingent Commissions

"Marsh falsely tells its clients that it is their 'advocate' and that its 'guiding principle' is 'our client's best interest.' ... In fact, a central part of Marsh's business plan is to promote the interests of insurance companies with whom they have contingent commission agreements."

" We need to place our business in 2004 with those [insurance companies] that pay us the most." [From a Marsh internal email quoted in the complaint]. "Marsh's business plan has been to increase its contingent commission income by steering clients to favored insurance companies."

"So Marsh does not, as it contends, always 'consider their client's best interest.' Nor is Marsh truly its clients' disinterested 'advocate.' To the contrary, Marsh primarily represents its own interests and those of its favored insurance companies. Both the insurance companies and Marsh profit because of their common interest, a common interest created by the contingent commission agreement."

Contingent commissions are the most direct, institutionalized conflict of interest we know of. Brokers are given contingent payments based on high premium volume and low claims paid, a situation directly opposite to the interests of the insured. Insureds would benefit by lower priced policies with broad coverage. The contingent commissions are not just a creature devised by Marsh-- they are an industry-wide convention.

Bid-Rigging

"Numerous large insurance companies have participated in a bid-rigging scheme with Marsh."

"At times, Marsh's plans to maximize the profits it received from contingent commissions went even further: it designated winners. Marsh solicited - and obtained - fictitious high quotes from insurance companies in order to deceive its clients into believing that true competition had taken place. It promised to protect insurance companies from competition, and did so. It threatened to hurt the business of those who thought of truly competing for particular pieces of business."

"In many instances ...the client is making a misinformed 'final decision' on insurance coverage. As set forth below, Marsh has repeatedly provided clients with false and inflated quotes. ... A choice made by a client under these circumstances has been made under false pretenses created by both Marsh and the complicit insurance companies."

Although we would not assume this kind of formal "bid-rigging" is common among the broker community in general, we do know that misleading market "opinions" are constantly given by brokers for the purpose of minimizing the chances of the client insisting on obtaining true competitive bids. These opinions involve inflating the perceived risk (and related premium) involved in an account and deflating the perceived interest in the account among available underwriters.

Insurance brokers have created a marketplace where they both provide the insurance product and act as advisors. The Financial Times (October 18, 2004) has called them "monopolist gatekeepers." The brokers have found a way to confound the competitive process by bundling together the advice and the product. By selling extra "service" beyond bringing the insurance product to the table (which is their proper role), they have made it very difficult for buyers to put one broker in competition with another. Clearly, the only solution to this conundrum is to unbundle the advice and consultation from the purchase of insurance, and have them done by different firms. The risk manager/insurance advisor must conduct multi-broker competition. Competition between brokers will eliminate abuses as brokers will need to actually perform in order to win and retain business. The insurance buyer will be the ultimatewinner.

The marketplace has been perverted for years as market disincentives flew under the radar of most business owners. A few have always had in-house risk managers or consultants who provided advice separate from the product provided by the broker. For these business owners the problem has been minimized or eliminated. The widespread publicity of this new litigation may nowmake this separation of roles the norm.

Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it.

(C) 2004 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution).

Contact us for risk management strategy and implementation. We stand ready to be your partner in your business ventures.

Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.

The above is intended to be general information, and should not be construed as specific recommendations.

 For more information, contact Debora Wu, at DWU@LicataRisk.com

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Reports

Fall 2005 INTERNATIONAL RISK MANAGEMENT
 
Spring 2004 EMPLOYMENT LAW MORPHS INTO A MONSTER

Fall 2004 INSURANCE BROKER SUED BY NEW YORK ATTORNEY GENERAL

Summer 2004 UNDERSTANDING THE DYNAMICS OF THE INSURANCE MARKET

Winter 2004 WORLD TRADE CASE UNVEILS INNER WORKINGS OF INSURANCE BROKER

 Fall 2003 A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE

Summer 2003 PRESERVING COVERAGE FOR INNOCENT INSUREDS

Spring 2003 LEAVING TERRORISM COVERAGE ON THE TABLE

Winter 2003 COMPUTER SECURITY IS NOT A BLACK HOLE

Fall 2002 "LET'S BE CAREFUL OUT THERE

Spring/Summer 2002 WHAT WARREN BUFFET KNOWS ABOUT INSURANCE COMPANY FINANCIALS

Spring 2002 OPPORTUNITIES ABOUND IN DEVELOPMENT OF CONTAMINATED PROPERTIES

Winter 2001 "YOU CAN'T PAY US THIS MONTH? WHAT DO YOU MEAN 'NEW DEVELOPMENTS?"

Fall 2001 WORLD TRADE TERRORISM -- REPERCUSSIONS FOR INSURANCE MARKET

Summer 2001 ENERGY AVAILABILITY: CURRENT REALITY OR FOND MEMORY?

Spring 2001 "HOLD THAT BALLOT UP TO THE LIGHT"