To The Point The regulators' trifecta Troubles came in threes for AIG By Emanuel Levy
Race track aficionados who place bets, and that’s probably near the 100% mark, dream of that moment when the horses they chose for win, place and show cross the finish line in that exact order. The odds for this achievement are considered slim, but the stakes are high in both dollars and esteem. The term “trifecta” seems to be gaining some usage in areas outside the track where the concept is applicable. That thought occurred to me when AIG in a February 9, 2006, press release made public its settlement with federal and state regulatory agencies. The regulators won agreement on their three major contentions: The insurer engaged in “bid rigging,” including the fraudulent payment of contingent commissions; there was falsification of financial statements to the detriment of shareholders; and it underpaid workers compensation premium taxes to all 50 states and the District of Columbia. This is a monstrous oversimplification of the acknowledgment of guilt and the findings of the state and federal regulators, who had stripped the giant international insurer to its bare bones in their investigation of suspected misdeeds and mis (mal) feasances. And, as just about everyone in the business world knows, it forced legendary CEO Maurice R. Greenberg out of office and into the friendly acres of his huge, successful C.V. Starr enterprise. From there he has been engaged in an internecine battle with AIG over the rights to certain policyholders and into a sniping contest with New York Attorney General Eliot Spitzer, telling the press that he has readied a paper detailing refutations of such allegations that AIG, under his leadership, was guilty of financial improprieties. So far as I can determine, that document is under wraps and has not been made public. Greenberg is unquestionably most capable of protecting his own interests and has legal counsel of tremendous prestige. Nevertheless the more time that passes, in my opinion, the more credence will be on the side of the regulators. The probe was actually initiated by Spitzer in 2004, triggered by a “whistle blower,” a Washington, D.C. legal foundation. The investigation, which at first centered on Marsh, spread to other major brokerage firms and several insurance companies considered to be involved in a conspiracy to direct the distribution of insurance business through a scheme to get the highest premiums for insurers by rigging bids. It later turned out that the risks involved only excess liability. For their complicity in the scheme, or perhaps traffic control, the brokerage firms were allegedly “rewarded” with contingency commissions in high ranging numbers. Spitzer, who began serving subpoenas on the suspected participants, unleashed his small army of attorneys and investigators to get the “evidence.” He was soon not alone, as the SEC, the New York Insurance Department and other regulatory agencies joined the inquiry. Spitzer’s foray into the insurance business, uncovering law and integrity violations, in a sense, left egg on the faces of state insurance departments. To its credit, the New York Insurance Department joined with the attorney general in sorting out the disreputable behavior. Of course, this is pretty well-chewed-over news because of the widespread reporting on the action against Marsh & McLennan that resulted in a shake-up of top management, including the ousting of CEO Jeffrey Greenberg and an ultimate agreement for the firm to set aside $850 million for “restitution” to those insureds who were overcharged. The settlement also called for ending the practice of accepting contingent commissions. There were indictments of individuals charged with complicity as well as some admissions of guilt by other executives. Currently, according to the New York Insurance Department, there are l7 outstanding indictments of individuals at five companies, including eight former Marsh employees, who had pleaded guilty to criminal charges. In addition, other restitution funds, under the regulators’ prodding, were exacted from Aon Corporation ($190 million) and Willis North America ($50 million). The books are still open on others cited as co-conspirators. The whole sorry affair, almost none of it litigated because the insurers and brokers agreed to settle (some fingers were found imbedded in the cookie jar), has been subject to substantial media coverage, not only in the United States, but in many place all over the world, including England and Australia. Mention of the allegations, findings, agreements and the huge dollar restitutions, have gotten news media coverage more than 2,000 times, from 2004 to present, with 144 mentions to date in 2006 and more to come. There have been well over a million words on all aspects of the story, both in news columns and editorial pages. However, the public does not seem to be outraged, or even interested. A cursory examination turns up no references in letters to the editor pages of newspapers. There has been no mention, as far as I have observed, of consumer commentary in the news reports either by individuals or organizations. Readers of Rough Notes, who are in daily contact with customers, are better judges than I am of whether the public has expressed any opinion about the charges that insurance companies or brokers and agents were engaged in tactics that are reprehensible or harmful to purchasers of insurance. Strangest of all is the absence of comment from risk managers, who were actually the ones who, as representatives of the corporate insureds, fell for the bid rigging. There are references in the details relating to the bid-rigging fiasco that, on occasion, a risk manager challenged the rates quoted to them by their brokers, but invariably accepted the coverage. News stories never mentioned these highly professional corporate buyers, but that may be because the entire “bidding” scheme defied explanation and general news writers have little or no clue as to how the business operates. A recent Web commentary by the Department of Risk Management and Insurance of the University of Georgia, one of the most esteemed university insurance specialty divisions, put the craft into perspective in its effort to recruit new students. It said: “The broad-based risk management industry employs over three million people worldwide, representing over a trillion dollars of business assets. We can assume that as the world’s wealth grows, and population ages, the demand for risk management professionals will also increase.” That makes the silence of the risk management segment on the bid-rigging revelations even more difficult to explain. What reignites the unhappy series of events is the agreement just entered between AIG and Spitzer, dated January 18, 2006, but made public in early February. It is noteworthy because it takes up more than 40 pages explaining AIG’s role in the “trifecta” and providing details of the intricate and clandestine bid-rigging mechanism that almost defies belief. The AIG agreement lists the regulators’ “facts” about AIG’s participation in the bid-rigging “schemes,” since “at least the mid-1990s” involving the payment by it and other insurers of millions of dollars in so-called ‘contingent commissions’ to the world’s largest insurance brokers.” The bizarre element uncovered was that many of the transactions were conducted through e-mail communica-tions, soliciting “losing bids” and listing exclusions—a real smoking gun. There are a half a dozen or so examples of this unabashed rate manipulation. Here, for example is the content of one such e-mail, from a Marsh underwriter to a “purported” competitor of AIG regarding an account: “AIG has quoted 25xp-$525,000; 50 xp-$675,000 GL attachment 2/4/4; AL 2mm. Please price your indica-tions for 25 [xp] pr 50 [xp] or both if you can. This is a fake quote both of them are fake.” The January 18 agreement between the New York Attorney General and AIG accepts settlements amounting to approximately $1.64 billion, most of it to resolve claims. A set-aside of $375 million will be paid into a fund to be supervised by Spitzer’s office and the New York Insurance Department to be used principally to reimburse AIG insureds that purchased excess casualty policies through the Marsh deception. The New York Insurance Department said that these insureds probably number in the thousands, but that no specific numbers are available. The department spokesman said AIG will review its data to try to uncover these insureds and that those insureds who think they were victims of the scam are urged to seek refunds while AIG will review its records to determine which of its insureds were overcharged. Preceding the AIG’s current mea culpa, Spitzer had hit hard, particularly at Marsh & McLennan, forcing the ouster of CEO Jeffrey Greenberg and other leaders as untrustworthy. His agreement in January 2005, to let the firm escape prosecution, called for the setting aside of $850 million for restitutions to policyholders using a premium formula for insureds served between January 2001 and December 31, 2004. Also charged with the collusion were Zurich American Insurance Company, ACE USA and Liberty International Insurance Company. The other changes agreed to by Marsh have certainly been the subject of enough official and media coverage without additional reference here. Again, it’s somewhat hard to fathom why there was no public outcry, except to presume that the sophistication surrounding the behavior of these giant insurance corporations and their machinations went over most heads. It is also probable that the high profile of AG Spitzer and his uncompromising demands for reforms, transparency on commissions and more regulatory surveillance served to create public confidence at all levels. The fact that the companies and brokers acknowledged their culpability in formal statements and written agreements, using unambiguous terms, is also a positive factor. However, that does not explain why the readers of Business Insurance magazine, with a reported subscribership of 45,000—a large percentage of whom are risk managers—voted Marsh as the “best overall commercial lines retail insurance broker” in a poll taken during the summer of 2005. Results were reported in October 2005. The poll criteria were service, value, quality and innovation. Obviously, the bid rigging and contingent commission difficulties were a blip in comparison to the brokerage firm’s operations in more than 100 countries, producing annual revenues of over $5 billion and employing nearly 30,000. But despite all the agreements, the conflict is not over. There are still outstanding indictments against the actual perpetrators of the unsavory practices. Also still in contention is the dispute between AIG, as now constituted, and the Greenberg posture in C.V. Starr & Company. It has been described recently as a “nasty and complicated divorce.” That is probably a modest description in view of Greenberg’s unyielding position, his obvious resentment of his former associates, and the vast amount of money and customer control that are at issue. C.V. Starr has four brokerage units. Greenberg has never been perceived as a pussycat, and there were bad vibes between him and the independent board members of AIG before he was unceremoniously ousted. Almost certain to come into conflict is the assertion of the attorney general that AIG and General Reinsurance had colluded in a $500 million finite reinsurance deal that was not based on insurance but was devised to enhance the financial position of AIG in an effort to deceive shareholders. This dispute has resulted in indictments handed down early in February against a small number of executives of the reinsurer, a subsidiary of Berkshire Hathaway, and a former AIG executive. A federal grand jury in Norfolk, Virginia, authorized the indictments, and the SEC has hooked into the action. Evidently because he was not seen as a participant in the negotiations for the reinsurance transaction, Greenberg was not indicted, but was named as a co-conspirator. When and if the court ever gets to consider the dispute, proceedings are likely to be explosive and there is a possibility that finite reinsurance will finally be defined. The whole matter promises to be dramatic but is unlikely to have any real impact on the business as a whole. Brokers and agents should at least have a familiarity with the issues in the unlikely event their customers ask about what it all means. It’s not an easy dilemma to dispose of. Hopefully, Greenberg and the indicted executives can explain the transaction and its validity. Indictments do not mean guilt in any event, and especially when the subject matter is esoteric. * The author |
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