A wave of redundancies has hit insurance broker Marsh following the fall-out of New York Attorney General Eliot Spitzer’s investigation of the insurance industry. Marsh was sued in October for alleged bid-rigging and price-fixing, and several major insurers including AIG were also investigated.
These payments are not illegal. Industry groups defend them as necessary in many cases. But the investigation has questioned whether they raise conflicts of interest.
At Marsh, these payments were the determining factor in the broker’s decision about which companies to send its clients to. To preserve the appearance of a competitive process, Marsh asked several insurers to enter bids that were higher than the one of the company to which it wanted to steer the business. This practice – called bid rigging – is a crime.
Spitzer has charged several others with similar collusive behaviour, including insurance giants Met Life and AIG.
Michael Rutherford, who was head of political risk business in London has left to join Axis. Penny Walker, a senior political risks broker, has also left. Rutherford reportedly resigned as major commission transparency irregularities came to light on Marsh’s terrorism account in the UK following the Spitzer report and the terrorism team reported to him. The head of the terrorism team, Julian Taylor, was dismissed.
The final weeks of October 2004 will be remembered as a watershed in US insurance history, with brokers and insurers scrambling for damage control. Marsh announced it was no longer accepting contingency payments from insurers, followed by Willis and Aon, while AIG announced it was no longer paying them. Then Marsh settled with the court, having to pay out US$850mn.
Jeffrey Greenberg, chief executive officer of Marsh, stepped down, while other industry executives were suspended or arrested. Insurance stocks plummeted, with Marsh losing 50% of its value within days and class action suits soon abounded. All this happened at a time when, in general, the US insurance industry seemed to be responding well in terms of profitability and market conditions. In many ways, October’s insurance scandals could not have come at a worse time.
Some US$845mn in such payments was generated for Marsh during 2003 alone. These fees represented 7% of the firm’s total revenue but a much greater portion of its profits since the acquisition cost of these fees was minimal. In November, Marsh announced it was laying off 3,000 employees and is looking at its worst profit scenario since 1997.
There is a new Marsh business model imminent, which will likely focus on ways to make up for lost income. More layoffs are expected.
New York, along with many other states and the federal government, is considering regulations that will better prevent such behaviour. Many insurers resent this idea, describing Spitzer as more concerning with his own political image than with creating effective regulations.