Insurance Fraud

Headline: World’s Largest Insurance Broker Accused of Rigging Bids.

Most people probably missed this story but I am following it with great interest as are, I am certain, all my former colleagues in the insurance business. Here’s what apparently happened as best I can put it together:

Marsh & McLennan (Marsh Mac, as we competitors not so loving called it) is the world’s largest insurance broker. They handle lots of big, high premium business accounts. When they place business with an insurance company, they qualify for additional commissions at the end of the year computed on differing formulas of sales volume and profitability. Almost every agent or broker in the insurance industry has this kind of “contingent” or “bonus” commission arrangement and it can be, and usually is, a significant portion of the agent/broker’s annual income. Some contingency plans are better than others and it is to the benefit of the agent/broker to place more business there. This is the reason for these arrangements in the first place. It provides an incentive for the agent/broker to do business with a particular company.

There is a check and balance on this system which protects the customer. Normally, the fear of competition keeps the broker honest. He or she will shop for competitive quotes at renewal to make certain they have the best price and coverage. And, insurance customers routinely let other brokers bid in order to keep their own broker honest.

But, apparently, Marsh Mac had accounts who thought that because they were the biggest, they were also the best and became what we used to call (probably still do), “captive accounts.” These are accounts one could rely on not to get competitive bids. Now, this would have been okay as long as Marsh Mac was doing its job. Unfortunately, they didn’t and here’s where the fraud occurred.

Marsh Mac wanted to maximize their contingency income by placing business with certain insurers who paid them more. In the aggregate this amounted to millions of dollars. In order to make their clients think they were doing a good job they would present bids from other insurers giving the impression that they were searching the marketplace. But they weren’t searching at all. The other bids were phony. Sometimes they made them up. In other cases they colluded with underwriters to give them a price higher tha the one they wanted to sell.

Elliot Spitzer, the very aggressive New York State Attorney General got wind of this and blew the whistle. Marsh Mac was caught red-handed. Their stock price tumbled, the stockholders were outraged and the CEO, Jeffrey Greenberg, forced to resign.

I’m certain that my friends in the industry had a very brief moment of schadenfreude (pleasure derived from the misfortune of others). But I’m equally certain their pleasure was short-lived for they would have to immediately be wondering how they would convince customers that they weren’t guilty of the same crime.

I’ve followed Elliot Spitzer’s career for some time. He is one kick-ass Attorney General. He has reformed investment banking, the mutual fund industry and now insurance. He normally does it not by putting people in jail but by pressuring them through loss of stock value and threat of jail to do the right thing. He’s also collected a few dollars in fines along the way. He proves that states, at least New York and California, can have real impact. In this case, more than the federal government has had lately.

Comments

[dave andersen]

Hey I remember Randall. He was the envy of all the First Baptist teenagers. Probably leading a rakish sailor's life.
I think he was serving on the USS Bonhomme Richard. In those days a career as an enlisted man in the Navy was my dearest aspiration. I even wrote my career paper for the 8th grade on the topic. I don't know how I could have gone so wrong in my life direction.