Scams that engulfed the corporate sector are now moving to insurance. What the investigators dig out may shake up this nascent industry in India also. The New York Times reports on deceptive practices at Aon Corporation.
October 25, 2004
Investigators Find Deceptive Practices at Aon, Too
By JOSEPH B. TREASTER and ALEX BERENSON
n six months of examining documents from insurance companies and brokers, investigators for the New York attorney general have discovered evidence at the Aon Corporation of deceptive and coercive practices, a person close to the inquiry said yesterday.
Until now, the sweeping investigation by Eliot Spitzer, the attorney general, has centered on Marsh & McLennan Companies, the world's largest broker, with headquarters in New York. In a civil lawsuit nearly two weeks ago, Mr. Spitzer accused Marsh of cheating customers by faking bids, fixing prices and steering business to the highest-paying insurance companies.
Investigators are pushing to complete their work on Aon, the world's second-largest broker, with headquarters in Chicago, and could bring a civil lawsuit against the company within two weeks, said another person who has been briefed on the case.
The investigators are also expected to file lawsuits shortly against some smaller national insurance brokers, this person said. Mr. Spitzer's accusations against Marsh and criminal charges that he brought against two executives of the American International Group and one executive of Ace Ltd. have shaken the insurance industry and investors. The stock prices of all big insurance brokers and insurance companies have fallen sharply, and several attorneys general and insurance regulators across the country have started or widened separate investigations.
On Friday, shares of Aon rose 54 cents, or 2.8 percent, to $19.80 on the New York Stock Exchange; they were trading at about $28 a share two weeks ago.
The discovery of improprieties at Aon broadens Mr. Spitzer's investigation to a company that, along with Marsh, dominates the insurance brokerage business. Together, they control more than 70 percent of the market.
At Aon, the person close to the case said, investigators have found documentation of brokers steering business to insurers that paid the company incentives. They also found another anticompetitive practice known as tying, a kind of pay-to-play arrangement in which brokers threaten to curtail sales for an insurance company unless the insurer lets the broker also arrange its own coverage needs or reinsurance. Fees on reinsurance, which insurers buy to reduce their risk, can run into the tens of millions of dollars.
Both steering and tying can violate New York's fraud and antitrust laws and apply to anyone doing business in the state. Though Aon is based in Chicago, it has offices in New York, which is an important center for the insurance industry. Its founder, Patrick G. Ryan, announced late last month that he would be stepping down as chief executive after running the company for 40 years, but he gave no indication of when he planned to move on.
Gary Sullivan, a spokesman for Aon, declined to comment yesterday.
While the investigators have found what they regard as antitrust violations at Aon, they so far have found no evidence of bid rigging and price fixing, people briefed on the case said.
Bid rigging and price fixing are the most serious accusations to arise thus far in the investigation because they are clearly defined antitrust violations that can also result in criminal charges, legal experts said. Steering and tying can also be against the law, the experts said, but they involve certain issues of judgment by the courts. These include the possibility that a company paying the highest incentive also provided the best deal to a customer and, in tying arrangements, the degree to which an insurance company was actually pressured to comply or acted in what it perceived to be its own best interests in anticipation of pressure.
"Bid rigging and price fixing are an absolute per se violation of antitrust laws," said John Coffee, a Columbia University specialist on securities law. "Steering and tying are in a gray area."
Insurance executives and analysts have been anticipating that Aon would be the next target. Marsh arranges the insurance coverage for about 40 percent of corporate America, and Aon handles 30 percent. Between them, they have enormous purchasing power that enables them to compel insurance companies to meet their demands or risk losing business, industry experts said.
"Anytime you have this much market power concentrated in the hands of such a small number of brokers, the pure competition that is supposed to occur in the free market is stifled," said Paul Equale, a Washington consultant. He is the former chief executive and chief lobbyist for the Independent Insurance Agents and Brokers of America, one of the industry's largest trade groups whose members mainly sell commercial insurance to small and medium-size businesses around the country as well as home and auto insurance.
So far, none of these small-scale agents and brokers have been implicated in the investigations. With the concentration of power by Marsh and Aon in the arena of big corporate insurance, Mr. Equale said, "the free market becomes an old-boys' network."
For decades, insurance brokers have taken hundreds of millions of dollars in payments annually from insurance companies that they ostensibly evaluate objectively on behalf of corporate customers, who pay fees to have their coverage arranged. The brokers insist that the payments from the insurers, called contingency fees or placement-service agreements, do not influence their judgment, and that they regard the money as an after-the-fact reward for a job well done. Since the late 1990's, brokers have been disclosing the payments, but only in general terms. And many of the people in charge of buying coverage for corporations, executives, known as risk managers, say they have been stunned by Mr. Spitzer's accusations.
When Mr. Spitzer was informed about the payments last spring, investigators said that he suspected a conflict of interest that could prevent customers from getting the best coverage at the best price. He began investigating with a barrage of subpoenas to brokers and insurers across the country.
In his suit against Marsh, he cited copies of company e-mail messages as evidence that the broker did, indeed, favor the highest-paying insurance companies. In one e-mail message obtained by Mr. Spitzer, a Marsh executive wrote that in 2004 the company needed to direct business to insurers that "have superior financials, broad coverage and pay us the most."
In a statement on Oct. 14, when Mr. Spitzer laid out his case against Marsh, Aon said that, "to the best of our knowledge" none of its employees had taken part in bid rigging and soliciting fake price quotes to make customers think there was competition for their business.
It initially defended its practice of taking contingency fees from insurers as "a longstanding and well-known practice in the insurance industry."
Late Friday, Aon said it would stop taking the payments from insurance companies; it received about $200 million in such payments last year.
Since it received its first subpoena from Mr. Spitzer in the spring, Aon has said that it is cooperating with the investigation. But a person who has been briefed on the investigation said that Mr. Spitzer's investigators did not agree. "They're not being terribly cooperative," the person said.
Mr. Sullivan, the Aon spokesman said: "We're obviously concerned if that's their opinion and we'll be back in touch with them straightaway to discuss their concerns."