Insurance Industry Scandal: Bid-Rigging and Price-Fixing Exposed

Strategic Insights -

New York Attorney General Eliot Spitzer has unleashed a devastating probe into the nation's largest insurance companies, alleging a broad scheme of collusion and price-fixing within the $1.1 trillion industry. Leading insurance broker Marsh & McLennan Cos. has been charged with cheating corporate clients by rigging bids and collecting big fees from major insurance companies for throwing business their way. The scandal has sparked widespread outrage, with insurance stocks plummeting and their market value falling by tens of billions of dollars.

Key Takeaways:

  • 13 major insurance companies, including American International Group Inc., Ace Ltd., and Hartford Financial Services Group Inc., were served with subpoenas by the New York attorney general's office, which has uncovered evidence of bid-rigging and price-fixing.
  • Marsh & McLennan Cos., the world's largest insurance broker, was charged with cheating corporate clients by rigging bids and collecting big fees from major insurance companies for throwing business their way.
  • The alleged scheme involves "pay to play" deals, where businesses seeking insurance hire a broker, which in turn solicits bids from several insurers, often rigging the process to favor a preferred insurer.
  • Contingent commissions, where insurers pay brokers extra commissions based on the volume or profitability of business directed to them, were also targeted by the lawsuit, as they incentivized brokers to direct business to insurers paying the most-generous fees.
  • Aon Corp., the second-largest U.S. insurance broker, is also under investigation, with the New York attorney general examining whether the company improperly steered its customers based on fees from insurers.
  • Insurance stocks have plummeted, with Marsh's stock falling by over one-third and the company losing $9 billion in market capitalization in two days.
  • The probe is widening, with the attorney general examining whether life and health insurers engage in bid-rigging, and two companies receiving fresh subpoenas - MetLife Inc. and National Financial Partners Corp.

Statistics:

  • $1.1 trillion: The size of the insurance industry under investigation.
  • 20%: The portion of the market held by Marsh & McLennan Cos.
  • $9 billion: The market capitalization lost by Marsh in two days.
  • 30%: The decline in Marsh's stock price.
  • 13: The number of major insurance companies subpoenaed by the New York attorney general.
  • 2: The number of companies in addition to Marsh charged in the investigation (AIG and Ace).
  • $6.7 billion: The brokerage revenue of Aon Corp. in 2003.

Sources:

  • (http://www.comtexnews.com)
  • Dow Jones Newswires News Provided by COMTEX (Oct 18, 2004)