Insurance scandal spreads to Britain

Watchdog says it received complaints about contingent commissions but failed to launch formal inquiry
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The Independent Online

The UK regulator for the insurance industry has said it attempted to launch investigations into several of its member firms earlier this year, after receiving complaints about "contingent commissions" paid between brokers and underwriters - now the subject of a major inquiry by the New York attorney general, Eliot Spitzer.

The UK regulator for the insurance industry has said it attempted to launch investigations into several of its member firms earlier this year, after receiving complaints about "contingent commissions" paid between brokers and underwriters - now the subject of a major inquiry by the New York attorney general, Eliot Spitzer.

Chris Woodburn, the chief executive of the General Insurance Standards Council, the industry's independent non-statutory watchdog, said his organisation held extensive discussions about the issue during the summer, but stopped short of launching any formal inquiries after the complainants said they were unwilling to be identified as whistle-blowers.

Mr Woodburn said that without the consent of the complainants, he did not feel he could proceed with an investigation. He added that while contingent commissions could be seen to present a conflict of interest, such practices are not illegal unless they are not disclosed properly. Contingent commissions, or "Placement Service Agreements" as they are also known, are extra payments made by insurers to brokers who bring in high volumes of business, or who bring in a higher percentage of low-risk business.

Mr Spitzer announced last Thursday that he was suing Marsh & McLennan, the global insurance broker, after allegedly finding evidence of fraud and violations of the US competition regulations. Among his accusations was the allegation that Marsh had been producing artificial quotes for customers, leading them to choose the insurer that would pay the broker the highest commissions. He added that a number of other firms were also implicated.

GISC, whose membership is voluntary, is to be replaced by the Financial Services Authority in January. The FSA, chaired by Callum McCarthy, will then have the full use of its statutory powers to regulate the industry. Both the FSA and GISC said that they were keeping a "watching brief" on the issue, and would be watching Mr Spitzer's inquiries.

Yesterday Ace, a Bermuda-based insurer, said it would stop paying brokers for steering insurance business its way. Mr Spitzer's legal case centres on Marsh but it also names Ace and American International Group (AIG) as having taken part in the schemes.

Mr Spitzer may widen his net and is understood to be considering whether Aon, the world's No 2 broker, improperly accepted payments from insurance clients. Aon said last week that it did not believe its employees had been involved in the alleged scheme to make money from clients in inappropriate ways. In the meantime, Mr Spitzer has secured guilty pleas from two mid-level managers at AIG and one Ace executive.

The investigation has already proved uncomfortable for three members of one family. AIG is headed by Hank Greenberg, one of America's most influential businessmen. His son Jeffrey is chief executive of Marsh and his other son, Evan, runs Ace. The insurance world is watching to see what happens to the trio.

Mr Spitzer's assault on Marsh last Thursday took the sector by surprise, with most people in the industry believing his inquiry into contingent commissions had got nowhere. Many insurers also feel mystified by the heavy-handedness of Mr Spitzer's action, as commissions have long been a part of the way insurers and brokers agree business and are usually fully disclosed in accounts.

US lawyers are already preparing themselves for an influx of business. James Hoyer, a Florida-based firm, has begun urging clients of all the brokers mentioned by Mr Spitzer, as well as Jardine Lloyd Thomson and Alexander Forbes - which have substantial UK businesses - to contact them. The firm's website advises that any clients of these firms may be able to make a legal claim against their broker.

Of the main UK-quoted companies, Benfield has stated that such commissions are not used within its organisation, but that it has been asked to assist Mr Spitzer with his inquiries. Jardine Lloyd Thomson said that it has not been involved with any illegal activities, and that it has not been accused by, or summoned to help, the investigation.

In a note written more than nine months ago, insurance analysts at JP Morgan predicted contingent commissions would become a topic of debate in 2004. "Our concern is that the disclosure is weak and incomplete," the note said. It focused mainly on the US market, estimating that about 5 per cent of revenues and 20 per cent of the profits of US brokers are generated by contingent commissions - profits which could now be lost as a result of the Spitzer inquiry.

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