US insurance scandal set to be focus of Senate inquiry

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The Independent Online

The US Senate is about to open an investigation into allegations that some of America's largest insurers and brokers have taken part in schemes to rig insurance bids and to gain inappropriate fees from customers.

There will be a hearing on Capitol Hill within the next few weeks at which the behaviour of Marsh & McLennan and Aon, the two biggest brokers in the US, is put in the spotlight.

The inquiry will be led by the Republican Senator from Illinois, Peter Fitzgerald, who is chairman of the government sub- committee on financial management. Mr Fitzgerald, who has a reputation for pursuing America's financial companies over various misdemeanours, also led an investigation into the mutual fund sector earlier this year which resulted in companies agreeing to lower their charges for ordinary investors.

The Senate inquiry will add to the pressure on the insurers and brokers, after Eliot Spitzer, New York's attorney general, launched a lawsuit last month against Marsh. Mr Spitzer also named a number of insurers in his case, including Ace and American International Group. He may widen his lawsuit further and is looking closely at the business practices of Aon.

"We're planning to have a hearing in the Senate within the next few weeks about the situation in the insurance broking industry," Mr Fitzgerald said. "We're interested in the business model which has been for brokers to take payments from both sides of the transaction - commission on the sale and also a kick back from the insurer."

The senators will also focus on the way insurers and brokers direct business to their reinsurance arms. "There seems to be evidence that they funnel business to reinsurers in which they have a large stake. We want to know to what extent that is the case," Mr Fitzgerald said.

Among those slated to give testimony at the hearing is Richard Bloomenthal, Connecticut's attorney general, who is considering launching legal action against insurers and brokers in his state. The insurance commissioners from New York and California will also be present. Mr Spitzer was invited, but declined. Employees from Marsh and others will not be asked to be present. If the Senate issued subpoenas, individuals from the companies named in the Spitzer case might choose to avoid giving evidence by pleading the Fifth Amendment, which allows citizens the right not to incriminate themselves.

The hearing will also consider whether America ought to abandon its historic practice of allowing states to regulate insurers by introducing federal legislation. Some believe the state by state system has been too lax, allowing insurers and brokers to get round federal antitrust laws and to carry out practices which are not illegal, but which are not in the interests of customers.

Mr Spitzer's case centres on allegations Marsh breached New York state's antitrust laws, by taking commission from corporate customers for finding them insurance and at the same time accepting fees from insurers, based on the amount and how profitable the business is likely to be.

Mr Spitzer has also alleged Marsh orchestrated an illegal scheme to rig bids, persuading several insurers to submit artificially high bids so that customers would opt for an underwriter which appeared to offer the best deal, and to which Marsh had already promised the business.