New York's Insurance New York's Insurance InvestigationInvestigation

Peter D. BernsteinPeter D. BernsteinAssistant Attorney GeneralAssistant Attorney General

Antitrust BureauAntitrust BureauNew York StateNew York State

Office of the Attorney GeneralOffice of the Attorney General

ABA Section of Antitrust LawInsurance Industry Committee

The Antitrust Laws and Insurance: RecentDevelopments and Core Principles

New York State Insurance InvestigationNew York State Insurance Investigation

BrokersBrokersMarsh - Market Allocation/Bid RiggingMarsh - Market Allocation/Bid Rigging

Aon - Dedicated Brokers/LeveragingAon - Dedicated Brokers/Leveraging

Willis - SteeringWillis - Steering Insurance CompaniesInsurance Companies

AIG – Bid Rigging/Fraud/Improper AccountingAIG – Bid Rigging/Fraud/Improper Accounting

Zurich - Bid Rigging/FiniteZurich - Bid Rigging/Finite

ACE – Bid Rigging/FiniteACE – Bid Rigging/Finite

Marsh AllegationsMarsh Allegations

Contingent CommissionsContingent Commissions Marsh had undisclosed or inadequately Marsh had undisclosed or inadequately

disclosed contingent commissions.disclosed contingent commissions.SteeringSteering Marsh would move business to the insurance Marsh would move business to the insurance

companies that paid it the most commission.companies that paid it the most commission.Bid RiggingBid Rigging In order to make the system work, Marsh In order to make the system work, Marsh

solicited fictitious or cover bids to make the solicited fictitious or cover bids to make the incumbent insurer appear competitive.incumbent insurer appear competitive.

Contingent CommissionsContingent Commissions

Agreements were not adequately disclosed and Agreements were not adequately disclosed and did not relate to actual services provided by the did not relate to actual services provided by the brokers.brokers.

Instead, the agreements commonly required the Instead, the agreements commonly required the insurance company to pay the broker based on insurance company to pay the broker based on one or more of the following:one or more of the following: The amount of business placed;The amount of business placed; The renewal rate of the broker’s clients; orThe renewal rate of the broker’s clients; or The profitability of the business placed.The profitability of the business placed.

Marsh Allegations:Marsh Allegations:SteeringSteering

Once Marsh began to “tier” the insurance Once Marsh began to “tier” the insurance companies based on the level of contingent companies based on the level of contingent commissions, it became simple to steer commissions, it became simple to steer business to “preferred” companies from which business to “preferred” companies from which Marsh received more commission.Marsh received more commission.Marsh was quick to tell companies that they Marsh was quick to tell companies that they would move business if the contingent would move business if the contingent commissions were not favorable.commissions were not favorable.In fact, Marsh often moved business from one In fact, Marsh often moved business from one insurer to another to reach milestones that insurer to another to reach milestones that triggered additional payments or increased triggered additional payments or increased percentages of commissions to Marsh under percentages of commissions to Marsh under contingent commission agreements.contingent commission agreements.

Bid RiggingBid Rigging

Numerous insurance companies conspired with Numerous insurance companies conspired with Marsh to rig bids, allowing Marsh to steer Marsh to rig bids, allowing Marsh to steer business towards the “preferred” insurance business towards the “preferred” insurance companies.companies.

For example, Marsh used fictitious bids or cover For example, Marsh used fictitious bids or cover bids to give the impression of competition.bids to give the impression of competition.

Much of the bid rigging was to ensure that Much of the bid rigging was to ensure that incumbent carriers were able to renew profitable incumbent carriers were able to renew profitable business.business.

The “B Quote”The “B Quote”

In order to give the appearance of competition in In order to give the appearance of competition in a renewal situation Marsh would ask insurers a renewal situation Marsh would ask insurers other than the incumbent for false quotes.other than the incumbent for false quotes.

Marsh would often provide these insurers with a Marsh would often provide these insurers with a target premium and policy terms, so that the target premium and policy terms, so that the insurers would not bid below the incumbent. insurers would not bid below the incumbent.

Marsh would tell these insurers that they would Marsh would tell these insurers that they would not get the business.not get the business.

Marsh SettlementMarsh SettlementRestitution Fund of $850 millionRestitution Fund of $850 millionChange in compensation structure: may only Change in compensation structure: may only accept specific fee from client; a specific accept specific fee from client; a specific percentage commission based on premiums percentage commission based on premiums paid; or a combination of both.paid; or a combination of both.Marsh must fully disclose commissions before Marsh must fully disclose commissions before the binding of policies and the client must the binding of policies and the client must consent in writing.consent in writing.Marsh may not retain the float on premium Marsh may not retain the float on premium collected without notification to the client and collected without notification to the client and only where such retention is permitted by law.only where such retention is permitted by law.Marsh agreed to certain mandated disclosures Marsh agreed to certain mandated disclosures and to implement company wide training.and to implement company wide training.

Marsh Settlement ProhibitionsMarsh Settlement Prohibitions

No accepting or requesting contingent No accepting or requesting contingent commissions.commissions.No accepting or requesting any other form of No accepting or requesting any other form of compensation from insurers in connection with compensation from insurers in connection with the selection of insurance companies from which the selection of insurance companies from which to solicit bids on behalf of clients (pay-to-play).to solicit bids on behalf of clients (pay-to-play).No more bid rigging of any form.No more bid rigging of any form.No reinsurance brokerage leveraging.No reinsurance brokerage leveraging.No inappropriate use of wholesalers without No inappropriate use of wholesalers without informing the client.informing the client.

Marsh Statement of ContritionMarsh Statement of Contrition““Marsh Inc. would like to take this opportunity to apologize for Marsh Inc. would like to take this opportunity to apologize for the conduct that led to the actions filed by the New York the conduct that led to the actions filed by the New York State Attorney General and Superintendent of Insurance. State Attorney General and Superintendent of Insurance. The recent admissions by former employees of Marsh and The recent admissions by former employees of Marsh and other companies have made clear that certain Marsh other companies have made clear that certain Marsh employees unlawfully deceived their customers. Such employees unlawfully deceived their customers. Such conduct was shameful, at odds with Marsh’s stated policies conduct was shameful, at odds with Marsh’s stated policies and contrary to the values of Marsh’s tens of thousands of and contrary to the values of Marsh’s tens of thousands of other employees.other employees.In response, we have taken prompt, corrective action and In response, we have taken prompt, corrective action and implemented a series of business and corporate governance implemented a series of business and corporate governance reforms. The employees of Marsh Inc. ask our clients and reforms. The employees of Marsh Inc. ask our clients and others to allow us the opportunity to regain their trust.”others to allow us the opportunity to regain their trust.”

AonAon

Settlement announced on March 4, 2005 Settlement announced on March 4, 2005 with NY Attorney General, NY Department with NY Attorney General, NY Department of Insurance, and the Attorneys General of of Insurance, and the Attorneys General of New York, Connecticut, and Illinois.New York, Connecticut, and Illinois.

Aon will pay $190 million in restitution to Aon will pay $190 million in restitution to policy holders harmed by bid rigging.policy holders harmed by bid rigging.

AonAon

Complaint had allegations very similar to those Complaint had allegations very similar to those in the Marsh complaint, but that did not contain in the Marsh complaint, but that did not contain analogous bid rigging allegations.analogous bid rigging allegations.Issues in Aon’s dealings on personal lines Issues in Aon’s dealings on personal lines (homeowners, automobile, personal liability, and (homeowners, automobile, personal liability, and umbrella coverage)umbrella coverage) Insurers paying for Aon Personal Lines Insurers paying for Aon Personal Lines

employees - buying dedicated brokersemployees - buying dedicated brokers Aon froze out insurer trying to gain inroads in Aon froze out insurer trying to gain inroads in

business– protecting the two primary insurers business– protecting the two primary insurers Reinsurance Leveraging and Clawback Reinsurance Leveraging and Clawback

AgreementsAgreements

Aon CEO ApologyAon CEO Apology

““As these investigations have revealed, Aon and other As these investigations have revealed, Aon and other insurance brokers and consultants entered into insurance brokers and consultants entered into contingent commission agreements and other contingent commission agreements and other arrangements that created conflicts of interest. I deeply arrangements that created conflicts of interest. I deeply regret that we took advantage of those conflicts. This regret that we took advantage of those conflicts. This conduct violated the longstanding principle embodied in conduct violated the longstanding principle embodied in our Code of Conduct and Aon’s Values Statement that our Code of Conduct and Aon’s Values Statement that our clients must always come first. Such conduct was our clients must always come first. Such conduct was improper and I apologize for it. Aon believes that these improper and I apologize for it. Aon believes that these investigations have done the industry a great service. investigations have done the industry a great service. Aon looks forward to working with regulators, insureds, Aon looks forward to working with regulators, insureds, insurance companies, and other stakeholders to put in insurance companies, and other stakeholders to put in place new business practices for the entire industry that place new business practices for the entire industry that eliminated the improper practices exposed by these eliminated the improper practices exposed by these investigations.”investigations.”

WillisWillis

Settlement announced on April 8, 2005 Settlement announced on April 8, 2005 with NY Attorney General and NY with NY Attorney General and NY Department of Insurance.Department of Insurance.

Willis will pay $50 million in restitution to Willis will pay $50 million in restitution to policy holders harmed by steering.policy holders harmed by steering.

Willis agreed to reforms modeled on those Willis agreed to reforms modeled on those in the Marsh and AON settlements.in the Marsh and AON settlements.

Willis CEO StatementWillis CEO Statement

“We believe that the regulatory investigations have been a catalyst for positive change in the industry. We strongly support the reforms that the Attorney General has advocated, and we previously had voluntarily implemented many as part of our Client Bill of Rights. We also were the first major broker in the industry to end the use of contingents, which we have abolished on a worldwide basis, and we believe that all insurance brokers and insurers should relinquish the use of contingent agreements.”

AIGAIG

Settlement announced on February 9, 2006 with Settlement announced on February 9, 2006 with NY Attorney General, NY Department of NY Attorney General, NY Department of Insurance, the Securities and Exchange Insurance, the Securities and Exchange Commission and the U.S. Department of Justice.Commission and the U.S. Department of Justice.AIG will pay more than $1.6 billionAIG will pay more than $1.6 billion $375 million in restitution to policy holders harmed by $375 million in restitution to policy holders harmed by

bid riggingbid rigging $800 million in restitution to investors deceived by $800 million in restitution to investors deceived by

false financial statements ($100 million is part of SEC false financial statements ($100 million is part of SEC penalty)penalty)

$344 to states harmed by AIG’s practices involving $344 to states harmed by AIG’s practices involving workers’ compensation fundsworkers’ compensation funds

$100 million in penalties to New York$100 million in penalties to New York

AIGAIG

AIG documents detailed the bid rigging AIG documents detailed the bid rigging scheme to fix prices.scheme to fix prices.AIG used transactions to inflate reserves AIG used transactions to inflate reserves and conceal underwriting losses, and conceal underwriting losses, intentionally misled the NY Department of intentionally misled the NY Department of Insurance regarding offshore transactions, Insurance regarding offshore transactions, and improperly reported workers’ and improperly reported workers’ compensation premiums. compensation premiums. AIG apologized for its actions.AIG apologized for its actions.

AIG ApologyAIG Apology

““AIG regrets and apologizes for the conduct that led to the AIG regrets and apologizes for the conduct that led to the action brought by the New York Attorney General and the action brought by the New York Attorney General and the New York Superintendent of Insurance and to today’s New York Superintendent of Insurance and to today’s settlement. Providing incorrect information to the investing settlement. Providing incorrect information to the investing public and to regulators was wrong and against the values public and to regulators was wrong and against the values of our current leadership and employees. In response to of our current leadership and employees. In response to these events, and to the guilty pleas of our own employees these events, and to the guilty pleas of our own employees and others, as part of today’s settlement, we have and are and others, as part of today’s settlement, we have and are continuing to aggressively implement business reforms to continuing to aggressively implement business reforms to prevent this conduct from recurring. We are committed to prevent this conduct from recurring. We are committed to business practices that provide transparency and fairness business practices that provide transparency and fairness in insurance markets. As part of our commitment, among in insurance markets. As part of our commitment, among other things, we have agreed not to pay contingent other things, we have agreed not to pay contingent commission for excess casualty insurance and will support commission for excess casualty insurance and will support legislation to eliminate contingent commission payments.”legislation to eliminate contingent commission payments.”

ZurichZurich

Settlement announced on March 27, 2006 with NY Settlement announced on March 27, 2006 with NY Attorney General, NY Department of Insurance, Attorney General, NY Department of Insurance, and Connecticut and Illinois Attorneys General.and Connecticut and Illinois Attorneys General.Zurich will pay a total of $153 millionZurich will pay a total of $153 million $88 million in restitution to policy holders harmed by bid $88 million in restitution to policy holders harmed by bid

riggingrigging $39 million in penalties to New York$39 million in penalties to New York $13 million in penalties each to Connecticut and Illinois$13 million in penalties each to Connecticut and Illinois This increases by $29.9 million the recovery consumers This increases by $29.9 million the recovery consumers

are to receive under a separate multi-state settlement.are to receive under a separate multi-state settlement.

ZurichZurich

Zurich documents detailed the bid rigging Zurich documents detailed the bid rigging scheme to fix prices in excess casualty scheme to fix prices in excess casualty insurance.insurance.

Zurich improperly used finite reinsurance Zurich improperly used finite reinsurance to bolster its own financial results and to bolster its own financial results and those of its clients.those of its clients.

Zurich apologized for its actions.Zurich apologized for its actions.

Zurich ApologyZurich Apology

““Zurich apologizes for the conduct that resulted in today’s Zurich apologizes for the conduct that resulted in today’s settlements. Zurich recognizes that certain of its settlements. Zurich recognizes that certain of its employees violated both acceptable business practices employees violated both acceptable business practices and Zurich’s own standards of conduct by engaging in and Zurich’s own standards of conduct by engaging in improper bidding practices and the “finite reinsurance” improper bidding practices and the “finite reinsurance” transactions described in the Assurance of transactions described in the Assurance of Discontinuance. Zurich is aggressively tightening its Discontinuance. Zurich is aggressively tightening its business practice controls to make certain that this type business practice controls to make certain that this type of conduct does not occur again. As part of Zurich’s of conduct does not occur again. As part of Zurich’s larger effect to promote transparency and a “level larger effect to promote transparency and a “level playing field” in the insurance industry, Zurich has playing field” in the insurance industry, Zurich has agreed to support legislation in the U.S. to eliminate agreed to support legislation in the U.S. to eliminate contingent compensation paid to brokers and agents.”contingent compensation paid to brokers and agents.”

ACEACE

Settlement announced on April 26, 2006 with NY Settlement announced on April 26, 2006 with NY Attorney General, NY Department of Insurance, Attorney General, NY Department of Insurance, and Connecticut and Illinois Attorneys General.and Connecticut and Illinois Attorneys General.

ACE will pay a total of $80 millionACE will pay a total of $80 million $40 million in restitution to policy holders harmed by $40 million in restitution to policy holders harmed by

bid riggingbid rigging $24 million in penalties to New York$24 million in penalties to New York $8 million in penalties each to Connecticut and Illinois$8 million in penalties each to Connecticut and Illinois

ACEACE

ACE documents detailed the scheme to ACE documents detailed the scheme to provide losing bids in exchange for future provide losing bids in exchange for future business.business.

ACE improperly used finite reinsurance to ACE improperly used finite reinsurance to bolster its own financial results and those bolster its own financial results and those of its clients.of its clients.

ACE apologized for its actions.ACE apologized for its actions.

ACE ApologyACE Apology

““As part of today’s settlement with the Attorneys General As part of today’s settlement with the Attorneys General and the Superintendent, ACE acknowledges that certain and the Superintendent, ACE acknowledges that certain of its employees violated both acceptable business of its employees violated both acceptable business practices and ACE’s own standards of conduct by practices and ACE’s own standards of conduct by engaging in behavior that included improper bidding engaging in behavior that included improper bidding practices and certain ‘finite reinsurance’ transactions. practices and certain ‘finite reinsurance’ transactions. ACE apologizes for this conduct. It has reformed its ACE apologizes for this conduct. It has reformed its business practices and is satisfied that this behavior will business practices and is satisfied that this behavior will not be repeated. In order to promote transparency and not be repeated. In order to promote transparency and reduce the potential for conflicts of interest, ACE has reduce the potential for conflicts of interest, ACE has supported legislation in the U.S. to eliminate contingent supported legislation in the U.S. to eliminate contingent compensation and through this agreement pledges to compensation and through this agreement pledges to continue to do so.”continue to do so.”

Individual Guilty PleasIndividual Guilty Pleas

Nine individuals pled to scheme to defraud in the Nine individuals pled to scheme to defraud in the first degree, a felony in violation of PL 190.65.first degree, a felony in violation of PL 190.65.

Two individual pled to scheme to defraud in the Two individual pled to scheme to defraud in the second degree, a misdemeanor in violation of second degree, a misdemeanor in violation of PL 190.60.PL 190.60.

Six individuals pled guilty to an attempted Six individuals pled guilty to an attempted violation of the Donnelly Act, a misdemeanor in violation of the Donnelly Act, a misdemeanor in violation of PL 110, and GBL 340 & 347.violation of PL 110, and GBL 340 & 347.

McCarran-Ferguson IssuesMcCarran-Ferguson Issues

• Antitrust Modernization CommissionAntitrust Modernization Commission• Public Comments were submitted on this specific Public Comments were submitted on this specific

topic by my office and others and it will be addressed topic by my office and others and it will be addressed at a hearing in December 2005.at a hearing in December 2005.

• U.S. General Accountability Office StudyU.S. General Accountability Office Study• GAO met with insurance companies, ratings bureaus, GAO met with insurance companies, ratings bureaus,

state attorneys general offices, and legal and actuarial state attorneys general offices, and legal and actuarial experts.experts.

• GAO found that it was difficult to determine which GAO found that it was difficult to determine which insurer activities would withstand antitrust scrutiny if insurer activities would withstand antitrust scrutiny if the exemption were removed; other immunities might the exemption were removed; other immunities might apply; and, even with a federal exemption, insurers apply; and, even with a federal exemption, insurers are subject to state law, including antitrust laws.are subject to state law, including antitrust laws.

ConclusionConclusion

The settlements with the brokers and insurance The settlements with the brokers and insurance companies should have all brokers and companies should have all brokers and insurance companies thinking about insurance companies thinking about establishing/updating best practices and internal establishing/updating best practices and internal compliance programs.compliance programs.

Overall recoveries of over $2.6 billion for Overall recoveries of over $2.6 billion for consumers and workers compensation plans consumers and workers compensation plans and guilty pleas from numerous insurance and guilty pleas from numerous insurance company executives and officers.company executives and officers.

McCarran-Ferguson changes areMcCarran-Ferguson changes are possibly just around the corner.possibly just around the corner.