New York's Insurance Investigation

1. ABA Section of Antitrust Law Insurance Industry Committee The Antitrust Laws and Insurance: Recent Developments and Core Principles New York's Insurance Investigation Peter D. Bernstein Assistant Attorney General Antitrust Bureau New York State Office of the Attorney General

2. New York State Insurance Investigation • Brokers • Marsh - Market Allocation/Bid Rigging • Aon - Dedicated Brokers/Leveraging • Willis - Steering • Insurance Companies • AIG – Bid Rigging/Fraud/Improper Accounting • Zurich - Bid Rigging/Finite • ACE – Bid Rigging/Finite

3. Marsh Allegations • Contingent Commissions • Marsh had undisclosed or inadequately disclosed contingent commissions. • Steering • Marsh would move business to the insurance companies that paid it the most commission. • Bid Rigging • In order to make the system work, Marsh solicited fictitious or cover bids to make the incumbent insurer appear competitive.

4. Contingent Commissions • Agreements were not adequately disclosed and did not relate to actual services provided by the brokers. • Instead, the agreements commonly required the insurance company to pay the broker based on one or more of the following: • The amount of business placed; • The renewal rate of the broker’s clients; or • The profitability of the business placed.

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

9. Bid Rigging • Numerous insurance companies conspired with Marsh to rig bids, allowing Marsh to steer business towards the “preferred” insurance companies. • For example, Marsh used fictitious bids or cover bids to give the impression of competition. • Much of the bid rigging was to ensure that incumbent carriers were able to renew profitable business.

10. The “B Quote” • In order to give the appearance of competition in a renewal situation Marsh would ask insurers other than the incumbent for false quotes. • Marsh would often provide these insurers with a target premium and policy terms, so that the insurers would not bid below the incumbent. • Marsh would tell these insurers that they would not get the business.

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

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

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

21. Aon • Settlement announced on March 4, 2005 with NY Attorney General, NY Department of Insurance, and the Attorneys General of New York, Connecticut, and Illinois. • Aon will pay $190 million in restitution to policy holders harmed by bid rigging.

22. Aon • Complaint had allegations very similar to those in the Marsh complaint, but that did not contain analogous bid rigging allegations. • Issues in Aon’s dealings on personal lines (homeowners, automobile, personal liability, and umbrella coverage) • Insurers paying for Aon Personal Lines employees - buying dedicated brokers • Aon froze out insurer trying to gain inroads in business– protecting the two primary insurers • Reinsurance Leveraging and Clawback Agreements

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

24. Willis • Settlement announced on April 8, 2005 with NY Attorney General and NY Department of Insurance. • Willis will pay $50 million in restitution to policy holders harmed by steering. • Willis agreed to reforms modeled on those in the Marsh and AON settlements.

25. Willis 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.”

26. AIG • Settlement announced on February 9, 2006 with NY Attorney General, NY Department of Insurance, the Securities and Exchange Commission and the U.S. Department of Justice. • AIG will pay more than $1.6 billion • $375 million in restitution to policy holders harmed by bid rigging • $800 million in restitution to investors deceived by false financial statements ($100 million is part of SEC penalty) • $344 to states harmed by AIG’s practices involving workers’ compensation funds • $100 million in penalties to New York

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

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

29. Zurich • Settlement announced on March 27, 2006 with NY Attorney General, NY Department of Insurance, and Connecticut and Illinois Attorneys General. • Zurich will pay a total of $153 million • $88 million in restitution to policy holders harmed by bid rigging • $39 million in penalties to New York • $13 million in penalties each to Connecticut and Illinois • This increases by $29.9 million the recovery consumers are to receive under a separate multi-state settlement.

30. Zurich • Zurich documents detailed the bid rigging scheme to fix prices in excess casualty insurance. • Zurich improperly used finite reinsurance to bolster its own financial results and those of its clients. • Zurich apologized for its actions.

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

32. ACE • Settlement announced on April 26, 2006 with NY Attorney General, NY Department of Insurance, and Connecticut and Illinois Attorneys General. • ACE will pay a total of $80 million • $40 million in restitution to policy holders harmed by bid rigging • $24 million in penalties to New York • $8 million in penalties each to Connecticut and Illinois

33. ACE • ACE documents detailed the scheme to provide losing bids in exchange for future business. • ACE improperly used finite reinsurance to bolster its own financial results and those of its clients. • ACE apologized for its actions.

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

35. Individual Guilty Pleas • Nine individuals pled to scheme to defraud in the first degree, a felony in violation of PL 190.65. • Two individual pled to scheme to defraud in the second degree, a misdemeanor in violation of PL 190.60. • Six individuals pled guilty to an attempted violation of the Donnelly Act, a misdemeanor in violation of PL 110, and GBL 340 & 347.

36. McCarran-Ferguson Issues • Antitrust Modernization Commission • Public Comments were submitted on this specific topic by my office and others and it will be addressed at a hearing in December 2005. • U.S. General Accountability Office Study • GAO met with insurance companies, ratings bureaus, state attorneys general offices, and legal and actuarial experts. • GAO found that it was difficult to determine which insurer activities would withstand antitrust scrutiny if the exemption were removed; other immunities might apply; and, even with a federal exemption, insurers are subject to state law, including antitrust laws.

37. Conclusion The settlements with the brokers and insurance companies should have all brokers and insurance companies thinking about establishing/updating best practices and internal compliance programs. Overall recoveries of over $2.6 billion for consumers and workers compensation plans and guilty pleas from numerous insurance company executives and officers. McCarran-Ferguson changes are possibly just around the corner.