Tuesday, October 19, 2004
New York Boy Makes Good...
SOMEBODY finally gets it.0 comments
And it just happens to be New York's favorite son, Eliot Spitzer, the New York attorney general.
NYTimes: Insurance Investigation Widens to Include Costs
As ET once said, "EL-I-OT!!"
Eliot Spitzer knows who the real "Evildoers" of our time are.
And he knows just the right thread to start pulling on in order to make an entire nasty enterprise start unraveling.
Let's not wait. Let's just jump ahead and vote for NY Governor this year! Like future Senator Barack Obama of Illinois, Spitzer's just too good to pass up. Convention host or not, George Pataki is toast.
It's amazing how you can become a star simply by doing your job!
There's the upside to the Depressed Expectations culture.
While the current focus of the New York investigation is on bid-rigging and price-fixing among commercial insurance brokers and insurance companies, investigators say Mr. Spitzer is also pursuing reports of payoffs that may increase coverage costs for tens of millions of individuals.
"Eliot Spitzer's interest is in the retail stuff, the effect on regular people,'' said David D. Brown IV, the chief of the state attorney's investment protection bureau.
"Our investigation is broadening and deepening,'' Mr. Brown said. "We are going to look across product lines, across insurers and across brokers, the big and the little."
The insurance controversy became public last week, when Mr. Spitzer sued Marsh & McLennan, the world's biggest commercial insurance broker, accusing the broker of rigging bids from insurance companies and fixing prices for corporate customers in exchange for fees from the insurance companies.
Three insurance companies have entered guilty pleas to rigging bids, and more criminal charges are expected, perhaps as early as this week.
Such bid-rigging schemes, investigators contend, have indirectly increased the costs of everything from houses to toothpaste as corporations pass along the expense. The bid rigging was discovered, Mr. Spitzer said last week, during an investigation into incentive fees insurers pay to insurance brokers.
Happily, Spitzer stated late last week that his office is not looking to make any deals as he did in the Wall St./Mutual Funds cases. He let it be known he's following these investigations all the way to trial.
That pounding you're hearing is the knees knocking in offices large and small from midtown and downtown Manhattan to Hartford, CT. In scores of offices, insurance execs and their broker cronies are staring at their closets, trying to decide if the red tie or the blue tie would go better with their perp walk.
Here's the main industry scam (although there are plenty of others being looked into) recently uncovered at Marsh & McLennan (and coming soon to an insurance office and broker near you):
The most widespread form of payments is a reward to the broker or consultant from an insurance company for a certain volume of business and for business that is expected to have few claims and therefore be especially profitable. This kind of payment, investigators and industry executives said, is the same as the kind widely used in commercial property and casualty insurance; in property casualty insurance, it raises the cost of insurance generally.
These arrangements are known as contingency fees, placement service agreements and market service agreements, just as they are in property casualty insurance.
But an additional form of payment that is absent in property casualty transactions results in higher individual costs for corporate employees who choose to buy life, disability or accident coverage beyond the amount provided by employers.
In those transactions, the executive said, the insurance company tacks on an additional annual fee of perhaps $5 to $15 for every worker who increases coverage.
While the extra money is collected by the insurance companies, the executive said, it is passed on to the brokers. Sometimes, the executives said, employers are aware of the extra charge, sometimes not.
In any case, the executive said, because of the hidden fees on workers, the corporation gets the services of a broker for less in direct costs than otherwise.
The degree to which incentive fees were important to Marsh was illustrated late yesterday, when the company said that it took in $843 million in such fees last year, or about 12 percent of its brokerage revenue of $6.9 billion. The disclosure was the first time the company had outlined the financial impact of the payments.
An incentive deal on steroids. We'll give you $15/head for every already overpriced fool you get to bump up to coverage he doesn't need.
And this scam accounted for 12% of one company's $6.9 billion revenue?? Just at Marsh & McLennan?
Whoa.
Looked at across the industry, the incentive plan alone surpasses the GDP of half the Third World.
That's a pretty damn good ride.
But, losing that much cash off the books is going to smack the ol' corporate lifestyle a bit, don't you think? Think they might be just a tad used to having that level of cash coming in? Er, flooding in?
Marsh said on Friday that it was halting the incentive payments. Yesterday, the company said that the decision would "negatively impact near-term operating income.''
No shit, Sherlock. My, these guys are quick when they need to be.
The payments represent 7 percent of its overall revenue. (Marsh's other main businesses are Putnam Investments and Mercer Consulting.)
Mr. Spitzer said on Thursday that the incentive payments could represent more than 50 percent of the parent company's income of $1.5 billion last year.
Ouch! Well, at least Wall St. will stand by their own guys, right?
Two rating agencies, Fitch Ratings and Moody's Investors Service, lowered their estimates of Marsh's ability to repay debt and said further downgrades were possible.
Earlier yesterday, shares of Marsh & McLennan fell for a third day. The stock closed down $3.63, at $25.57. Since Mr. Spitzer announced the lawsuit on Thursday, the shares have tumbled 45 percent.
Ow. My, that's three times worse than Sinclair Broadcasting's free-fall.
And that's why execs throughout the insurance industry are planning just the right courtroom ensemble.
And the investigation is gathering speed. Already, Mr. Spitzer has 20 lawyers investigating the insurance industry, or nearly double the number involved in the investigation into mutual funds.
"This is a much bigger team,'' Mr. Brown said, "and it's much more interdisciplinary. The other cases were largely investor protection. This one involves people from our consumer fraud unit and antitrust as well as from criminal prosecutions."
Referring to Marsh, Mr. Brown said, "The first place we looked, we found massive issues.
"We're going to keep pounding on this,'' he said.
If we, and leaders like Eliot Spitzer, can smash the greed running through all aspects of the Insurance Industry today, many of the ills of America will start to right themselves.
posted by Gotham 1:47 PM
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