Insurance price-fixing – how far will probe go?

New York attorney general Spitzer testifies to a Senate sub-committee. Keystone Archive

The CEO of Zurich Financial Services (ZFS) says the outcome of investigations into insurance market bid rigging in the United States “cannot be predicted”.

James Schiro made the comment on Wednesday, shortly after two of the Swiss firm’s US-based executives pleaded guilty to criminal charges relating to violation of anti-trust law.

He was speaking during a conference call to discuss the company’s nine-monthly figures, and did not elaborate.

However, a ZFS spokesman told swissinfo that several other employees had been suspended pending the outcome of an internal investigation.

Analysts say it is hard to tell how far the industry-wide probe will continue – and what the impact is likely to be on both individual companies and the overall image of the insurance sector.

Three down

ZFS is the third insurance company to be implicated in the US investigation, which began in October and is being led by New York State attorney general Eliot Spitzer.

Five executives at three major insurance companies have pleaded guilty to criminal charges.

Last month, two executives at American International Group (AIG) and one at ACE Insurance Company of North America pleaded guilty to similar charges.

“The investigation is proceeding carefully and methodically,” said Spitzer in a statement on Tuesday.

“Our goal is to determine the full extent of wrongdoing in the industry and its effect on consumers, to punish those involved in misconduct and to implement appropriate corrective measures,” he added.

He said he expected more criminal plea agreements “in the very near term”.

Affordable

René Locher, an analyst at Kepler Equities in Zurich, told swissinfo that it was hard to tell how much further the investigation would go and what it would reveal.

He said he was “surprised” at how far the probe had already been extended, as it had initially focused primarily on one company but now seemed to have become industry-wide.

However, he added: “At the end of the day, I think the financial impact will be minor. It is not just ZFS, it is the whole insurance industry in the US that is being investigated.

“If Eliot Spitzer is going for one or two billion [dollars] in total claims, that will be affordable. What is really negative about this is the bad sentiment it creates about the insurance industry in general.”

Locher added that the “good news” for ZFS and several other leading players was that the insurance market would become “more competitive” as a result of the probe.

The main result would probably be loss of business for Marsh & McLellan, the largest US insurance broker and the main subject of the probe.

That business would then go to other companies – including ZFS, the number two in the US commercial insurance segment.

“We have not yet seen figures for how much was involved in the rigging of bids, but there is a possibility that ZFS will get back some business from them,” said Locher.

Grey areas

Spitzer accuses Marsh & McLellan of bid rigging, price fixing and heavy use of incentive fees – otherwise known as marketing services agreements or placement service agreements.

The fees are paid to brokers above normal commissions paid by companies in exchange for getting more business.

The two ZFS underwriters were employed in the Specialties Excess Casualty unit at Zurich and dealt exclusively with executives at Marsh Global Broking, a subsidiary of Marsh & McLellan companies, which is the original subject of Spitzer’s investigation.

In addition to illegal practices, the investigation has highlighted several “grey areas” in the field of insurance commissions.

The attorney of the two ZFS executives said he did not believe the defendants committed crimes, but were engaging in practices they were unaware were illegal.

Some companies have already adopted reforms in their practices since the investigation was made public on October 14.

swissinfo, Chris Lewis

In brief

The case against two Swiss insurance executives raises questions about how far the current US investigation could go.

It is the first time that employees of a European insurance company have pleaded guilty to charges in the context of the inquiry.

ZFS chief executive Spiro said he could not predict the outcome or the extent of the investigation.

Key facts

Spitzer says agents for insurance brokers accepted financial and other inducements from insurers in return for “steering clients their way”.
These are not necessarily illegal – provided they are disclosed and do not “distort behaviour”.
The attorney general previously exposed misconduct in the mutual fund and Wall Street analyst businesses.