3 insurance brokerages being probed

N.Y. investigator looking for conflicts of interest

Biggest companies subpoenaed

Practice of being paid by both sides is suspect

April 24, 2004|By BLOOMBERG NEWS

NEW YORK - New York state Attorney General Eliot Spitzer, who shook up investment banks and mutual funds with investigations into stock research and trading, is examining possible conflicts of interest at insurance brokerages.

Marsh & McLennan Cos., Aon Corp. and Willis Group Holdings Ltd., the world's biggest insurance brokerages, said yesterday that they have received subpoenas concerning their practice of accepting payments from both sides of an insurance transaction. Some brokers are receiving similar requests, Aon said.

Spitzer, who has extracted billions of dollars in settlements from banks and funds, is looking at whether brokers are violating client relationships by receiving commissions from the insurers with whom they place their clients' business.

Fox-Pitt Kelton Inc. analyst Jon Balkind said brokers probably receive about 4 percent of their revenue from the agreements.

"The fundamental principle here is that a purchaser should understand how a broker is compensated," said Jacob Frenkel, a former Securities and Exchange Commission enforcement lawyer and a partner at Smith, Gambrell & Russell in Washington.

The Washington Legal Foundation, an advocacy group and law firm, asked Spitzer two months ago to investigate brokers' payments from insurers on concerns they "compromise the broker's fiduciary duty to represent the best interests of their clients."

Marsh's Putnam Investments mutual fund unit agreed to a $110 million settlement this month with regulators over improper trading.

Marsh, Aon and Willis are the three biggest commercial insurance brokerages by sales. All three said they disclose their income sources to clients and on their Web sites and they are cooperating with the probe. Gary Sullivan, a spokesman for Aon, said Spitzer's subpoena is part of a "preliminary inquiry."

Spitzer's spokeswoman, Juanita Scarlett, declined to comment. Glenn Lammi, the Washington Legal Foundation's chief counsel for legal studies, didn't return a message.

Commercial insurance brokerages charge their clients a fee or commission to arrange the purchase of property, workers' compensation and other policies from insurers such as American International Group Inc., St. Paul Travelers Cos. and Chubb Corp.

On its Web site, Chicago-based Aon says it also receives payments from the insurers providing the policies "based on the volume of business placed with the insurer." In addition, Aon says it might earn commissions for unspecified services it provides to insurers or if a client's policies produce few losses. The fee structure means the broker might receive payments from the buyer and the seller of policies.

Spitzer probably will examine the language of the brokers' disclosure, whether clients can easily understand the brokers' multiple sources of income and whether disclosures are included in actual insurance contracts, said Frenkel. "There's disclosure, and then there's sufficient disclosure," he said.

This year, Marsh noted increases in the amount of fees it gets from insurers as one reason that its revenue rose 16 percent to $6.9 billion last year, Morgan Stanley analyst Vinay Saqi said.

"Such compensation agreements between insurance companies and brokers are a longstanding and common practice within the insurance industry," Aon said.

Brokers typically don't disclose what percentage of their revenue comes from the payments. Eliminating the payments may cut profit at the largest brokers by 10 percent to 18 percent, Fox-Pitt's Balkind said in a research note.

The inquiry might not uncover wrongdoing, said Spencer Chen, an analyst at New York-based Pzena Investment Management, which manages about $7 billion and owned 7.3 million shares of Aon as of December.

"I think it's a dead end," Chen said. "It's not like it's a secret that's out there. The insurance clients all know about it."

Shares of Aon declined 94 cents to close at $27.82 on the New York Stock Exchange. Marsh's shares fell 98 cents to $45.01, and Willis' shares dropped $1.25 cents to $35.50.

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