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PSA investigation spurs regulators’ zeal

Although the New York attorney general set the wheels in motion, last week provided ample evidence that many other US regulators are proving equally zealous in probing the insurance industry for apparent defects.

One of the driving forces was the Californian insurance commissioner John Garamendi who has followed Eliot Spitzer’s actions closely ever since the attorney general issued subpoenas against the three global brokers in April this year.

Last week, Garamendi filed suit against the employee benefits broker Universal Life Resources days after Spitzer had issued a complaint against the firm for allegedly participating in kickbacks and illegal incentives. Garamendi also filed an action against four insurers – MetLife, Prudential Financial, Cigna and UnumProvident – over their involvement with the firm.

Separately, Connecticut’s attorney general Richard Blumenthal also sought information from Allianz Life, the US life insurance unit of German insurance group Allianz.

Not to be outdone, Florida’s attorney general has issued subpoenas to 11 insurance companies seeking details on “questionable” fee arrangements and possible bid rigging in the last week. Of the 11 insurance companies that received subpoenas, three were subsidiaries of American International Group, including National Union Fire Insurance Company of Pittsburgh, American International Specialty Lines Insurance Co. and Lexington Insurance Co. The others include CNA's Continental Casualty Co., Nationwide's Scottsdale Insurance Co.; Chubb's Federal Insurance Co., Ace American Insurance Co., Zurich American Insurance Co.; St. Paul Fire & Marine Insurance Co., State Farm Florida Insurance Co., and Twin City Fire Insurance Co., a unit of Hartford Insurance Group.

"At this point, we are seeking to determine whether violations of Florida law have occurred," the State’s attorney general Charlie Crist said in a statement. He has already subpoenaed 10 insurance brokers, including the three globals MMC, Aon and Willis.

Separately, a Texas based motor insurer Affirmative Insurance Holdings Inc revealed that it received subpoenas from the Illinois Department of Financial and Professional Regulation, Division of Insurance, requesting documents and seeking information related to its “industry wide investigation into producer-compensation arrangements”.

In Zurich, the world’s second largest reinsurer Swiss Re revealed that both the Securities and Exchange Commission (SEC) and Spitzer’s office had asked for details of its “non-traditional” products. "Swiss Re may receive similar requests from other governmental or regulatory authorities," explained the reinsurer in a statement.

Investigations into finite reinsurer have also led to subpoenas from the SEC to Platinum Underwriting, the Bermudian reinsurer who earlier this month cancelled such a contract with Berkshire Hathaway. Spitzer also issued a similar subpoena to US insurer St Paul, the company revealed.

While Hartford Financial Services – one of the insurers named in Spitzer’s original 14 October complaint against MMC – revealed that it has received subpoenas from the Californian and Florida attorneys general last week back on the subject of broker compensation.

Another company that was named – Munich Re – revealed last week that it had also been subpoenaed by insurance regulators in North Carolina and Texas to provide information for their probes into the industry.

The allegations of bid-rigging and widespread collusion have led to criticisms of the US’ State based insurance regulation and suggestions that reform is overdue. Adding to the controversy, testifying at a Senate Governmental Affairs subcommittee, Eliot Spitzer called for a congressional inquiry into the industry’s practices. “The Federal government should not pre-empt state insurance enforcement and regulation. Nonetheless, I do believe there is a role for the Federal government, especially in the areas of offshore capitalisation and investment by insurance companies” he explained.

At a minimum, Federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals. Congress has acted in similar cases. Whether in investigating and implementing reforms for the oil and railroad cartels of the late 19th century, or more recent probes into the savings and loan industry, tobacco, or energy markets and Enron Corp, there is ample precedent for Congress to investigate the insurance industry and to undertake reform,” Spitzer told the subcommittee.

But Ken A Crerar, president of the Council of Insurance Agents & Brokers, responded with a robust defence of the industry. "We categorically challenge assertions that fraud, bid rigging and kickbacks are commonplace in the insurance brokerage industry," he said in a statement. "It is wrong to translate a handful of isolated charges into an indictment of an entire industry" he added.

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