Settled, at a price

FINANCE & ECONOMICS

Marsh & McLennan

Feb 3rd 2005
From The Economist print edition

A vast settlement between Eliot Spitzer and the giant insurance broker

HOW much does it cost to shake off Eliot Spitzer, New York's tireless attorney-general? For Marsh & McLennan, the world's largest insurance broker, the answer is $850m. On January 31st Marsh agreed to pay that sum to settle civil charges of rigging bids for insurance contracts and sending clients to favoured insurers, in a suit brought by Mr Spitzer and New York state's insurance superintendent. Marsh will pay no fines. Instead, all the money will go into a fund to compensate policyholders in several instalments, ending in 2008.

Even for a company of Marsh's size, $850m is a lot of money, although Michael Cherkasky, its chief executive, says the payments “will not threaten the company's viability”. Marsh will fork out more than any other financial-services firm targeted by Mr Spitzer. Last year's biggest haul was the $375m which Bank of America paid to settle allegations, made by the Securities and Exchange Commission as well as Mr Spitzer, of mutual-fund misconduct. Marsh's sum is almost two-thirds of what ten Wall Street firms together paid in 2003 to settle charges brought by several regulators, led by Mr Spitzer, that the firms' analysts had played up the shares that their investment-banking colleagues were hawking at the same time.

The Marsh settlement's wording is almost as eye-catching as its price tag. In common with other firms skewered by Mr Spitzer, Marsh neither admitted nor denied wrongdoing. Though coy about its own guilt, it issued a statement castigating some former employees for having “unlawfully deceived their customers” and indulging in “shameful” conduct. Marsh also released a report from an internal investigation, which found that discussions of bid-rigging “took place regularly” among certain employees.

This nice distinction between errant employees and their employer owes much to the pile of lawsuits Marsh is likely to face from shareholders, policyholders who do not opt into the settlement, and other states' insurance commissioners and attorneys-general, who have also been investigating the company. Connecticut is already bringing civil charges against Marsh and ACE, an insurer, alleging a concealed kickback between the two. Marsh hopes to head off the state regulators by compensating policyholders and by carefully dividing the New York settlement money by state (Californian clients will get $131m, Texans $55m and so on). Still, Morgan Stanley estimated before this week's settlement that legal action could cost Marsh $2 billion in all.

What next? As well as trying to keep clients and bracing itself for lawsuits, Marsh has been making changes. Mr Cherkasky, who became chief executive in mid-crisis in October, has cut jobs and disbanded the firm's “global broking” arm, the centre of the bid-rigging charges. Unlike some competitors, Marsh has also banned contingent commissions (payments insurers make to brokers in exchange for getting more business), which can make brokers more loyal to insurers than to their clients. The amount of this week's settlement just about matches the $845m Marsh received in 2003 in such fees.

The insurance industry as a whole nervously awaits more fire-breathing from Mr Spitzer. He has subpoenaed lots of companies and already wrung guilty pleas from six executives, including one at Marsh. He says more such pleas are likely. Insurers and brokers can only hope that the attorney-general will soon be distracted by his bid to be elected governor of New York in 2006. Trouble is, note some in the industry glumly, in New York the governor appoints the insurance superintendent.

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