US Insurance Sector Corrupt, Says Spitzer

Eliot Spitzer, the battling New York attorney general who took on Wall Street, yesterday turned his sights on the insurance industry, accusing it of widespread corruption.

The allegations were made in a lawsuit filed against the largest insurance broker in the United States, Marsh & McLennan. The suit also names some of the biggest insurers, including Chubb, American International Group, ACE, Hartford Financial Services and Munich Re, and Mr Spitzer said separate civil or criminal actions could be pursued against each of them.

The suit alleges that Marsh & McLennan steered unsuspecting clients to insurers with whom it had lucrative payoff agreements. He also said the broker solicited rigged bids for insurance contracts to make it look as though it had sought the best offer. The result is a distorted market and higher insurance costs, the suit claims.

"This investigation is broad and deep and it is disappointing," Mr Spitzer said - disappointing because of what it "once again reveals about the craven disregard for ethics and the law in some of our largest corporations".

Two unnamed insurance executives from AIG and one from ACE have pleaded guilty to criminal charges in connection with the scheme, the attorney general said.

Mr Spitzer has cast himself as a crusader aiming to clean up corporate America. He wrung $1.4bn from the biggest banks on Wall Street to settle allegations that the banks' research departments were issuing conflicted advice to in vestors. He has also extracted hundreds of millions of dollars from the mutual fund industry in an ongoing investigation into corrupt practices that favour big clients over ordinary investors.

More recently he has turned to the drugs industry and exposed GlaxoSmithKline's suppression of negative data about its anti-depressant, Seroxat.

The complaint against Marsh alleges that the firm has "at least since the late 1990s" received special payments from insurance companies above and beyond normal sales commissions. The payments, known as "contingent commissions", were characterised as compensation for "market services" but were in fact rewards for the business that Marsh steered their way, Mr Spitzer said. Marsh collected $800m in contingent commissions in 2003 alone, more than half its $1.5bn profit.

Mr Spitzer said the allegations went to the heart of the way the insurance industry does business. "The insurance industry needs to take a long, hard look at itself," he said. "If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."

Shares across the industry were mauled on Wall Street. Marsh shares fell more than 17% on the announcement, tumbling $7.83 to $38.30. AIG was 11% lower in mid-day trade and ACE dropped more than 8%. Marsh, AIG and ACE had no immediate comment. Hartford denied any wrongdoing and said it was cooperating with the investigation.