More from the "Greed is Good" School of Business

Update 8: Marsh & McLennan Comments on Incentive Fees
10.19.2004, 10:16 AM
Forbes.com

The company at the center of a probe into insurance brokerage fees says it took in more than $1.2 billion in incentive payments over the past 18 months and that its decision to stop using such fees will reduce operating income.

Marsh & McLennan Companies Inc. disclosed late Monday that its Marsh Inc. insurance unit collected $845 million of such fees in 2003, and another $420 million through June 30 this year.

The fees, which are over and above ordinary commissions, have been paid by insurance companies to brokers, mainly for steering profitable clients the insurer's way. New York Attorney General Eliot Spitzer sued Marsh & McLennan last week over the fees as well as for bid rigging, and said the investigation extends to several large insurers.

Spitzer's civil suit says the "placement service agreements," also known as contingent commissions or market service agreements, had led to corporate customers not getting the best prices on property and casualty policies. New York-based Marsh & McLennan has since ended the practice, and this week two major insurance companies named in Spitzer's probe - New York-based American International Group Inc. and Bermuda-based ACE Ltd. - said they also have stopped using such incentives.

Spitzer has alleged that March & McLennan, as part of bid-rigging efforts, sought phony quotes from some insurance companies to try to give commercial customers the illusion of a competitive bidding process. In a statement Monday, Marsh & McLennan said the $845 million in fees represented 12 percent of its risk and insurance services revenue of $6.9 billion and 7 percent of its $11.6 billion in overall revenue. The fees also represented more than 50 percent of the company's earnings over the same period.

Besides ACE and AIG, Spitzer's probe also mentioned Hartford Financial Services Group Inc. and Munich-American Risk Partners, a division of the German-headquartered Munich Re Group. None of the insurers has been charged.

ACE, AIG and Marsh & McLennan have all said they have hired outside experts to look into their operations. All three of the firms are headed by members of an insurance dynasty. Maurice "Hank" Greenberg is chairman and chief executive of AIG. His son Jeffrey is chairman and CEO of Marsh & McLennan, while another son, Evan, is president and CEO of ACE.

Note: The Greenberg's are prolific donators to politicians, both Republicans and Democrats, with Maurice and Evan contributing mostly to Republican candidates, and Jeffrey mostly to Democratic candidates.

Marsh & McLennan say these fees represent seven percent of it's overall revenue but fifty percent of of its earnings...and they are now agreeing to voluntarily end this contingency fee abuse which brought in $840 million last year. Yeah...sure...