In 2004, New York Attorney General Elliot Spitzer charged several large insurance brokers with improperly attempting to use their leverage with insurers to make contingent commissions bonuses a certainty rather than a possibility without disclosing the situation to their customers. Since the investigation, other states have begun exploring agent/broker pay programs. October 2007 marks the latest action, bringing the reinsurance industry into the fold. Connecticut Attorney General Richard Blumenthal filed an antitrust lawsuit in state Superior Court against Guy Carpenter & Co., one of the world's largest reinsurance brokers. The Connecticut Department of Consumer Protection is also participating in the lawsuit, utilizing the Connecticut Unfair Trade Practices Act. According to the Commissioner, "While the reinsurance industry may operate outside the view of the general public, its actions in the marketplace can ultimately help or harm consumers." Blumenthal is using the suit to raise broader questions about the largely and historically unregulated reinsurance business.
Guy Carpenter sells reinsurance, which allows insurance carriers to spread the risk associated with the policies they issue to clients. Reinsurance is insurance for insurance companies. A reinsurance contract may completely or partly insure the risk that an insurance company assumes for its own customers. A major cost driver for retail insurance costs and premiums, reinsurance is intended to serve as another layer of protection to guarantee that the risks that primary insurers assume are safely covered. A single contract for reinsurance often involves multiple reinsurers signing on to the same contract for different percentages of the risk. This grouping of reinsurers in one contract may be necessary to spread the risk.
The suit seeks damages, restitution and civil penalties on behalf of Connecticut consumers. The complaint alleges that Guy Carpenter, conspiring with numerous reinsurers to exploit its position as a dominant reinsurance broker, fixed prices, shut out competitors, manipulated the markets and substantially increased profits in the reinsurance market.
The suit alleges that, as part of the scheme, Guy Carpenter illegally funneled business to Excess Reinsurance Co., a company in which it owned interest. The complaint cites nine other alleged co-conspirators including Arch Reinsurance Company of Nebraska, Aspen Insurance UK Limited of Bermuda, Employers Mutual Casualty Company of Iowa, Farmers Mutual Hail Insurance Company of Iowa, Farm Mutual Reinsurance Plan of Canada, The Hartford Steam Boiler Inspection and Insurance Co., Swiss Reinsurance America Corporation of Armonk, NY, The Toa Reinsurance Company of America of New Jersey and QBE Reinsurance Corporation of New York, although they are not named as defendants. Blumenthal claims Guy Carpenter funneled lucrative business to the select reinsurers in exchange for excessive fees and other benefits. The reinsurers included in these facilities agreed not to compete against the prices and terms set by Guy Carpenter or another "lead reinsurer" and instead agreed to be bound by the same prices and terms as the other participants. If the carrier was unwilling to participate, Blumenthal alleges, the firm was blocked from potential reinsurance business that it was otherwise willing to compete for and write.
Specifically, the lawsuit claims that Guy Carpenter exploited a group of approximately 170 insurance company clients by never disclosing its relationships with the reinsurers or the fact that it was often the entity setting the price and terms for the reinsurance contracts. The complaint asserts that Guy Carpenter's actions caused reinsurance costs for 170 primary insurers to be as much as 40 percent higher than industry averages for decades, which in turn inflated the price of insurance for Connecticut insurance buyers as much as 10 to 40 percent. Blumenthal claims the broker made more than $80 million in illicit profits, plus millions more in undisclosed contingent commissions as a result of the conspiracies.
The suit alleges that Guy Carpenter also steered hundreds of millions of dollars of business over a 50-year period to Excess Reinsurance, a company in which Guy Carpenter had a direct ownership interest and management role. In fact, Excess Reinsurance did not have any employees, and its office was located physically within Guy Carpenter's Philadelphia office. When Guy Carpenter steered clients to this company, it failed to disclose to clients its interest in the company.
Blumenthal said his ongoing investigation has also "revealed several other problematic practices in the reinsurance industry." For example, he cited the industry practice involving "best available terms" that requires all reinsurers bidding on a contract to receive the same price and terms, resulting in an "alignment of premiums" - even if one or more reinsurers quoted a lower price or better terms for the client. Thus if one reinsurer included in the contract negotiates a higher price or more restrictive conditions, then all other reinsurers - including the lower bidders - receive the same higher price and restrictive conditions.
The AG's office began an aggressive investigation after insurers in Connecticut and nationwide sought to impose unconscionable and unacceptable burdens on consumers, particularly along coastal areas. Blumenthal said, in a written statement. "Our investigation has revealed a system of cascading costs resulting from illegal price-fixing arrangements in the reinsurance industry that created a complete vacuum of competition … Reinsurance is essentially a completely unregulated business where backroom deals abound." Blumenthal said the investigation is ongoing and further action is anticipated.
According to Guy Carpenter, "the Connecticut attorney general's complaint is based on a fundamental misunderstanding of reinsurance facilities that have been in operation for the benefit of small and mid-sized clients for as long as 50 years. As many of our clients have confirmed during this investigation, these facilities result in improved availability and terms of reinsurance and ultimately benefit insurance buyers. Simply put, there is no basis for the attorney general's lawsuit." Guy Carpenter intends to oppose the lawsuit.