Broker Commission Investigation Explodes in U.S.

With the announcement in mid-October of a civil suit against Marsh & McLennan over broker commission practices by New York Attorney General Eliot Spitzer, the floodgates of civil litigation, broker reform and even spin-off investigations here in Canada were opened.

The Spitzer announcement, which accused Marsh of bid-rigging, but also of engaging in “steering” clients to insurers with which it had the best contingent commission agreements, caused Marsh & McLennan to replace CEO Jeffrey Greenberg with Michael Cherkasky and promptly axe 3,000 employees. Marsh, along with other large brokers announced they would discontinue contingent commissions and institute other reforms aimed at transparency.

Insurers were also caught up in the fray, with two executives of AIG and one from ACE pleading guilty to criminal charges related to broker compensation. Raters and the stock market reacted negatively to the controversy, downgrading or placing negative outlooks on brokers and insurers, while the stock prices of several companies dropped significantly.

Here in Canada, regulators picked up the thread, with the Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organizations (CISRO) announcing a joint task force to look into the issue. The Financial Services Commission of Ontario (FSCO) is leading the effort with an insurer questionnaire, described by industry insiders as “comprehensive” and addressing broker compensation and a host of other market conduct issues.