Marsh & McLennan Companies Inc. said Friday it was suspending its practice of using “market services agreements” with insurance carriers, which the New York attorney general has alleged were used to rig bids, cheating customers.
The agreements – also known as contingent commissions or placement service agreements – are at the center of a lawsuit announced Thursday by New York State Attorney General Eliot Spitzer accusing the New York-based firm of taking payoffs from insurance companies to steer corporate clients their way, rather than get those customers the best prices for corporate property and casualty policies.
The fees are over and above ordinary commissions, that brokers receive from insurance companies, mainly for steering volume business the insurer’s way.
Marsh & McLennan said the practice would be suspended at Marsh Inc., its risk and insurance services subsidiary.
“Today’s decision was made in light of the serious allegations and questions that have been raised about this long-standing industry practice,” the company said in a statement.
The statement also quoted chairman and chief executive Jeffrey W. Greenberg as saying: “We are greatly disturbed by the allegations of wrongdoing. We take them very seriously, and we are conducting a thorough investigation of these allegations.”
He added: “As the facts are being reviewed, we believe it is in the best interest of our clients to suspend MSAs immediately.”
The announcement came as shares in Marsh & McLennan, which fell 25 percent on Thursday, took another beating on Friday. Moody’s Investors Service put Marsh & McLennan’s debt rates on “outlook negative,” which often precedes a downgrade. And several brokerages, including Prudential Equities Group, lowered their ratings on the stock.
In early afternoon trading, Marsh & McLennan shares were down $5.76, or nearly 17 percent, at $29.09 on the New York Stock Exchange.
Shares in insurance companies named in Spitzer’s civil suit Thursday against Marsh & McLennan also tumbled for a second day.
American International Group was down $2.93 at $57.07, ACE Ltd. was off $2.66 at $33.81, and Hartford Financial Services Group Inc. was down $255 at $55.85. The probe also mentioned Munich-American Risk Partners, a division of the German-headquartered Munich Re Group.
Spitzer said other insurance companies are being investigated.
“The damages are vast, the corruption is remarkable,” Spitzer said at a news conference after a court appearance.
The attorney general’s office also announced that two executives of AIG pleaded guilty Thursday to participating in the illegal conduct and are expected to testify in future cases.
The two executives, Karen Radke, 42, a senior vice president of an AIG division, and co-worker Jean-Baptist Tateossian have been suspended pending the outcome of the case, AIG said Friday. They face up to four years in prison, but their sentence will depend on how much more they cooperate, Spitzer said.
On Friday, the chairman and chief executive of AIG, Maurice R. “Hank” Greenberg, told a conference call with analysts that the company had launched its own investigation of the allegations, using outside investigators, and was cooperating fully with Spitzer’s office.
Hank Greenberg, who is the father of the Marsh & McLennan CEO, told analysts that AIG had sought guidance from New York state insurance regulators about contingent commissions long before Spitzer’s probe got underway.