The burgeoning insurance kickback and price-fixing scandal has officially gone bicoastal.
A week after New York Attorney General Eliot Spitzer filed civil fraud charges against
Marsh & McLennan
, regulators in California and Connecticut also are jumping into the fray with a raft of new rules and subpoenas.
California Insurance Commission John Garamendi on Wednesday announced a new series of regulations that requires brokers to "disclose any financial incentive" they receive for steering business to a particular insurance company. Failure to comply with the new regulation can result in a $10,000 fine for each infraction.
The regulation is aimed at cracking down on so-called "contingent fees," the payments between brokers and insurers that are at the center of the civil fraud case filed against Marsh. The case alleges that such payments are unethical and possibly illegal because they create an incentive for a broker to keep steering new business toward an insurer, even if doing so is not in the interest of the broker's customer.
Garamendi and Spitzer both have likened "contingent fees" to kickbacks and contend the payments have led to overcharging in the insurance industry.
"When consumers place their trust in the hands of agents and brokers to find them the best policy at the best price, they should know if a back-room deal has already been struck," Garamendi said.
The new regulation, however, may be unnecessary because the industry appears ready to abandon contingent fees in response to the Marsh charges.
Marsh, for instance, which took in $845 million in contingent-fee revenue last year, has said it will stop the practice in an initial bid to make nice to Spitzer. Other brokers and insurers are considering taking a similar step, even though most in the industry defend the practice.
But the California regulation is an indication that the insurance industry has more than just Spitzer to worry about in the coming months, as state regulators compete with each other to score the next big hit and look under every rock for signs of wrongdoing.
Within the past few days, Connecticut Attorney General Richard Blumenthal issued subpoenas to insurers seeking evidence of alleged price-fixing by brokers and insurers. The subpoenas are similar to ones issued by Spitzer's office late last week.
The California insurance commissioner says he may file his own civil suits against some insurance firms next week.
Spitzer's fraud complaint against Marsh also alleges the firm engineered a scheme to solicit fictitious bids from insurers into boost premiums. At the same time Spitzer was charging Marsh with civil fraud, his prosecutors were securing guilty pleas from two
American International Group
employees and another at
, for their part in the apparent bid-rigging scheme engineered by Marsh.
The frenzy of regulatory activity has decimated stocks of insurance firms and brokers with many losing more than 10% of their value since last week. The carnage has been widespread, with investors hammering shares of any company that says it's merely received a subpoena.
The bloodletting, however, eased up a bit Wednesday. Marsh and
, two of the hardest hit, actually posted small gains, with Marsh rising 50 cents, of 2%, to $24.60 and Aon, up 64 cents, or 3%, to $19.84.
But even the threat of a subpoena has some insurers cowering. A source says one insurer that has yet to receive a subpoena recently hired a law firm to conduct an internal investigation of its payment practices to see if it has anything to worry about.
While the scandal is still in its infancy, several people familiar with the investigation say they don't expect regulators to find widespread instances of price-fixing and bid-rigging in either the life insurance or health insurance business. They say they believe the practice of soliciting fictitious bids to inflate premiums was limited mainly to the commercial insurance business.
Still, they expect Spitzer and the other regulators to pursue that line of inquiry with vigor for the next several months, leading to additional negative headlines for the industry.