Willis to Cut Out Fees

The insurance brokers says it finds no evidence of bid-rigging.
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Another insurance broker says it will no longer accept the kind of disputed payments that are at the heart of the kickback and bid-rigging scandal that is spreading through its industry.

Willis Group

(WSH)

, a London-based firm, said Thursday that it will stop accepting so-called "contingent fees" from insurers. The fees, long standard practice in the insurance business, have become a source of controversy in the wake of an investigation started by New York Attorney General Eliot Spitzer.

The New York prosecutor contends that the fees are akin to kickbacks and a reward to brokers for steering a large volume of work to them. He contends 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.

Last week

Marsh & McLennan

(MMC) - Get Report

, another big broker, said it would no longer accept the fees, after Spitzer filed a civil fraud suit against Marsh over the payments. Spitzer's office also accused Marsh of orchestrating a bid-rigging scheme to drive up premium prices.

Contingent fee deals have been a big source of income for insurance brokers and the loss of those fees will no doubt cause earnings to shrink. Marsh, last year, took in $845 million in contingent commission revenues. Willis estimated its 2004 contingent fees at $160 million.

Brokers, however, will be able to make up some of that lost revenue by charging standard commissions on every deal they place with an insurer. With contingent fee agreements, brokers earned fees based on the volume of work they steered to an insurer.

Willis officials also threw some cold water on the most explosive element of the Spitzer investigation, which is the allegation of rampant price-fixing and bid-rigging by brokers and insurers in an attempt to manipulate the market. Firm officials said they found no evidence of any bid-rigging by its employees.

To date, three insurance employees, two from

American International Group

(AIG) - Get Report

and another from

Ace

(ACE)

, have pleaded guilty to participating in the bid-rigging phase of the scandal. The insurance employees all pleaded guilty to taking part in a price-fixing scheme engineered by Marsh.

Spitzer, at a press conference last week, said he believes bid-rigging may be widespread in the industry, and he has served subpoenas on dozens of brokers and insurers in the commercial, life and health insurance business. He promised additional criminal prosecutions.

But people familiar with the investigation say they don't expect regulators to find widespread instances of price-fixing and bid-rigging outside of the commercial property business.

Earlier this week,

MetLife

(MET) - Get Report

said it's "not aware of any instance" in which a MetLife employee supplied a "fictitious" price quote to a broker. Last week the insurer said it had received a subpoena from Spitzer's office, seeking information related to the price-fixing allegations.In a separate move, Marsh meanwhile suspended five employees in the aftermath of the Spitzer lawsuit. The firm won't identify the employees. But several Marsh employees were named but not charged in court paper as playing a role in the bid-rigging scheme.