The Insurance Scandal: Just How Rotten?

The insurance industry is the latest financial sector to have its darkest secrets exposed to the light.

German insurers claim they are not aware of any unsavory practices at home. For one thing, the use of intermediaries is less common. In many cases Allianz, Europe’s biggest insurer, and Munich Re deal directly with clients. Moreover, Lufthansa, Siemens and other big firms have in-house brokers, which are not conflicted. Even so, American brokers have made inroads in the German market in recent years. Today the country’s biggest broker is Aon Jauch & Hübener, a subsidiary of Aon. It is followed by Marsh, which expanded in 1999 when it took over Gradmann & Holler, a broker in Stuttgart.

German brokers are not regulated by BaFin, the country’s financial regulator, but rely on a consensus-based system of self-regulation. The VDVM, an association of German insurance brokers, recently developed an ethics code for its more than 570 members. It now wants to speed up the implementation of these guidelines.

In France insurers and brokers profess to be shocked by Mr. Spitzer’s discoveries. Leading French brokers such as Fimat claim they are more transparent about their fees than rivals in other countries. They are, at least in theory, regulated by an agency under the wings of the economics ministry. According to French insurance legislation, the agency “can” oversee brokers. In reality they look after themselves, much like their German colleagues. In 2001 they agreed their own code of conduct when one of their main trade unions jointly developed new guidelines with France’s association of risk managers.

But brokers in France and Germany will soon lose some of their independence. The European Union’s Insurance Mediation Directive aims to bring all parties involved in the sale of insurance under the jurisdiction of one national regulator. The directive comes into effect next January, although it is being resisted fiercely by insurance lobbyists, so it will take even longer than usual for member states to implement the law. One obvious hurdle is that France and Italy, among others, do not have a single financial regulator.

A British Disease?

Mr. Spitzer’s charges have raised most alarm in Britain. As in America, the business there is dominated by a handful of brokers. Aon has 25 percent of the British market, and Marsh is also a leading broker. Britain has several good-sized insurance brokers of its own. Willis is headquartered in London; others include Jardine Lloyd Thompson (JLT) and Benfield, a reinsurance broker. Benfield does about 40 percent of its business in America and has been contacted by Mr. Spitzer, but says it does not accept contingent commissions. JLT says such commissions account for just 2 percent of revenue. Though share prices in both companies dropped in the wake of Mr. Spitzer’s announcement, researchers at UBS, an investment bank, say that Marsh’s stumble could mean more business for them. Justin Bates of Numis, an institutional broker, says Mr. Spitzer’s charges may stop both firms from being snapped up by the big three as insurance pricing softens.

Many people expect British regulators to launch their own investigation. But that will not happen immediately. The General Insurance Standards Council, the current regulator, says that it has no interest in a “fishing expedition” in the absence of a complaint. It is more likely, then, that the Financial Services Authority (FSA), which takes over the regulation of insurance brokers next January, will follow up on Mr. Spitzer’s complaints.

Though the FSA says that it is “monitoring the situation”, it has taken its cue from Mr. Spitzer before on matters such as market-timing (a sin of mutual-fund managers) and investment banks’ allocating of shares in hot initial public offerings to preferred clients. On both those counts, Britain has avoided the worst abuses (though there have been plenty of other financial-services scandals). The industry is cringing at the notion of the FSA demanding yet more information on top of the existing deluge of paperwork. But that might prove a small price to pay if the result is that it avoids the punishments facing American firms. The insurance industry’s moment in the spotlight is far from over.

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