11 February 2005
Key Points:
As a result of a US lawsuit, Australian insurance brokers are subject to increased scrutiny by ASIC regarding commissions paid
Not long after proceedings were brought by New York Attorney General Elliot Spitzer against Marsh McLennan ("MMC") on 14 October 2004 alleging conflicts of interest, bid rigging and client steering, the impact was being felt in Australia.
In the proceedings, that have now settled, Spitzer claimedthat MMC, the largest insurance broker in the world, held market service agreements with insurance companies which created improper incentives for MMC.
Although it can be accepted practice for insurance brokers to receive commissions and profit sharing based on the amount of business they place with insurance companies, it is not legitimate for brokers to base their decisions about which insurer to deal with solely upon the amount of money that they will receive in commission.
Spitzer contended that this is how MMC was conducting its business. Furthermore, it was asserted that these decisions were often made before the bidding process had begun, and that MMC would produce fictitious or inflated quotes from other insurance companies to suggest that a bidding competition had taken place. MMC shareholders have commenced filing suits against the company over these practices.
On 31 January 2005, MMC announced that it had reached a settlement with Spitzer involving the establishment of a US$850 million fund to compensate clients. MMC also undertook to set the standard for transparency and industry participants will be watching closely to observe the full impact of the settlement and the extent to which it sets a new benchmark for future conduct.
Although MMC has to date been the focus of attention, other brokers are now being caught up in the storm. Some brokers have announced that they will stop accepting contingent commission payments from underwriters altogether.
Australian impact
Australia's regulation watchdog ASIC announced on 30 November 2004 that it would investigate insurance brokerage arrangements in Australia. ASIC stated that it would obtain information and documents from a selection of insurance brokers and insurance companies in order to evaluate current practices in the Australian insurance industry. Australian brokers have been resolute thus far in asserting that the practices allegedly undertaken in the US have not occurred in the Australian market.
The information requests issued by ASIC to insurance brokers and insurance companies are extensive. It issued broad requests for information (under section 912C of the Corporations Act) and documents (under section 31 of the ASIC Act) relating to "financial benefit arrangements" entered into or in place between brokers and insurance companies. The requests also extended to systems and procedures relating to the monitoring and managing of potential conflicts of interest arising from any financial benefit arrangements.
ASIC policy statement PS 181 governing the management of conflicts of interest commenced on 1 January 2005. PS 181 requires all insurance brokers to have arrangements in place to monitor potential conflicts of interest that may arise in their business. PS 181 also requires brokers to disclose any potential conflicts of interest in their business providing greater transparency for their clients. Interestingly, while the ASIC notices to brokers only relate to pre 1 January 2005 conduct, they may also encompass matters that are now the subject of PS 181.
ASIC intends to publicise its findings relating to this investigation by March 2005. At that stage, it will also indicate whether further regulatory action will be necessary.
The outcome of the review will be watched with interest by brokers, insurers and insureds alike. Corporate insureds may now wish to review the transparency of their insurance broking arrangements to ensure appropriate broker remuneration and an absence of conflicting interests.
For further information, please contact Ray Giblett and Peter Mann.
