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Raters react swiftly to NY commission probe charges


October 17, 2004   by Canadian Underwriter


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Rating agencies are reacting to news that New York Attorney General Eliot Spitzer has filed civil charges against broker Marsh, and exacted guilty pleas from two AIG executives relative to industry placement practices.
The news came last Thursday, with Spitzer accusing Marsh of “bid rigging” and other deceptive practices relative to the placement of insurance contracts. He also made public accusations of “widespread corruption” against the insurance industry relative to the placement of contracts with brokers, however only the Marsh suit and AIG charges have been filed thus far.
Rating agency Moody’s Investor Service notes the number of insurers mentioned in the filing against Marsh, although none of these companies (other than the two AIG employees) has actually been charged included are: ACE Ltd., The Hartford Financial Services Group, Munich Re and subsidiaries of AIG.
“Moody’s stated that it considers the allegations to be serious, and that the filing of the “Marsh Suit” may represent the beginning of a process whose outcome could have a negative impact on the credit profile of these, or other insurers,” notes the rater’s press release. “The range of possible financial and business impacts on the insurers is broad, and while some of the possible outcomes could have negative rating implications for these, or other insurers, Moody’s does not presently have sufficient information to make a judgment about that prospect.”
The rater adds that there may be little more information available in the short-term to indicate any impact the investigation may have on ratings or the financial strength of insurers or brokers.
Rating agency Fitch, however, has placed the ratings of Marsh parent Marsh & McLennan Cos. Inc. (MMC) on rating watch negative, following the news. Fitch notes that the suit seeks disgorgement of all profits the broker made as a result of the placement of business under contingent fee agreements, as well as punitive damages.
“The potential costs related to this litigation may significantly affect Marsh & McLennan’s capital position and debt repayment capacity relative to current rating expectations,” the rater notes. “The nature of the allegations may also affect the ongoing revenue and profit potential of MMC’s insurance brokerage operations.”
Standard & Poor’s says it is not taking action on any of the insurers named in the filing, but has put a negative watch on MMC. However, S&P notes the charges could have wider implications for the industry.
“Although the extent of these practices is currently unknown, heightened regulatory scrutiny of insurance practices is expected which will likely increase the cost of doing business within states and across the nation,” says S&P credit analyst Grace Osborne. “On a broader scale, the prospect of pricing collusion and other anti-competitive measures to attract business are serious matters. The implications on both business position and brand recognition could have adverse implications on the ratings of insurance companies that have engaged in these practices.”