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Friday, October 22, 2004 - Page updated at 12:00 A.M.
Insurer AIG says it's target of federal grand-jury probe
By EILEEN ALT POWELL
NEW YORK One of the nation's largest insurance companies, American International Group (AIG), said yesterday it has been notified by the federal prosecutor in Indiana that it is a target of a federal grand-jury investigation into "nontraditional" insurance products.
Meanwhile, a major insurance brokerage, Willis Group, announced that it will stop accepting contingency commissions, the fees that are at the center of a probe announced last week by New York Attorney General Eliot Spitzer.
Willis, with offices in New York and London, also said that an internal review in response to subpoenas from Spitzer's office found no evidence of bid rigging or tying placements with insurers.
Marsh & McLennan, the brokerage Spitzer filed a civil suit against on Oct. 14, earlier said it was stopping the use of incentive fees. Insurance companies pay these fees, which are over and above ordinary commissions, to brokers for steering profitable clients the insurer's way.
Also yesterday, the rating agency Standard & Poor's lowered its debt ratings on Marsh & McLennan, the nation's largest broker, and Aon, the No. 2 brokerage. S&P also put Willis Group's debt rating on its negative watch list because of "ongoing uncertainties represented by the continued New York state attorney general's investigation." That status can lead to downgrading of the company's debt.
The Indiana probe into AIG concerns "nontraditional insurance" or "income smoothing" products marketed by the New York-based company. They apparently involved agreements with businesses that would appear to be insurance and would be accounted for as insurance, but did not involve any actual risk transfer, AIG said.
AIG said the investigation is directed at a contract between AIG and Brightpoint, a cellular-phone distributor based in Plainfield, Ind., that was previously investigated by the Securities and Exchange Commission.
That matter was resolved in a September 2003 settlement. AIG agreed to pay a $10 million civil fine to settle federal regulators' allegations that it fraudulently helped another company falsify its earnings report and hide losses.
Spitzer's investigation into the insurance industry has focused on contingent commissions, also known as placement-service agreements or market-service agreements.
Some analysts believe Spitzer may expand his investigation to include "tying," which is the practice by which insurance companies hand over their reinsurance needs in exchange for future referrals for their primary insurance.
Willis said yesterday that it is "ending the practice of accepting contingency payments from insurers."
The company said that, on a global basis, market agreements had been expected to generate about $160 million in revenue for 2004. Of this amount, about $35 million was from North America in 2004 and the rest from other markets around the world.
Aon has said it is cooperating with Spitzer's probe, but defends the practice of accepting incentive fees on grounds that they are well-known in the industry and are disclosed to clients. It also has said it does not believe any of its employees were involved in bid rigging.
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