ST. PAUL, Minn.—St. Paul Travelers Cos. Inc. on Tuesday said it will pay $77 million and reform its business practices to resolve allegations of client steering, bid rigging and finite reinsurance abuse brought by three states.
The pact ends probes into St. Paul Travelers' practices by attorneys general in New York, Connecticut and Illinois, who accused the insurer of improper business practices, including: paying undisclosed contingent commissions to agents and brokers to steer business to St. Paul; engaging in so-called "reinsurance tying" agreements, in which reinsurance arrangements are linked to insurance placements; and colluding with several other insurers in a scheme led by New York-based Marsh & McLennan Cos. Inc. to rig bids for excess casualty insurance.
Marsh in February 2005 paid $850 million in client restitution to settle bid-rigging and steering charges brought by New York Attorney General Eliot Spitzer.
The settlement also resolves charges that St. Paul, Minn.-based St. Paul Travelers improperly used finite reinsurance to boost its earnings. St. Paul from 1999 through 2002 entered into a series of aggregate excess-of-loss reinsurance contracts with Barbados-based Underwriters Reinsurance Co. while, at the same time, arranging side agreements specifying that any losses suffered by Underwriters Re would be made up by St. Paul, the attorneys general allege in the "assurance of discontinuance" document outlining the allegations and settlement terms.
Under St. Paul Travelers' settlement, $37 million will be used to compensate certain excess casualty policyholders harmed by the insurer's alleged bid-rigging activities with Marsh. The remaining $40 million will be used to pay fines—of which $24 million will go to New York and $8 million each will go to Connecticut and Illinois.
The cost of the settlement has already been funded through $42 million recorded in the second quarter of 2006 and additional amounts previously recorded, St. Paul Travelers said in a statement.
The multistate agreement reached by St. Paul Travelers largely mirrors those reached by other insurers this year, including Bermuda-based insurer ACE Ltd. and Swiss insurer Zurich Financial Services Group Inc. It bars the company from paying contingent commissions on excess casualty business through 2008 and on lines of business where insurers representing 65% of overall gross premiums written in that line do not pay such commissions.
The company also must support legislation that would outlaw such payments industrywide.Furthermore, St. Paul must adopt various business reforms, including: enhanced disclosure of its compensation for producers; improved employee training and education; better controls on its finite and nontraditional reinsurance transactions; and stricter reinsurance reporting obligations.
According to the assurance of discontinuance, the full $37 million restitution amount must be paid into a fund no later than Sept. 7. Policyholders eligible to tap the fund—which include clients who purchased or renewed St. Paul Travelers excess casualty policies, excluding workers compensation policies, through Marsh between Jan., 1, 2000, and Sept. 30, 2004—should be paid no later than June 4, 2007.
As part of its settlement, St. Paul Travelers did not admit to any breaches of state or federal law, but did issue an apology for its conduct.
"St. Paul Travelers acknowledges that certain of its employees violated acceptable business practices and St. Paul Travelers' own standards of conduct by engaging in improper bidding practices and certain 'finite reinsurance' activities. St. Paul Travelers apologizes and has enacted business practice reforms to ensure that these incidents do not occur again," the insurer's apology states.
"St. Paul Travelers has joined the growing number of insurers, brokers and agents who have pledged to make the market for insurance coverage more transparent and competitive," Mr. Spitzer said in a statement.
"Conducting our business according to the highest standards of integrity has been, and will continue to be, of paramount importance to all of us at St. Paul Travelers," and "we are committed to continuing to embrace changes to our business practices that are consistent with that objective," St. Paul Travelers' Chairman and Chief Executive Officer Jay Fishman said in a statement.
"We have already taken significant steps toward strengthening the ongoing training and education of our employees.Through this settlement, we will implement additional measures to further the overall goal of increased transparency in the marketplace," Mr. Fishman said.
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