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Marsh unit faces conspiracy suit

Reinsurance business targeted in latest probe

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Marsh unit faces  conspiracy suit

HARTFORD, Conn.--Another Marsh & McLennan Cos. Inc. unit--this time its reinsurance brokerage--came under fire last week when Connecticut Attorney General Richard Blumenthal filed antitrust and unfair trade charges against the unit.

The suit against Guy Carpenter & Co. L.L.C. marks a new twist in investigations into insurance industry practices, which until now have focused on brokers and insurers.

However, it is uncertain whether the suit--reminiscent of former New York Attorney General Eliot Spitzer's 2004 blockbuster fraud and antitrust suit filed against MMC and its Marsh Inc. brokerage unit--will have the same industrywide impact, sources say.

Several experts last week raised questions about the strength of the suit, and Guy Carpenter vowed to defend itself saying the complaint has "no merit."

The suit, filed Oct. 4 in Superior Court in Hartford, Conn., alleges that the New York-based reinsurance brokerage conspired with reinsurers to fix prices--at levels above where they would be set in a competitive market--and stifled competition through its use of its own reinsurance facilities (see story, page 29).

As a result of the alleged schemes, insurance buyers have paid up to 40% more for coverage as cedents passed on the higher reinsurance costs, Mr. Blumenthal alleges (see story, page 29).

Rather than seeking competitive quotes on behalf of its cedents, Mr. Blumenthal alleges that Guy Carpenter funneled lucrative business to the facilities, with which it retained binding authority until 2004, in exchange for excessive fees and other benefits that were not disclosed to cedents.

Mr. Blumenthal alleges that Guy Carpenter misled its cedents regarding its "duplicitous role." It also alleges that, despite relinquishing underwriting authority in 2004, cedents were unaware that Guy Carpenter continues to set ceding commissions. Ceding commissions are paid by reinsurers to cedents.

In addition, Guy Carpenter set up an unlawful tying arrangement by insisting that cedents that used the facultative facilities also buy treaty coverage through the brokerage, the suit charges.

"My antitrust investigation has revealed an industry plagued by pervasive anticompetitive and anti-consumer practices," Mr. Blumenthal said in a statement. "Guy Carpenter's schemes were enabled by a shifting coterie of more than 20 co-conspirators--reinsurers willing to play Guy Carpenter's game of deceit, and damage consumers."

The suit also names Philadelphia-based Excess Reinsurance Co., a reinsurer in which Guy Carpenter has a 9.5% ownership interest and a management role. Mr. Blumenthal alleges Guy Carpenter funneled business to Excess Re, which is 90% owned by its policyholders, without clients' knowledge of its ownership and management interest. Excess Re ceased underwriting in 2003.

The suit, which alleges violations of the Connecticut Antitrust Act and Connecticut Unfair Trade Practices Act, seeks damages, restitution, disgorgement and civil penalties.

In a statement, Guy Carpenter blasted the lawsuit. It "is based on a fundamental misunderstanding of reinsurance facilities that have been in operations for the benefit of small and midsize clients for a long as 50 years. As many of our clients have confirmed during this investigation, these facilities result in improved availability and terms of reinsurance and ultimately benefit insurance buyers," the reinsurance brokerage said.

In a statement, Excess Re said it is "confident" that the allegations are "without merit" and that it will defend itself "aggressively."

Although not charged in the suit, Mr. Blumenthal lists as "current co-conspirators:" Arch Reinsurance Co., Aspen Insurance U.K. Ltd., Employers Mutual Casualty Co., Farmers Mutual Hail Insurance Co. of Iowa, Farm Mutual Reinsurance Plan, Swiss Reinsurance America Corp., Hartford Steam Boiler Inspection and Insurance Co., Toa Reinsurance Co. of America and QBE Reinsurance Corp.

An HSB spokesman said the company is "disappointed" that it was named in the suit and it "is confident that it has done nothing wrong and has been cooperating with the attorney general's office in its investigation."

"Swiss Re is not named as a defendant in the complaint. We have cooperated with the AG's investigation and have fully complied with the AG's subpoena for documents and information," a Swiss Re spokeswoman said.

Other reinsurers either declined to or were unavailable for comment.

Market impact uncertain

Attorneys and other industry experts had various reactions to the lawsuit and its potential effect on the reinsurance market.

"What's especially interesting here is he is specifically going after the reinsurance market, which has always been known as a murky, insulated business," said Anthony Sabino, a law professor at the Peter J. Tobin business school at St. John's University in New York. "Clearly Blumenthal is taking the tack that the way it works is in a very dirty fashion."

It's too early to say whether the suit will have the same effect on the industry as Mr. Spitzer's did, Mr. Sabino said. But "he's definitely going to pull a Spitzer" in issuing subpoenas and investigating other players in the reinsurance market.

Mr. Blumenthal said further action is anticipated.

James W. Carbin, a partner with Duane Morris L.L.P. in New York, said Guy Carpenter's reinsurance facilities detailed in the complaint are not "particularly uncommon" in the reinsurance market. "What it does potentially highlight, though, is the conflict arising when a company wears two hats--that of intermediary and that of binding authority for the very risks they're placing and the proper use of that authority and the disclosure of those roles."

"I don't think the case raises any particularly novel antitrust issues," said James M. Burns, a partner with Williams Mullen in Washington. "The complaint seems to ask whether it is appropriate for several reinsurers to work together to satisfy certain capacity requirements and that presents a rather common joint venture-type question."

"To the extent that any of the other conduct alleged in the complaint is the basis for the state's antitrust claim, well that might be novel, but I don't think that is the case, nor do I think that it would support such a claim if it is," Mr. Burns said.

Robert P. Hartwig, president of the New York-based Insurance Information Institute, for one, said he thinks the complaint falls short.

"It makes no mention of the fact that this is a very competitive market, and from an economic perspective it's difficult to believe that these organizations were systematically being overcharged for decades and didn't go off with another (reinsurance) broker," he said.

According to the complaint, New London County Mutual Insurance Co. and Patrons Mutual Insurance Co. had to substantially increase their primary umbrella insurance rates in 2002 to comply with terms of purchasing reinsurance through Guy Carpenter's umbrella facility.

Mr. Carbin questioned, however, whether the ceding companies, given their relatively small size, "could have gotten the same reinsurance protection had they gone into the open market as opposed to what they were able to secure by these facilities."