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Bid-rigging, finite re probes lead insurers to settlement table

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The U.S. insurance industry settlement frenzy of 2005 showed no signs of letup in 2006.

As authorities continued to aggressively pursue resolutions with insurers over bid-rigging charges and finite reinsurance wrongdoing, they expanded investigations to annuities and personal lines.

With major brokers settling regulators' probes into contingent compensation in 2005, in 2006 it was the insurers that one after another inked settlements--each costing millions in policyholder restitution and penalties, and forcing changes to business practices. In all, insurers paid more than $2 billion in fines and restitution.

In February, American International Group Inc. agreed to pay $1.64 billion to resolve allegations by New York Attorney General Eliot Spitzer and other states that it, among other charges, conspired with Marsh & McLennan Cos. Inc. to rig bids.

The following month, it was Zurich Financial Services Group Inc. that reached settlements of $153 million in nine states' investigations of bid-rigging and improper use of finite reinsurance. Later in 2006, Zurich reached similar settlements with more states as well as the District of Columbia and agreed to pay another $141.8 million.

Bermuda-based ACE Ltd. paid $80 million in April to end investigations by New York, Connecticut and Illinois.

In May, Hartford Financial Services Group Inc. said it would pay $20 million to settle charges brought by Mr. Spitzer and others concerning its broker compensation for placing group annuity business.

St. Paul Travelers Cos. Inc. wrapped up similar charges in August by entering a three-state agreement for $77 million.

The settlements continued right through the end of year.

UnumProvident Corp. agreed in November to pay $17.4 million to settle charges by New York and others over its compensation practices.

In December, Prudential Insurance Co. of America reached a $19 million settlement with Mr. Spitzer--who by then had won New York's race for governor--as well as a settlement with California Insurance Commissioner John Garamendi concerning its business practices.

Also in December, Chubb Corp. agreed to a $17 million compensation practices settlement with attorneys general of New York, Connecticut and Illinois, and became the first property/casualty insurer to agree to eliminate contingent commissions on all U.S. business.

But it wasn't just about the money. The companies all vowed to make significant changes in how they conduct business, including halting contingent commissions as well as enhancing reporting requirements and client disclosure.

To top it off, Mr. Spitzer in late November informed ACE, AIG, St. Paul Travelers and Zurich that--in addition to contingent commissions they previously agreed to stop paying on certain classes of business--they also must end contingent payments for six additional lines of business. The lines included automobile, homeowners mulitperil, boiler and machinery, and financial guarantee coverage.

The move, in which Mr. Spitzer targeted the personal lines industry for the first time, prompted an outcry from independent agents, many of whom are reluctant to give up contingents as a producer incentive.

Despite all the 2006 handshakes, two companies refused to bend.

Liberty Mutual Group Inc., which Mr. Spitzer sued in May for allegedly participating in a bid-rigging and steering scheme with Marsh, said the settlement demands were "excessive and unreasonable." The brokerage maintains that its business practices were lawful and vowed to defend itself in court--one battle the entire industry is waiting to watch unfold.

And Acordia Inc. and parent Wells Fargo Bank N.A. declared in late December that the brokerage would vigorously fight claims by three states that it accepted nearly $200 million in undisclosed commissions from insurers.