January 15, 2005

A.G. Spitzer eyes offshore captives, may need feds to help

On January 7, New York Attorney General Eliot Spitzer told his state's legislature that in his expanding investigation into the insurance industry, "[w]e have also begun to look at other troubling areas of the insurance industry beyond steering and bid rigging, such as conflicts of interest that arise between brokers and captive insurance and reinsurance companies that are operated or owned by brokers."

Attorney Spitzer attributed to a 2002 Swiss Re study a statement that a majority market share was concentrated in two or three insurance brokerages, saying that "the threat of collusion has become a reality. We found that a small group of brokers and insurance companies have created a network of interlocking connections and secret payments which ensure that the bulk of business goes to certain insurers and that profits remain high."

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Although he did not provide a precise citation to the Swiss Re study, a web search at Swiss Re's website found a 2004 research paper with the indicated data. From the executive summary "Commercial insurance and reinsurance brokerage -- love thy middleman," Sigma No. 2/2004 (Swiss Re, March 2004):

"In 2002, global commercial brokerage revenues were estimated at about USD 27 billion. The broker industry is highly concentrated, with Marsh and Aon accounting for 54% of revenues. As a subset of that market, the 2002 global revenues from reinsurance brokerage are estimated at USD 3 billion. This market segment is highly concentrated, with the four companies accounting for 78% of the total market."

"The growth of offshore markets -- particularly the Bermuda market -- has increased the share of brokered business in commercial lines and reinsurance, and is responsible for the recent decline or [sic] brokered commercial business in US insurance market statistics. Brokers have played a very active role in setting up some of the new Bermuda players and serve as the sole distribution channel for offshore reinsurance carriers." Swiss Re, Sigma No. 2/2004 (March 2004).

Attorney Spitzer acknowledged the challenges of investigating operations such as captive insurers that are located outside the jurisdiction of the United States, and called for greater federal involvement in insurance industry accountability.

His remarks were during testimony to the State Assembly Standing Committee on Insurance on January 7, 2005. insurance_assembly_testimony.pdf (application/pdf Object)

The Attorney General's statements open up the issues of potential antitrust exposures of brokers and reinsurers operating outside of the United States but impacting trade and commerce within the United States. As the ultimate risk bearers for the global insurance network, reinsurers have a significant impact on the pricing and availability of insurance at all levels of distribution.

In the 1980's, decisions by international reinsurers had a substantial impact on the availability of commercial liability insurance in the U.S. and became the subject of major antitrust action by state attorney generals. In its decision, the Supreme Court reaffirmed that "the Sherman Act applies to foreign conduct tha was meant to produce, and did in fact produce, some substantial effect in the United States." Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993).

DougSimpson.com/blog

Posted by dougsimpson at January 15, 2005 07:34 AM | TrackBack
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