Connecticut AG Sues International Reinsurance Broker For Schemes That Inflated Insurance Costs Nationwide

October 8, 2007 -- Connecticut Attorney General Richard Blumenthal today announced an antitrust lawsuit against one of the world's largest reinsurance brokers for anticompetitive practices that illegally inflated insurance costs for insurance companies and consumers nationwide.

"Thousands of consumers in Connecticut and many more in most states across the country paid premiums up to 40 percent higher, costing them potentially hundreds of millions of dollars," Blumenthal said. "We are drawing back the cloak of secrecy on industry practices that inflated prices and profits at the expense of 170 insurance companies and their customers. Our investigation is active and ongoing."

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Blumenthal's lawsuit reveals a series of alleged conspiracies within the reinsurance industry, principally led by defendant broker Guy Carpenter & Company, LLC, an international reinsurance broker based in New York. Guy Carpenter essentially created markets that - in its own words - were "insulated from competition."

Conspiring with numerous reinsurers to exploit its position as a dominant reinsurance broker, Guy Carpenter fixed prices, shut out competitors, manipulated the markets and substantially increased profits in the lucrative reinsurance market.

The lawsuit also names reinsurer Excess Reinsurance Company, a company that Guy Carpenter funneled business to, despite its ownership interest in the company. It names nine other coconspirators involved, including The Hartford Steam Boiler Inspection and Insurance Company. Although they are not named as defendants in this lawsuit, Blumenthal said the investigation is ongoing and further action is anticipated.

"Guy Carpenter served as ringleader in choreographing the reinsurance market to fix prices, stifle competitors and collect excessive profits at the expense of an entire industry," Blumenthal said. "My antitrust investigation has revealed an industry plagued by pervasive anticompetitive and anti-consumer practices. Guy Carpenter's schemes were enabled by a shifting coterie of more than 20 coconspirators - reinsurers willing to play Guy Carpenter's game of deceit, and damage consumers.

"This company and its coconspirators created an illusion of competition - a faux functioning market. They raised costs for insurance companies, which ultimately were paid by businesses, homeowners and taxpayers - almost anyone or any entity that buys insurance.

"We began an aggressive investigation after insurers in Connecticut and nationwide sought to impose unconscionable and unacceptable burdens on consumers, particularly along coastal areas. Our investigation has revealed a system of cascading costs resulting from illegal price fixing arrangements in the reinsurance industry that created a complete vacuum of competition.

"Reinsurance is essentially a completely unregulated business, where backroom deals abound. Guy Carpenter's illegal agreements are akin to the illegal trusts that existed over 100 years ago - spurring enactment of our nation's antitrust laws. We will fight vigorously for both court remedies and reforms in industry practices that have harmed consumers at every level."

Department of Consumer Protection Commissioner Jerry Farrell, Jr., who is participating in the lawsuit, said, "While the reinsurance industry may operate outside the view of the general public, certainly its actions in the marketplace can ultimately help or harm consumers. For this reason, I am utilizing the Connecticut Unfair Trade Practices Act to discourage reinsurance companies from adopting practices that would cause damage to consumers."

Additional reinsurers - alleged coconspirators in the schemes - identified in the lawsuit, include Arch Reinsurance Company of Nebraska, Aspen Insurance UK Limited of Bermuda, Employers Mutual Casualty Company of Iowa, Farmers Mutual Hail Insurance Company of Iowa, Farm Mutual Reinsurance Plan of Canada, Swiss Reinsurance America Corporation of Armonk, NY, The Toa Reinsurance Company of America of New Jersey and QBE Reinsurance Corporation of New York.

Guy Carpenter allegedly funneled lucrative business to select inner circles of reinsurers - or "facilities" - in exchange for excessive fees and other benefits from these reinsurers.

Reinsurers included in these facilities agreed not to compete against the prices and terms set by Guy Carpenter or another "lead reinsurer" and instead agreed to be bound by the same prices and terms as the other participants.

If a reinsurer was unwilling to "play ball," as Guy Carpenter put it, that reinsurer was foreclosed access to potential reinsurance business that it was otherwise willing to compete for and write.

Because of the unregulated nature of the reinsurance industry, Guy Carpenter's dominant position in the market and the inertia inherent in the industry, Guy Carpenter maintained these conspiracies virtually undetected for almost 50 years.

Guy Carpenter exploited a group of approximately 170 insurance companies - its clients - never disclosing its relationships with the reinsurers or the fact that it was often the entity setting the price and terms for the reinsurance contracts.

The success of the price fixing schemes was staggering - profits on the various lines of business were as much as 40 percent higher than industry averages for decades. During that period, more than a billion dollars in premiums unlawfully flowed to the reinsurers as a result of the conspiracies, inflating insurance premium costs for consumers by as much as 10 to 40 percent.

Guy Carpenter received more than $80 million in fees, plus millions more in undisclosed contingent commissions as a result of the conspiracies. As one coconspirator noted, Guy Carpenter "has a sweeter deal through (these facilities) and would obviously like to funnel more premium through it."

The scheme also made it easier to place business because - unbeknownst to its clients - Guy Carpenter did not have to seek competitive bids or quotes on behalf of each client. This anticompetitive structure was concealed from Guy Carpenter's clients, who relied on Guy Carpenter to obtain the best reinsurance product at the best price. Or, as one of the lead reinsurers put it:

The facility structure continues to hold potential for outside perception of conflict of interest, since the (facility) business is placed at brokerage terms that are more lucrative for Carpenter than normal placements, and open market competition is eliminated on over 150 individual ceding company programs.

Guy Carpenter also steered hundreds of millions of dollars of business over a 50-year period to a company in which Guy Carpenter has a direct ownership interest and management role - Excess Reinsurance Company. In fact, Excess Reinsurance did not have any employees and its office was located physically within Guy Carpenter's Philadelphia office. When Guy Carpenter steered clients to this company, it failed to disclose to clients its interest in the company.

Blumenthal's ongoing investigation has also revealed several other problematic practices in the reinsurance industry.

Reinsurance - in essence - is insurance for insurance companies. A reinsurance contract may completely or partly insure the risk that an insurance company assumes for its own customers.

A major cost driver for retail insurance costs and premiums, reinsurance is intended to serve as another layer of protection to guarantee that the risk that primary insurers assume are safely covered.

A single contract for reinsurance often involves multiple reinsurers signing on to the same contract for different percentages of the risk. This grouping of reinsurers in one contract may be necessary to spread the risk. Blumenthal said that he found that certain aspects of these contracts are troubling.

For example, the longstanding industry practice involving "best available terms" requires all reinsurers bidding on a contract (often through a broker) to receive the same price and terms, resulting in an "alignment of premiums" - even if one or more reinsurers quoted a lower price or better terms for the client.

In other words, if one reinsurer included in the contract negotiates a higher price or more restrictive conditions, then all other reinsurers - including the lower bidders - receive the same higher price and restrictive conditions. Blumenthal said his investigation has found that this practice is anticompetitive. The European Commission on Competition echoed Blumenthal's belief in a recent report, finding these agreements were anticompetitive and led to higher prices.

"In reinsurance, the highest price sets the market - bloating costs and burdening consumers all the way down the line," Blumenthal said. "The so-called 'alignment of premiums,' - where the most expensive bid determines the contract cost for all bidders - is a backwards way of doing business. Insurers, and consequently all consumers, are victimized by these practices."

Attorney General Richard Blumenthal thanked those in his office who worked on the investigation - Assistant Attorneys General Joseph Nielsen and Erik Zwicker and Paralegal Holly MacDonald under the direction of Assistant Attorney General Michael Cole, Chief of the Attorney General's Antitrust Department.

View the entire complaint (pdf)

Source: Connecticut Attorney General