Sidestepping a Quagmire

The ripples spreading from the New York attorney general's broadside against the world's largest broking group were quick to reach London. Whether they will swell into waves remains to be seen.

Marsh & McLennan's British operation was quick to launch damage-limitation efforts when Attorney General Eliot Spitzer made his accusations on October 14.

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Bruce Carnegie-Brown, Marsh UK's chief executive, hired London law firm Freshfields Bruckhaus Derringer to investigate whether there was evidence of improper activity in its use of Placement Service Agreements (PSAs) or Market Service Agreements (MSAs). The probe focused on evidence of bid-rigging, perhaps the most serious of the Spitzer charges against the U.S. parent.

Marsh revealed that out of the $845 million in contingent commissions or PSAs received by the group in 2003, around $200 million was derived from the U.K. operations. Some of this came from business placed for international clients at Lloyd's. Reports suggested $80 million represented insurance contracts on behalf of British clients.

Freshfields' report absolved the company of serious malpractice, finding no evidence of bid-rigging or the submission of false quotes in connection with the placement of insurance business in the UK.

CONFLICTS OF INTEREST

The report, however, did find evidence of a conflict of interest, with a "number of specific examples of brokers being encouraged to use or not use a particular underwriter" because of incentive commissions.

Freshfields also found "evidence of pressure applied by senior employees to brokers to maximize MSA income." Despite this, Freshfields concluded that clients did not appear to have paid more for their insurance or suffered "actual prejudice or disadvantage" as a result of MSAs.

Although Marsh U.K. is reported to have lost about $200 million in revenues from the fallout and is cutting 280 jobs, the findings could help itretain most of its remaining clients.

This is despite reports in the U.K. financial press that many British risk managers were under pressure by senior managers to drop Marsh. Rival broking groups reported they had received "scores of call" from managers interested in deserting Marsh.

After the report's Dec. 2 release, Marsh's new chief executive, Michael Cherkasky, planned a London trip seen as a "charm offensive" to reassure clients that results of a strategic review would be issued in mid-January.

Carnegie-Brown has already indicated that Marsh U.K. will seek to offset lost MRA revenue by by charging underwriters for administrative tasks such as computerizing records or issuing insurance certificates.

SERVICE AGREEMENTS UNPOPULAR

The publication date for Marsh U.K.'s proposed changes to its practices, likely to coincide with a new business model for its U.S. parents, will be around January 15--the date when British financial sector watchdog, the Financial Services Authority, is due to begin regulating the insurance industry.

Marsh U.K. was not the only broker to say it would cease reliance on MSA revenues. A number of larger rivals such as Jardine Lloyd Thompson and Heath Lambert quickly followed suit.

A recent poll of U.K. risk managers found that 93 percent wanted contingent commissions to be banned outright or to be investigated by the FSA.

January 1, 2005

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