By Brian Grow and Diane Brady The tangled web of insurers and the brokers who deliver them billions in premiums from Corporate America is being deciphered faster and faster. Witness this: When Ashland (ASH), a 22,000-employee heavy-industrial company headquartered in Covington, Ky., hired insurance broker Universal Life Resources (ULR) to solicit bids for life, accident, and travel insurance two years ago, it agreed to pay the firm a flat $47,000 consulting fee. In exchange, ULR agreed to forgo lucrative extra compensation -- known as "override payments" -- often doled out by insurers when they land new business. But when Prudential Insurance won the contract that year, it allegedly paid $66,478 in such fees to ULR, then lied about it when quizzed by an Ashland executive in September.
The alleged collusion between ULR and three of the nation's biggest life, accident, and disability insurers didn't stop there, according to a complaint filed against San Diego-based ULR by New York State Attorney General Eliot Spitzer on Nov. 11. MetLife (MET), the nation's largest life insurer, allegedly agreed to hike ULR's special commissions by 50% if MetLife won one out of every three bids the insurer entered with the broker.
OTHERS ON HOT SEAT. UnumProvident (UNM), the biggest disability insurer in the country, allegedly hid commissions from federal disclosure forms at ULR's behest and created sham bids to block competing offers. Their tangos allegedly even extended to allowing ULR Chief Executive Douglas P. Cox to approve at least two communiques from Prudential to clients that shaded the truth about fees charged to their employees, according to the lawsuit.
"The Spitzer investigation... has now firmly hit the life-insurance companies," says Nigel Dally, insurance analyst at Morgan Stanley (MWD) in New York. All three insurers declined to comment on details of the complaint. An attorney for ULR, Robert J. Cleary, says the firm disagrees with a number of its conclusions, and plans to discuss them with Attorney General Spitzer soon.
Fresh off his takedown last month of commercial-insurance broker Marsh & McLennan (MMC), Spitzer now has a new set of underwriters in his sights: employee-benefits insurers. An official in the New York Attorney General's office indicates that charges could land in a courthouse in the near future against Prudential, MetLife, and UnumProvident.
The fallout: Analysts expect those charges to unleash a slew of class actions and, potentially, to wipe out the cozy special commissions paid by big benefits insurers to their preferred agents. It's the latest salvo in Spitzer's assault on an insurance industry he sees as rife with conflicts of interest.
WASHINGTON, TOO? "We found that favoritism, secrecy, and conflicts rule this market, and not open competition," said Spitzer in testimony about the insurance industry before the U.S. Senate Committee on Government Affairs on Nov. 16.
Spitzer's hunt for malfeasance could soon spiral into a federal investigation by the Labor Dept. That's because the ULR indictment offers hints of how the feds, too, have been hoodwinked: Until 2004, ULR had a written agreement with UnumProvident that the broker's override compensation "[would] not be represented on [Schedule A] reports," according to the lawsuit. Hiding those commissions would violate the federal Employee Retirement Income Security Act (ERISA), which requires disclosure of payments to brokers.
On Nov. 11, the Labor Dept. told BusinessWeek Online that it is investigating whether insurers are paying improper fees to brokers and how those fees are being disclosed to the federal government. It's the incestuous relationship between big underwriters and their preferred brokers that troubles some benefits advisers. "The insurers want to maintain an unlevel playing field where big brokers get additional commissions," says William Lindsay, principal at Benefits Management & Design, an employee-benefits consulting group in Denver. "The quid pro quo is the broker provides the insurance company with a large block of business."
So far, the three benefits insurers aren't backing off their broker compensation deals. MetLife says it's conducting an internal review of its commissions practices and has fully disclosed the special fees that it pays brokers. UnumProvident is also parsing its commission payments and will not enter any new compensation agreements until that review it complete, according to CEO Thomas Watjen. Prudential declined to comment.
"CRIMINAL FAVORITISM." And some of the insurers could slip through with a slap on the wrist, say analysts. One reason: ULR only took in $11.3 million in override commissions in 2003, vs. $845 million for industry behemoth Marsh. For now, MetLife -- which has received four subpoenas from Spitzer -- faces only one allegation in the ULR lawsuit of pumping up ULR's commissions if it won more business, and this has helped to keep its stock price near a 52-week high.
Prudential will have a tougher time explaining the allegedly false commissions data in its Ashland bid, say Morgan Stanley's Dally. Meanwhile, UnumProvident, already hobbled by hundreds of class actions claiming improper denials of disability claims, could face more serious charges of conspiring with ULR to rig a bid to block Aetna (AET) from a deal, say analysts. All three companies say that they are cooperating fully with the New York Attorney General's investigation.
Still, the intensifying spotlight has benefits insurers hunkering down. With a growing battalion of state and federal regulators accusing them of "criminal favoritism," in Spitzer's words, the benefits bestowed by brokers such as ULR could possibly soon become bookings in the court docket instead of on the balance sheet. Grow is a correspondent in BusinessWeek's Atlanta bureau and Brady is an associate editor in New York