February 27, 2008

White Collar Crimes: Marsh & McClennan, AIG & GenRe

A few days ago we blogged insurance crime for amateurs: the saga of Regency Insurance, which was an insurance operation in name only. Today we deal with three big Kahunas: Marsh & McClennan, AIG and GenRe. When it comes to insurance crime, it just doesn't get any bigger than these folks.

Before we get to the particulars of the Marsh situation, we need to acknowledge the ambiguity that lies at the heart of the agent's role. In recommending the best insurance product for their clients, agents face a "perverse incentive." The lower the premiums for the client, the lower the agent's commission. The agent has a financial incentive to place the business either with a more expensive carrier, or with a carrier who pays higher commissions. The interests of the agent and the client are not always aligned.

Which leads us to the clever solution fashioned by some folks at Marsh. Bill Gilman and Ed McNemmy, former Marsh executives, solicited inflated bids from some (cooperating) carriers, so that the carrier they preferred would appear to be the lowest bidder. That's illegal, of course. Bill and Ed have been convicted of one count of bid rigging and face up to four years in prison.

Gilman's attorney, Robert Cleary, has not given up the fight. "Bill Gilman was really the client's best friend and the insurance carrier's worst enemy," he says. "We look at this as merely round one." That's an interesting statement, which goes right to the heart of the matter. Gilman was many things, but given his cosy relationship with the carriers who participated in the scheme, he certainly was not "an insurance carrier's worst enemy."

Big Names, Really Big Mistake
The second criminal act involved two insurance behemoths: AIG and GenRe. AIG has a justly deserved reputation for insuring anything that moves (and some things that don't), the bigger the better. Nothing wrong with a hearty underwriting appetite, but in embracing some pretty exotic risks, the company is vulnerable to big losses. So Christian Milton, AIG's VP for reinsurance, cooked up a deal with GenRe to hide half a billion in losses: GenRe wrote a policy to "cover" the losses, when in fact AIG was still on the hook for payment. In other words, this was risk transfer (insurance) without the risk or the transfer.

Why bother? By cooking the books, AIG artificially inflated its profitability - and the value of its stock. High losses magically disappeared from the books. Ingenious, yes, but illegal. By participating in this fraud, GenRe executives are facing serious fines and jail time. We're talking about people at the very top of the insurance food chain: Ron Ferguson, 63, former CEO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC, and mail fraud; Elizabeth Monrad, 51, CFO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud; Robert Graham, 58, SVP and assistant general counsel, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud.

These former executives were mostly "boomers" - nearing undoubtedly lucrative retirements. The one exception is Liz Monrad, whose financial skills helped her break through the glass ceiling for women - only to crash back through it by her willing participation in fraud. These highly trained professionals are facing substantial jail time and fines for their cozy deal with AIG - a deal that ironically held no risk for GenRe. Ultimately, there was plenty of risk, just not the type they included in their calculations.

Why did these very well paid executives stake their careers on these ill-advised schemes? The motivation is not much different from that of the losers who concocted the Regency Insurance scam: sheer greed. There was (and is) a heck of a lot of money on the table. They did it because they could, and because they assumed with the customary arrogance of the truly powerful that they would get away with it. Which serves as a reminder to the rest of us that we all participate in ethical risk assumption and risk transfer, every day of our lives. Let's hope we do a better job of it than these (former) captains of the industry.

| 2 Comments

2 Comments

You got the facts wrong on the AIG-Gen Re deal. It was just the other way around. AIG reinsured GenRe, that is, AIG promised to reimburse Gen Re for losses that Gen Re might suffer under a block or blocks of business. Unfortunately, there was no risk of loss actually transferred in the deal. No problem - except that AIG accounted for it as an insurance transaction, which it wasn't. Gen Re accounted for it correctly as a deposit transaction, but by knowingly facilitating AIG's cooking its books with this transaction, the Gen Re execs are as guilty as AIG's.

Wow. AIG wouldn't insure my home because I have an underground oil tank. Who would have thought...

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This page contains a single entry by Jon Coppelman published on February 27, 2008 9:59 AM.

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