On October 9, 2007, Connecticut Attorney General Richard Blumenthal filed a state law antitrust complaint against Guy Carpenter ("Guy Carpenter"), an international reinsurance intermediary of Marsh & McLennan Companies, Inc. and Excess Reinsurance Company, for whom Guy Carpenter acts as a general manager, alleging a series of conspiracies within the reinsurance industry to fix prices and output, foreclose competitors from access to markets, and allocate markets to eliminate competition for the purpose of substantially increasing profits in the market for reinsurance. The 107 page complaint, which also seeks relief for Guy Carpenter's alleged breach of fiduciary duties owed to its clients and affirmative misrepresentations, also names nine other co-conspirators whose alleged anticompetitive business practices are being aggressively investigated.1
The filing of the Connecticut complaint is another example of aggressive antitrust enforcement State Attorneys General of the multifaceted insurance industry. Reinsurance companies should pay careful attention to this litigation and potential spillover to other jurisdictions. In announcing the lawsuit, Attorney General Blumenthal stated,
"Thousands of consumers in Connecticut and many more in most states across the country paid premiums of up to 40 percent higher, costing them potentially hundreds of millions of dollars. 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."
Background of Enforcement in the Industry
State Attorney Generals' Investigations
Over the past 18 months, Attorneys General from Connecticut, New York, and Illinois have focused their investigative efforts on allegations of anticompetitive behavior in the insurance and reinsurance industry. The Connecticut Attorney General's office has issued approximately 24 subpoenas in the past few months alone. Several of the attorney generals' investigations have led to substantial settlements.
Private Litigation
Private allegations of bid rigging in the insurance and reinsurance industry have not been as successful. On September 28, in In Re Insurance Brokerage Antitrust Litigation, Judge Brown of the U.S. District Court for the District of New Jersey, dismissed claims brought by policyholders against a number of insurance brokers and carriers, including Marsh & McLennan, the world’s largest insurance broker. Suing as a class, the plaintiffs in alleged six causes of action, which included RICO violations, pursuant to 18 U.S.C. §1961, et seq.; violations of Section 1 of the Sherman Act, 15 U.S.C. §1; and violation of the antitrust laws of forty eight states and the District of Columbia. In Re Insurance Brokerage Antitrust Litigation, 2007 U.S. Dist. LEXIS 73220, at *38.
Judge Brown dismissed the RICO claims with prejudice, noting that the plaintiffs had been given three opportunities to state a claim. He wrote, “Plaintiffs’ allegations offer nothing more than a kaleidoscope of acts executed by a kaleidoscope of actors, and combine broker-defendants and insurer-defendants in such a fashion that the court is unable to discern any systemic permutation.” Id. at *111. Judge Brown also dismissed plaintiff’s state law claims without prejudice “because the Court decline[d] to exercise supplemental jurisdiction over these solely state law claims,” effectively terminating the class action against Marsh. Id. at 163. Judge Brown had already dismissed plaintiff’s antitrust claims, reasoning that, “Plaintiffs have failed to provide facts for this Court to base an inference of an agreement among the Broker Defendants.” In re Ins. Brokerage Antitrust Litigation, 2007 U.S. Dist. LEXIS 64767, at *95.
Other private law suits have also been filed. On July 25, 2007, Supreme Auto Transport filed a class action lawsuit in the Southern District of New York against Certain Underwriters of Lloyd’s of London, including 24 Syndicate Members, and Marsh & McLennan, Marsh Private Client Services, Aon Corp. and other insurance brokers. The complaint alleges that the defendants conspired to defraud policyholders by using the “payment of contingent commissions as payments to certain brokers by Lloyd’s of London entities in exchange for the brokers steering clients to certain higher profit accounts that resulted in higher premiums to the clients.” The Plaintiff claims that defendants “did not disclose the existence of contingent commissions to their clients” and “defendants procured bogus and false bid quotes from co-conspirators.” In a five count civil indictment, Supreme Auto Transport alleges violations of Section 1 of the Sherman Act and Section 4 of the Clayton Act, violations of a number of state antitrust statutes and other claims. The complaint seeks, inter alia, damages for restraint of trade under New York law and for the alleged violation of the consumer protection statutes and treble damages for alleged antitrust violations.
A similar suit was filed just nine days earlier. On July 16, 2007, Lincoln Adventure, LLC and Michigan Multi-King, Inc., filed a class action lawsuit in the Southern District of Florida against Marsh & McLennan, Marsh Private Client Services, Marsh Ltd., Aon Corp., and other insurance brokers, and Certain Underwriters of Lloyd’s, London, including 23 Syndicate Members. The complaint alleges that insurance brokers conspired with certain Lloyd’s of London underwriters to “manipulate the market for commercial insurance in the United States through both the U.S. and London Markets” by accepting undisclosed contingent commissions to direct customers and premium to the paying insurers. In a nine count civil indictment, Lincoln Adventure and Multi-King allege, inter alia, violations of Section 1 of the Sherman Act, violations of the RICO Act, violation of state antitrust laws, and other claims. The complaint seeks, inter alia, treble damages for alleged antitrust violations, disgorgement and other relief.
Allegations of the Complaint
The Attorney General's lawsuit challenges a series of alleged conspiracies within the reinsurance industry, principally led by Guy Carpenter, acting as both agent and underwriter, to fix prices and terms on reinsurance contracts purchased in Connecticut and throughout the United States by ceding company clients.
The complaint alleges that Guy Carpenter traded exclusive access to a lucrative book of business in exchange for excessive fees and other benefits by creating a series of reinsurance "facilities," or binding authority programs, that were aimed at a large block of its smallest insurance company clients. In exchange for agreeing to be part of the program, these reinsurers were provided with exclusive access to the reinsurance business generated by the programs. No competitive bidding or quotes were obtained for any reinsurance placed in the program; instead the business was placed straight with the participating reinsurers at predetermined rates. The complaint alleges that this market was totally insulated from competition or any competitive market forces.
A number of specific anticompetitive antitrust allegations are raised in the complaint regarding the Guy Carpenter reinsurance facilities and how they were employed:
A. Horizontal Restraints
- Price Fixing: By agreeing to be part of a facility, each reinsurer agreed to forego competition and provide reinsurance at prices that were fixed in advance, in exchange for access to Guy Carpenter's large and profitable book of business. As a result, several reinsurance companies who would otherwise be competing with each other on premiums and contract conditions ceased doing so, thus reducing the variety of reinsurance services offered to ceding insurance companies.
- Output Restrictions and Fixing of Terms: By agreeing to be part of a facility, each reinsurer agreed to forego competition and fix the amount of reinsurance that any individual insurer would be allowed to cede to the facility. Because it is alleged that Guy Carpenter was not seeking competition from the open market, output was limited and choices were reduced for Guy Carpenter clients seeking to purchase reinsurance through the facilities. Reinsurers are also alleged to have agreed to setting contracts with fixed terms, reducing the variety of reinsurance services and new products in the industry.
B. Market Allocation
The complaint alleges that because Guy Carpenter decided which reinsurers will participate in its various facilities, it therefore allocated markets among its favored reinsurers, allowing access to some whole precluding access to others who did not agree to terms imposed by Guy Carpenter.
C. Vertical Restraints: Tying, Price Fixing, and Exclusive Dealing
The Complaint also alleges that Guy Carpenter used the various reinsurance facilities in an unlawful tying arrangement to create more lucrative treaty business for the reinsurers and itself, making the facilities available only to existing treaty clients, thereby foreclosing a significant amount of business from potential competition.
In one specific facility, the complaint alleges that Guy Carpenter and the reinsurers required ceding insurers to charge minimum rates for insurance in order to obtain reinsurance through the facility, and that Guy Carpenter tried to force ceding insurers to increase rates to increase the profitability of its reinsurer partners.
The last vertical restraint alleged in the complaint is based on exclusive dealing. It alleges that the Guy Carpenter facilities were established to create an exclusive relationship between it and the reinsurer participants, guaranteeing exclusive access to business as long as reinsurers viewed Guy Carpenter as their exclusive broker, and would not collectively accept business on behalf of any other entity or broker. As result, a large number of reinsurers were excluded from accessing any of the business.
D. Foreclosure of Competitors from Access to Facilities
Guy Carpenter is also alleged to have placed business into the facilities without seeking competition from the open market, further cementing its exclusive dealing relationship with the participating reinsurers. As a result, prices were significantly higher than if potential entrants had been allowed to bid for this business. Because these entrant reinsurers were foreclosed from entering the market to compete on pricing, there was no ability to compete on price, despite the presence of competitive alternatives to the facilities.
E. Breach of Fiduciary Duty
Lastly, the complaint asserts various non-antitrust claims that it claims constitute Guy Carpenter's breach of fiduciary duty owed to its clients, including: not acting in its clients' best interests, that Guy Carpenter was in a conflict of interest with respect to its ceding clients, that it steered certain business to certain facilities, failed to disclose its allegiance to reinsurers to those clients, and that it made affirmative misrepresentations to the ceding companies concerning the status of certain reinsurance products.
Implications
While the business of insurance is largely exempt from federal regulation, despite recent efforts to repeal or modify this limited exemption to the insurance industry from the federal antitrust laws, anticompetitive practices are not immune from antitrust liability. As discussed above, the Connecticut Attorney General's investigation is one of many that has focused on the reinsurance industry. The list of claims is significant and the complaint contains many citations to documentary evidence to support its factual allegations. It remains to be seen how events will play out during discovery. However, companies involved in the business of reinsurance should pay close attention to developments in this litigation. Investigations in other jurisdictions also may arise, including the potential for investigation by the European Commission, which has been active in enforcing potential anti-competitive conduct, particularly as it relates to dominant single firm conduct and cartel activity. If contacted by state attorney general or other jurisdictional competition authorities, companies should retain antitrust counsel to aid them in navigating and complying with the government antitrust investigation.
Footnotes
1. The other named co-conspirators 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 New York, The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, The Toa Reinsurance Company of New Jersey, and QBE Reinsurance Company of New York.
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