Spitzer’s Ghost

Reading Connecticut attorney general Richard Blumenthal’s 101-page indictment against the reinsurance industry in general — and against a reinsurance broker in particular — one can’t help but wonder how this antitrust lawsuit won’t launch a whole new wave of disclosure regulation, this time related to reinsurance brokers and pools.

Theoretically, of course, it will be up to the local courts to decide the merits of the case. But unfortunately the attorney general’s public complaint is so laden with hyperbole — i.e. “This lawsuit challenges a series of conspiracies within the reinsurance industry” — it’s easy to imagine the reinsurance industry is in cahoots with Jack Ruby, Fidel Castro and responsible for the disappearance of Jimmy Hoffa.

Essentially, the Connecticut attorney general is charging his local reinsurance sector with breaching the state’s anti-trust laws. According to the complaint filed with the Superior Court in Hartford, a large reinsurance broker created “a series of reinsurance ‘facilities’ aimed at a large block of its smallest clients. [The broker thus] created what was essentially a closed market for certain categories of business and then, rather than seeking competitive quotes on behalf of its clients, funnelled business to the reinsurers participating in the facilities.”

Reinsurers, the complaint goes on to say, “in order to gain access to this closed market, agreed not to compete on the prices and terms set by either [the reinsurance broker] or another ‘lead’ reinsurer, and instead agreed to be bound by the same prices and terms as the other reinsurer participants. The result was a market that was … totally ‘insulated from competition’ or any competitive market forces.”

The reinsurance broker named in the complaint has already said in a public statement that “the Connecticut attorney general’s complaint is based on a fundamental misunderstanding of reinsurance facilities that have been in operation for the benefit of small- and mid-sized clients for as long as 50 years.”

The broker goes on to say its clients confirmed during the attorney general’s investigation that the facilities [made up of a group of participating reinsurers] “result in improved availability and terms of reinsurance and ultimately benefit insurance buyers.” Simply put, the broker concludes, there is “no basis for the attorney general’s lawsuit and we intend to defend ourselves vigorously.”

And well the reinsurance industry should defend itself vigorously. Reading the attorney general’s complaint, one can’t help but wonder how he plans to prove all of his assertions, some of which are extremely broad-sweeping in scope and effectively tar the entire North American reinsurance industry with a single brush. [There is a Canadian angle to this story as well, given that an Ontario reinsurer is named as participating in one of the facilities named in the complaint.]

But even if the reinsurance broker and reinsurers ultimately win their case in Connecticut, we’re all reminded of how badly this story ended in New York. Thanks to legal actions launched against commercial insurance brokers in New York by then-attorney General Eliot Spitzer, this type of grand-scale legal action resulted in legal settlements. And unfortunately, like it or not, in the public’s mind a “settlement” is a payment that makes a legal problem go away. Settlements are bad news for the industry because they do not connote innocence; rather, they suggest there is a reason to “cut a deal” with authorities, even if that reason may be none other than to save the taxpayers some money by avoiding a lengthy trial that might ultimately vindicate the industry.

Spitzer’s ghost in New York is now haunting the reinsurance industry in Connecticut. To wit: a crusading attorney general is throwing a lot of mud at the insurance industry, and essentially railroading the industry into a settlement by threatening to chew up a lot of money in legal proceedings to prove 101 pages of accusations. And then, for the piece de resistance, he calls for more regulation of the industry.

The Connecticut attorney general is following this trajectory in his complaint, setting up the reinsurance industry for more regulation in the future. “[R]einsurance is less regulated than primary insurance, especially with regard to the contractual relationships between insurers and reinsurers,” says Blumenthal, who, perhaps like Spitzer, will parlay his regulatory action against the insurance industry into a future political election bid to a higher office.

Cue regulatory action in Canada.

Of course Canada’s reinsurance scene is different than that of the United States — the market is different, the players don’t have the same concentration of market share as their counterparts in the U.S. — but Canadian reinsurers should be wary that this didn’t seem to matter in the Spitzer scenario. In fact, Canada’s insurance industry regulators used the opportunity created by Spitzer to exercise “an abundance of caution” and adopt a new set of principles to which the Canadian reinsurance industry already adheres. Stop us if you’ve heard this one before, but in huge antitrust suits like this, even when the industry wins, it always seems to lose.