On October 9, the Connecticut Attorney General (the “CT AG”) filed a Complaint against Guy Carpenter and Excess Reinsurance Inc. The Complaint is 107 pages long and contains numerous highly-disputed allegations about the structure of the reinsurance markets over the last fifty years as well as hotly contested claims about the activities of the participants in certain reinsurance facilities. (Click here to read the Complaint.)
In this Blog post, we provide a comprehensive summary of the CT AG’s allegations. We expect that when Guy Carpenter and Excess Reinsurance provide a response to the Complaint, many, if not all of the allegations described below will be disputed.
Background of Balis (Complaint at 21)
The Complaint asserts that as early as the 1950s, reinsurance broker Balis & Company (“Balis”) maintained a number of small domestic insurance companies as clients. Balis developed what it called “binding authority” programs to provide pro rata property facultative reinsurance to those clients that did not generate enough business to warrant a larger treaty reinsurance contract to cover an entire line or book of business. One of Balis’s largest binding authorities was known as the “Multiple Line Binding Authority” (“MLBA”). Balis located a group of reinsurance companies willing to provide some portion of the reinsurance capacity needed for the program. The Complaint alleges that Balis did not seek out competitive bids or quotes for any reinsurance placed in the program, but instead placed the business straight with the participating reinsurers at predetermined rates and that as a result the ceding companies did not receive the most favorable terms available in the market.
The CT AG alleges that in each of the programs Balis established, the reinsurers granted Balis the authority to act as their managing general agent and underwriter, with discretion to make all significant decisions or agreements on price and any other issues related to underwriting specific risks, in addition to Balis’ role as a broker for the primary insurers. If Balis refused to underwrite a particular risk, it would place it in the open market and seek placement from other reinsurers who were not a part of the program.
It is alleged that prices for pro rata facultative reinsurance were set through the use of a ceding commission, which was a fixed percentage amount for each insurance company ceding business to the program. The CT AG alleges that prices for this reinsurance placed in the programs rarely changed, regardless of the type of risk being ceded, the loss history of the insurance company ceding the policies, or even the total amount of business ceded to the program.
It is alleged that Balis exclusively determined which insurance company clients would place business into what program. The Complaint alleges that the MLBA and the other similar programs were highly profitable for the participating reinsurers compared to industry averages. Over time, Balis expanded the MLBA concept and other property facultative programs to include an Umbrella Facultative facility.
In 1967, Balis was purchased by Marsh & McClennan Companies, Inc. (“MMC”), and became a division of Guy Carpenter & Co., Inc. From 1967 until approximately 2004, Balis remained a division of Guy Carpenter. In approximately 2004, Guy Carpenter stopped using the Balis name, but has continued to operate the MLBA, Umbrella and other similar programs.
Operation of the Facilities (Complaint at 25)
• Contractual Agreements and Relationships
The CT AG alleges that upon becoming a member of one of the facilities and in exchange for access to Guy Carpenter’s book of business, the participating reinsurers and Guy Carpenter collectively entered into a “Memorandum of Agreement” (the “MOA”) defining their respective roles and responsibilities. The AG further alleges that at some point the MOA was abandoned, and each participating reinsurer entered into an agreement only with Guy Carpenter called an “Underwriting Management Agreement” (the “UMA”).
According to the Complaint, the UMA, like the MOA, gave Guy Carpenter the discretion to negotiate, underwrite, bind, sign and accept reinsurance contracts on behalf of the reinsurers. The agreement also gave Guy Carpenter “full power and authority” to set the ceding commission or rate on all contracts, and to exercise its own judgment as to which insurance companies to accept business from. These agreements were allegedly not disclosed to Guy Carpenter’s clients, because, according to the Complaint, Guy Carpenter did not want to be seen as having a special relationship with the reinsurers.
The Complaint alleges that reinsurers were aware of the other reinsurers participating in the facility and what their respective participation level was. It is asserted that each reinsurer was also aware in advance, or had access to, the prices and terms of the contracts being entered into on its behalf with the primary insurers, and knew that the other reinsurers had agreed to these same terms by agreeing to be part of the facility. Even though it is alleged that Guy Carpenter, as underwriting manager, was historically given the discretion to set the price for reinsurance placed on behalf of the facility, the CT AG alleges that those prices rarely, if ever changed.
The CT AG further alleges that “Guy Carpenter maintained ultimate control over the reinsurers because it could, at any time, decide not to allow a reinsurer to participate in the facility at the end of the current year’s contract if the reinsurer did not agree to ‘play ball’ with Guy Carpenter.”
By way of these agreements, the CT AG has alleged the following:
“By entering into contractual agreements directly with the reinsurers participating in the various facilities, and by agreeing to act as the agent and underwriting manager for the various reinsurers, Guy Carpenter placed itself in the same position as the reinsurers.”
“Guy Carpenter’s interests are aligned with the reinsurers.”
“Reinsurers participating in the facilities have historically viewed Guy Carpenter as one of them, and as having a vested interest in the profitability of the facilities.”
“Guy Carpenter’s stated goals with regard to the facilities have been to ‘return profitable results to reinsurers’ and to ‘produce an attractive underwriting result for its reinsurers.’”
It is alleged that in 2004, 12.32% of the policies reinsured through the facility were written on property located in Connecticut. The Complaint also states that since at least 2004, Guy Carpenter has administered and managed the property facultative facility out of its Hartford, Connecticut office. “Guy Carpenter has been compensated for its operation of the facility by a fixed rate fee, which is currently set at 5% of all premiums written by the facility. In the past, the fee exceeded 5%. These fees are higher than Guy Carpenter’s normal compensation for similar contracts placed in the open market.”
The CT AG alleges that current members of the facility (and their respective participation amounts) include: Arch Re (37.5%); Hartford Steam Boiler (32.5%); Farmers Mutual Hail (4%); Toa Re (11%); and Aspen Re (15%).
2. Umbrella Facility (Complaint at 31)
In or about 1974, it is alleged that Balis created a facility to reinsure umbrella policies, which was aimed at the same group of small primary insurers that utilized the property facultative facility. The Complaint asserts that reinsurers and Guy Carpenter coordinated to create an “Umbrella Underwriting Manual,” which was provided to each primary insurer wishing to cede policies to the facility.
The CT AG asserts that Guy Carpenter’s fee for administering the umbrella facility require the reinsurer to pay a fixed, maximum commission to Guy Carpenter (not the primary insurer), which includes both the ceding commission paid to the primary insurer as well as Guy Carpenter’s fee. “Guy Carpenter is then responsible for setting the ceding commission for each of its clients – with the knowledge that its own fees will be directly affected by how high or low the ceding commission is set.” The CT AG alleges that the more expensive the reinsurance is for the primary insurer, the more compensation Guy Carpenter receives. It is alleged that Guy Carpenter did not disclose to its clients that it was setting their ceding commission or that Guy Carpenter’s fee was directly affected by how it set the ceding commission.
The Complaint asserts that the current members of the facility (and their respective participation amounts) include: Swiss Re (55%); Toa Re (30%); and QBE Reinsurance Co. (15%).
3. Regional Accounts Program (“RAP” Facility) (Complaint at 37)
In 1994, the Complaint alleges that Guy Carpenter created its first treaty facility aimed at the same group of small clients that purchased reinsurance through the property facultative and umbrella facilities. Originally, the CT AG asserts that only the smallest primary insurers – those with less than $5 million in direct written premiums – were targeted. The CT AG states that over time Guy Carpenter and the reinsurers targeted larger companies. The RAP facility provided a number of different types of treaty reinsurance contracts to primary insurers, in both property and casualty lines. It is alleged that the contracts between Guy Carpenter and the reinsurers were similar to the other facilities.
The CT AG alleges that like the other facilities, Guy Carpenter did not seek competitive bids or quotes for any of the contracts it placed into the facility, and that Guy Carpenter received undisclosed contingent commissions, also referred to as “profit commissions” or “overrides,” for placing business with the facility. The CT AG further alleges that RAP reinsurers met collectively with Guy Carpenter and each other at least annually to reach a consensus on various issues including the direction of the facility, specific contract terms and exclusions, and how the reinsurance would be priced; reinsurers in the RAP facility also communicated and shared information directly with each other.
The Complaint asserts that the current members of the facility (and their respective participation amounts) include: Arch Re (37.25%); EMC (6.25%); QBE Re (27%); Toa Re (13%); and Aspen Re (16.5%).
4. Treaty Reinsurance Program (“TRP”) (Complaint at 42)
The Complaint asserts that in 1998, Guy Carpenter created another treaty facility, again aimed at a portion of the same group of small to mid-sized primary insurance clients. The TRP, while similar to the RAP, did not operate in the same way in all respects. The CT AG alleges that the TRP was created to act as one of several participants in the more competitive market for Guy Carpenter’s mid-size clients that were too large to qualify for reinsurance through the RAP facility. The TRP consisted of a group of several competing reinsurers, each signing agreements with Guy Carpenter. The Complaint alleges that the structure and day-to-day operation of the TRP was similar to other facilities created by Guy Carpenter.
According to the Complaint, the TRP operated in some ways as another entity in the competitive market for various treaties. However the Complaint states that the difference between the TRP and other reinsurers in the open market was that Guy Carpenter treated the TRP as a “preferred” reinsurer and provided the TRP with a “right of first refusal” on any business that was presented to it. In exchange, the CT AG alleges that Guy Carpenter received a number of different types of fees, such as an underwriting management fee, its standard brokerage, plus an override/contingent commission based on the profitability of the facility. As with the other facilities, the CT AG alleges that none of this was disclosed to Guy Carpenter’s clients that ceded business to the TRP.
According to the Complaint, as of 2004, Guy Carpenter ceased managing the TRP. The Complaint asserts that in 2003, the members of the facility included: Arch Re (21%); EMC (8%); American Agricultural Insurance Company (13%); and certain underwriters at Lloyd’s of London (25%).
Allegations of Horizontal Restraints
1. Price Fixing (Complaint at 58)
The CT AG alleges that by agreeing to be part of a facility, each reinsurer agrees to forego competition and provide reinsurance at prices that are fixed in advance. The reinsurers agree to be a part of this “scheme” in exchange for access to a “large and very profitable book of business” that would not be available absent entering into the “conspiracy” with Guy Carpenter and other reinsurers. “The goal of Guy Carpenter and the participating reinsurers has been at all times to maximize profits.”
2. Fixed Restraints on Output (Complaint at 60)
“By agreeing to be part of a facility, each reinsurer agrees to forego competition and fix terms which limit the maximum amount that any individual insurer is allowed to cede to the facility.” “The reinsurers and Guy Carpenter have fixed and limited available output in the market.”
3. Terms of Reinsurance Contracts Fixed in Advance (Complaint at 61)
“By agreeing in advance to provide only these fixed contract terms, Guy Carpenter and the reinsurers have precluded competition on individual terms by individual reinsurers that would otherwise be available in a competitive market.”
Allegations of Market Allocation (Complaint at 29)
“Guy Carpenter allocates markets among its favored reinsurers, allowing access to certain reinsurers while at the same time precluding access to those reinsurers that do not participate in its schemes.”
Allegations of Vertical Restraints
1. Tying (Complaint at 63)
The CT AG alleges that Guy Carpenter would only make the facultative facilities available “to existing [Guy Carpenter treaty] clients and new business prospects with a clear intention to place more business through [Guy Carpenter].” The Complaint further alleges that Guy Carpenter conditioned the purchase of reinsurance through the facultative facilities on the purchase of other, more lucrative treaty business through Guy Carpenter. As a result, the CT AG asserts that these arrangements had a significant effect on commerce and substantially increased the profits of Guy Carpenter and the reinsurers at the expense of Guy Carpenter’s clients.
2. Vertical Price Fixing (Complaint at 64)
The Complaint alleges that participation in the umbrella facility required primary insurers to charge certain minimum rates for the insurance they sold in order to obtain reinsurance through the umbrella facility. The CT AG alleges that Guy Carpenter “often attempted to force” primary insurers to increase their rates in order to increase the profitability of Guy Carpenter’s reinsurer partners. The CT alleges that these requirements unreasonably restrained trade and had the effect of increasing rates charged to consumers in Connecticut and elsewhere.
3. Exclusive Dealing (Complaint at 66)
The Complaint alleges that by entering into an agreement with Guy Carpenter, a reinsurer was granted exclusive access to business of a certain type. It further alleges that instead of seeking competition in the open market, Guy Carpenter placed business with each of the facilities exclusively, “whether or not it was in the clients’ best interest.”
Allegations That Foreclosing Competitors From Access To The Facilities Significantly Affected Reinsurance Prices (Complaint at 67)
The CT AG claims that reinsurers not in the facilities were willing to write this business. “If they were not selected by Guy Carpenter to participate or did not agree to relinquish their own underwriting authority, however, they were excluded from access to any business placed in the facilities.” As a result, the CT AG alleges that “in the absence of competition, prices charged by each of the facilities have been significantly higher than what could have been obtained had competitive forces been present.”