ACE craftily negotiated the wording of the apology demanded by the state enforcement officials wherein the regulators affirm that ACE's standards of business conduct -- as did the law in its majesty -- prohibited the conduct that its employees engaged in (without the apology's quite coming to grips with that this was no mailroom operation but involved among other things the creation of fraudulent documentation by ACE's North American president and ACE's president of casualty risk).

ACE's two paragraph apology says:

As part of today's settlement with the Attorneys General and the Superintendent, ACE acknowledges that certain of its employees violated both acceptable business practices and ACE's own standards of conduct by engaging in behavior that included improper bidding practices and certain 'finite reinsurance' transactions. ACE apologizes for this conduct. It has reformed its business practices and is satisfied that this behavior will not be repeated.

In order to promote transparency and reduce the potential for conflicts of interest, ACE has supported legislation in the US to eliminate contingent compensation and through this agreement pledges to continue to do so.

ACE will be able to argue that the law enforcement officials have signed off on its internal reforms but also with the idea that only certain individuals were misguided as opposed to the company's (if you will) soul. ACE accomplished quite a lot for itself in the agreement, for which it and its general counsel should receive great kudos from its shareholders. Whether the citizens of this nation, insurance policyholders, insurance brokers, and competitors should respond as positively is perhaps a different matter.

But let's review the bidding, er, an unfortunate turn of phrase in this context, so shall we say, let's review how we got here as set forth in the Assurance of Discontinuance and Voluntary Compliance. Here are the findings agreed to by ACE (the numbered paragraphs quote the stipulated wrongdoing by ACE (with elisions indicated "[ ]" and the material in brackets "{ }" are my comments):

1. Since at least the mid-1990s ACE and other insurers have paid hundreds of millions of dollars in so-called 'contingent commissions' to the world's largest insurance brokers . . . as well as tens of thousands of smaller brokers and independent agents.

2. ACE entered into a number of contingent commission agreements . . . to pay compensation to [brokers] as a result of which they steered insurance policies to ACE to increase the volume of policies written by ACE . . . and to direct policies to ACE.

3. Under these agreements, when Marsh, for exampled, helped ACE retain its existing business at renewal time, ACE paid Marsh higher contingent commissions. . . . These contingent compensation payments were passed on to ACE's customers in the form of higher premiums. {Note: these higher prices would have floated up the market price for all carriers, so all policyholders were adversely affected.}

4. In 2002, ACE decided to greatly expand its position in the potentially lucrative excess casualty market . . . . Previously, ACE had maintained only a small presence in this market. . . . ACE [then] signed a lucrative placement service agreement [with Marsh]. In addition, ACE agreed to join other insurers and Marsh in rigging the process of bidding for insurance policies and actively deceiving clients. ACE participated in the scheme in two ways: (1) where ACE was the incumbent on the lead layer of business, Marsh generally sought to protect ACE's incumbency and gave ACE an unfair competitive advantage by seeking out non-competitive bids from other insurers; and (2) where ACE was not the incumbent on the lead layer, Ace agreed to provide quotes to protect the incumbent, with the understanding that ACE would receive business on an excess layer without competition, thereby allowing it to enter the market. These practices were to the detriment of the insured, whose best interests Marsh was supposed to be serving. {And at least when ACE was an "incumbent," ACE had a contractual duty of good faith and fair dealing to the insured.}

5. The details of the scheme were as follow: when ACE was the incumbent carrier on the lead layer, or was otherwise chosen by Marsh to win a client's excess layer business, Marsh set a target for ACE which included proposed premium and policy terms for ACE's bid. If ACE met this target, Marsh generally arranged for ACE to win the business, regardless of whether ACE, or any other insurance company, could have quoted better terms for the client.

6. In order to control the market, Marsh instructed other insurance companies to provide intentionally losing bids that were inferior to those provided by the incumbent or its chosen winner for the excess layer. . . . They were also known as "B Quotes." . . Once it has secured such quotes, Marsh would present them to clients [policyholders] as bids obtained through a competitive process. This pretense of competition was intended to, and did, give clients the impression that ACE's bid was the best available. It also had the effect of directing business to ACE, not at terms best for the client, but rather at terms advantageous to ACE.

8. The arrangement with Marsh allowed ACE to become a major competitor in the excess casualty market with phenomenal speed. In 2001, before entering the scheme, ACE received only $5 million in Excess Casualty premiums in the United States from Marsh [the largest broker]. This number increased in 2002 to $41 million, $98.6 million in 2003 and $93.5 million in 2004. These premiums placed ACE . . . as the third largest carrier of excess casualty with Marsh. . . . {Note that ACE's premium had an eight-fold increase once it started acting in cahoots to the policyholders' detriment and then doubled against the next year; in other words, its business exploded 1600% in two years!}

8a. In or about December of 2002, Client A approached Marsh to help Client A obtain excess casualty insurance. In response to the ensuing quote request from Marsh, an ACE assistant vice president sent a fax to Greg Doherty, a Senior vice president in Marsh Global Broking Excess Casualty division, quoting an annual premium of $990,000 for the policy. Later that day, ACE revised its bid upward to $1,100,000. . . . An e-mail the next day from the assistant vice president to an ACE vice president of underwriting explained the revision as follows: 'Original quote $990,000. . . . We were more competitive than AIG in price and terms. [Marsh] requested we increase premium to $1.1M to be less competitive, so AIG does not [lose] the business. . . .'

9. In addition to participating in the bid-rigging scheme with Marsh, ACE engaged in a variety of other improper activities to ensure that brokers gave ACE preferential treatment in the placement of contracts. These activities included: (1) compensating brokers for business steered to ACE by agreeing to obtain ACE's own reinsurance through the same broker, and (2) sending fraudulent e-mails to a broker misrepresenting ACE's payments to help the broker meet its targeted performance goal.

12. To promote its relationship with a broker and receive more business, ACE also provided false documentation that would improve the appearance of the broker's year end results. . . .

13. ACE also used non-traditional and finite reinsurance to improperly enhance both its own earnings and those of its clients. In at least six separate deals, ACE created the false appearance of risk transfer, utilizing methods such as secret side agreements, to negate the wording of written contracts that did not accurately characterize the agreement reached between the parties. . .

a. In 1998, Hiscox Syndicates . . . . was seeking a reinsurance contract for a policy it had insured with a $45 million dollar limit on which $40.8 million of losses had already occurred. . . . . [T]he contract on its face would appear to have sufficient risk of loss to any auditor or regulator who examined the contract. Both ACE and Hiscox, however, believed that it was likely that the losses would reach at least the [policy limit]. Accordingly, the parties negotiated a secret side agreement providing that ACE would not have to pay any claims [until 4 years later]. . . . ACE inadvertently showed a copy of the side agreement to its outside auditing firm which, as a result, refused to authorize the deal as reinsurance. Rather than simply abandoning the deal, however, ACE falsely told its auditor that the transaction would proceed without the side agreement. In reality, ACE and Hiscox simply reached a verbal agreement for the same terms as the previous side agreement. The verbal side agreement was followed by the parties. . . .

c. ACE also used finite insurance to improperly shift losses among its subsidiaries, accounting for inter-company transfers as 'reinsurance.' [ACE Tempest Re and ACE Bermuda] entered into a sham transaction that appeared to involve Tempest Re paying $70 million for $120 million in reinsurance . . . . The substance of the deal as it appeared n paper, however, was overridden by a secret side agreement. . . . Despite the lack of risk, both parties accounted for the deal as 'reinsurance.'

14. Based on these allegations, the Attorneys General and the Superintendent allege that ACE unlawfully deceived policyholders, regulators and other authorities and shareholders by: (a) participating in scheme to steer business; (b) participating in rigging of bids for excess casualty insurance through Marsh; and (c) improperly using insurance transactions to bolster the quality, quantity and stability of their clients' and ACE's earnings.

21. Without admitting or denying any of the above allegations, ACE is entering into this Assurance and the Stipulation.

I spend the space here quoting these allegations directly because I believe that summarizing them does not capture their full impact. (Maybe the way to state this is that this is a story that writes itself.)

In the acknowledgement of its avarice, ACE agrees to set up a compensation fund to the policyholders who were overcharged for their insurance sold by ACE. Like the AIG fund before it, the ACE fund ($40 million) will be paid out to policyholders based on qualifying policyholders' percentage premium share of the overall premiums collected by ACE. Policyholders must tender a broad release (ee Exhibit 2 to the Assurance of Discontinuance and Voluntary Compliance)
as a condition of payment (a structure that I criticized in discussing the AIG settlement so I won't repeat those points here) and must do so on or before January 26, 2007. If policyholders don't drain the fund because some do not step forward, then the settling policyholders will receive further proportional payment from the fund by early 2008.

The settlement agreement does not prohibit contingent commissions evermore: first, their payment is barred for excess casualty through 2008; and second, the regulators allow for their return after 2008 if the insurers that do not pay contingent commissions henceforth find themselves at an undue competitive disadvantage. If ACE and other insurers that do not pay contingent commissions lose market share (below 60 percent), then ACE can notify the attorneys general it intends to commence paying such commissions and, if they don't object, ACE can start paying such kickbacks again.