A View From The Press Box

I love the Moby Dick referrence! To borrow your seaworthy analogy, I do think there is blood in the water and the state and federal regulators are not done feeding yet.

To some degree, this type of insurance industry prosecution is new territory, and after sharpening their teeth on these recent victories, they will be looking for more.

As for Mr. G., this is a long way from his first whale hunt. If they come for him, they better go big or stay home.

Sam, you are right that the convictions add to the problems faced by insurers. It is clear that George Orwell was right--some fraud perpetrators are more equal than others.

If an insurance executive commits fraud, he or she is prosecuted to the full extent of the law, and some face up to 1,000 years in jail--they should live so long--while those who defraud insurers for millions of dollars, when they are caught, serve two weekends in jail and are allowed to keep most of their ill-gotten gains.

The difference is that the victim of insurance executives is more likeable than the victim of insurance fraud perpetrators.

Mr. Zalma, I think the difference is in degrees of magnitude.

It would literally take millions of individuals to cause the financial damage that a handful of General Re executives caused.

Excellent entry and analysis, Mr Friedman.

Research shows that positive perceptions of the industry have taken a big hit in the last 10 years (53% to 37% in our latest consumer survey) for a variety of reasons.

There's a good slice of America that is more likely to commit fraud if they feel the industry doesn't play fair, so while indictments and convictions can't be quantified, these headlines come with a price.

The industry needs to invest in enhancing its reputation and image, and develop a more ethical culture.

By the way, in addition to the two cases you cited, you could have also included last week's indictment of U.S. Rep. Rick Renzi, who was accused to looting his insurance agency to fund his Congressional campaign.

The sham reinsurance transaction between Gen Re and AIG probably didn't even do a whole lot of direct damage, except the $5 million "fee" paid by AIG to Gen Re for, basically, nothing.

If the resulting distortion to reserves in the financial statements caused the stock price to float a little higher for a little while, that just affected the prices at which a few shares of AIG were bought and sold in the interim.

But it was symptomatic of, and continued to foster, an attitude of lawlessness and disdain for ethics within the company. That attitude flowed down from the top.

It reflected itself in the willingness of executives in AIG's Excess Casualty unit to play along with Marsh's bid-rigging game.

It reflected itself in the willingness of high-level AIG executives, over many years, to misreport millions of dollars of workers' compensation premiums as general liability premiums, and to shift a fair burden of WC assessments and assigned-risk losses over to other carriers.

It was reflected in the willingness of AIG executives to violate systematically, and for many years, the insurance laws of all the states through the use of unfiled and unapproved forms, rates and rules.

When, near the end of Hank Greenberg's rule, he started speaking to AIG employees about how we have always adhered, and must continue to adhere, to the "highest standards of integrity," it was pretty ironic to hear.

I agree with other commentators that the most interesting phase of this case may be yet to come.

I actually feel a bit sorry for Chris Milton; he was only doing what he was told to do. He never implicated Hank during the trial--he and his lawyers probably never thought the jury would understand the case well enough to convict him.

But with years in prison staring him in the face, he may yet change his mind. It depends on what Hank has promised him, or threatened him with.

SAM RESPONDS:
One other point that I would add--on a fundamental level, the scam ultimately undermines analyst and investor confidence in the balance sheet of publicly held insurers, and that can't be good.

The investment community is already down enough on the insurance industry about its relatively now ROEs, without calling the integrity of the numbers into question as well.

For what it's worth, there must be multitudes writhing in laughter in the aisles realizing that we, as insurers, are required to have sophisticated anti-fraud units, yet some of the greatest frauds are perpetrated by some of our own.

Sam, I keep hearing from practitioners of "finite re" that, as part of the solution to prevent fraudulent use of the device, regulators should publish clear guidelines for legitimate uses of the device.

I have never heard of a use for that device, for anything other than cooking the books of the cedant. Maybe you could ask your audience:

Have they ever heard of legitimate uses for finite re, and can they provide explanations or examples?