Insurance Fraud at

AIG

By Akash Nagar (4889) & Rohit Jain (4895) BBS – 1C

Akash Nagar (4889) Rohit Jain (4895) BBS – 1C . style and substance.Acknowledgement We would like to express our deep sense of intellectual debt to our mentor and teacher Ms. Without her help. who provided valuable comments and suggestions from time to time as to methodology. able guidance and encouragement. the making of this project would not have been possible. Swati Gupta.

Table of Contents .

American International Group Inc. commercial insurer • 93. but it also sells life and property insurance to individuals • One of the largest. most profitable companies in the world • Known for its steady earnings growth • CEO: Maurice “Hank” Greenberg • World’s biggest reinsurance buyer .000 employees • Does work from insurance to asset management in 130 countries • Main customers are businesses.S. “We Know Money” • Largest U.

Who is Eliot Spitzer?  He resigned as the Governor of New York in 2008 He was the New York Attorney General for 8 years who was brilliant at prosecuting Wall Street fraud He was also the Client 9 of a prostitution ring He is also the son of a multimillionaire real estate developer    .

Coral Re held more than $1 billion in estimated losses from AIG but only had $15 million in capital  Regulator’s became convinced that Coral Re was under AIG’s control and no real risk was being transferred .Initial Warning Signs at AIG  A company founded in 1987 called Coral Reinsurance in Barbados only had one customer: AIG  In 1991.

so AIG does not (lose) the business. wine/spirits." Mr. Spitzer has charged that insurers intentionally produced inflated quotes and lost business in the alleged Marsh bid rigging.) as a victim of the bid-rigging. but AIG never admitted Coral Re was an affiliate and never was fined  Eliot Spitzer named AIG as a participant in a bid-rigging scheme with other major insurers and insurance broker Marsh & McLennan Cos. (Marsh) requested we increase premium to $1. AIG eventually agreed to stop its business with Coral Re. Marsh directed underwriters at ACE Ltd. Maurice Greenberg’s other son) to raise their quote on excess liability coverage for Fortune Brands to keep it from competing with a unit of American International Group Inc.1 million to be less competitive. In an internal email it was stated by ACE "We were more competitive than AIG in price and terms. etc.  2 former AIG employees pleaded guilty in the scheme  Marsh & McLennan’s CEO at the time was AIG CEO Maurice R. knowing that they would later win other accounts from . “Hank” Greenberg’s son (Jeffrey Greenberg) Eliot Spitzer cited Fortune Brands (sells home/office products. (headed by Evan Greenberg.

but during the time AIG paid . no risk was transferred). Mr.the broker. By disguising the money as insurance AIG enabled Brightpoint to spread a loss that should have been recognized immediately out over several years (Brightpoint would pay monthly premiums to AIG for 3 years. Greenberg was forced from his post as the chief of Marsh & McLennan Cos. after Mr. Spitzer’s investigation has produced 9 guilty pleas in total so far. Greenberg was in charge. The younger Mr.” Basically. charging the broker with steering clients to insurers paying Marsh the highest contingent commissions and rigging bids on client programs. money just transferred from Brightpoint to AIG back to Brightpoint.rigging probe of its insurance brokerage if Mr. AIG’s Previous Fraudulent Encounters  Brightpoint AIG helped Brightpoint design a retroactive “insurance policy” to spread out losses that should have been recognized immediately SEC accused AIG of both fraud and helping Brightpoint falsify its earnings in 1998 o Overstated earnings by 61% o Hid some of Brightpoint’s $29 million in losses o Fraud surfaced in 2003 AIG agreed to pay $10 million fine in a settlement of civil charges with the SEC AIG worked hand-in-hand with Brightpoint personnel to custom design this “insurance policy. New York Attorney General Eliot Spitzer sued MMC. Spitzer publicly said he wouldn't deal with the company during a bid.

 PNC Financial Services Group Inc. These investment vehicles allowed PNC to dump assets into them that they expected to deteriorate. AIG resisted requests for documents.000. This let PNC show earnings that were 52% more then they would have been without these special purpose vehicles. AIG. made $8. requested and downplayed the seriousness of investigations in public statements. AIG helped these companies hide adverse financial developments from their shareholders  AIG never admitted or denied wrongdoing in either case . AIG’s profit from this policy was less than $100. off-balance-sheet investment vehicles in 2001 SEC charged that AIG acted as a counterparty to move $762 million of underperforming loans or volatile assets off PNC’s balance sheet AIG again helped clients deceive investors by selling insurance products or creating off-balance-sheet vehicles that have the effect of downplaying losses or overstating earnings. emails. AIG helped PNC Financial Services create 3 specialpurpose. AIG also withheld documents and committed other abuses which made its misconduct worse. from the firm’s management fees for the first year. Brightpoint recorded the payments as insurance receivables to offset its losses).the money back in the form of insurance claims. SIMILARITIES in BOTH the Cases  In both cases. and other information the SEC and Justice Dept. AIG also contributed funds to these vehicles.1 million from the PNC transactions.

" As part of the settlement. then you have gone too far. the Justice Department also said it would defer prosecution on its criminal complaint for 13 months and eventually dismiss the complaint if AIG and its subsidiaries fully comply with the obligations set forth in the agreement. which includes scrutiny of loss mitigation products.AIG pays:  $80 million penalty to the Justice Department  $46 million to a SEC restitution fund Additional Provision of Settlement  Provision of settlement requires AIG to hire an independent consultant jointly chosen by the company. Settlement. The settlement does not apply to Eliot Spitzer's ongoing probe of the insurance industry. and the Justice Dept. the SEC. to review certain transactions between 2000 and 2004 to determine whether they were used to violate accounting rules or manipulate financial results  When asked about the regulatory environment Greenberg said the crackdown was excessive and “When you begin to look at foot faults and make them into a murder charge. .

and you can lose the match. .”Although it wouldn't be publicly disclosed for five more days. AIG’s own accounting goes under review  New York Attorney General Eliot Spitzer and the SEC had been focusing on the relationships between AIG and their clients  Now focus is shifting to AIG’s own financial statements  Regulators are interested in whether AIG has aided their own results with the techniques they pioneered and marketed in years past  AIG maintains its own accounting is not an issue Starting to investigate nontraditional insurance products and certain assumed reinsurance transactions and AIG's accounting for such transactions. very careful talking about foot faults. these aren't just foot faults. AIG in February 2005 had announced it was subpoenaed by the U.Spitzer addressed the AIG chief's comments. But more importantly. that very evening Spitzer's office was serving AIG with the subpoena that would end Greenberg's career. "Hank Greenberg should be very.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer's Office in an investigation of non-traditional insurance products that investigators said might have been used to improperly improve the company's financial picture. "Too many foot faults." he warned.

.Investigation is beginning to focus on AIG’s own use of finite risk coverages. Neb. including General Re Corp. company said the subpoenas sought documentation and information relating .. ACE Ltd. The SEC has also requested information on the use of finite risk products from other companies.. Spitzer and the SEC subpoenaed Berkshire Hathaway Inc. and Swiss Reinsurance Co. Could AIG be manipulating its own earnings and/or balance sheet?  Regulators gain interest in AIG and transactions it has had with General Re possibly dating back 3 or 4 years Mr. New Questions encountered…. Chubb Corp. The Omaha. This may be the first time regulators are investigating these products' impact on an insurer's own book. the insurance-holding company run by billionaire investor Warren Buffett. rather than on its clients'..

or taking on another company's reserves. Some of the "alternative risk" transactions that regulators are looking into across the industry allow insurers to improve their balance sheets in the short run either by moving some of their claims reserves to another insurer. Such arrangements can violate accounting rules if sufficient risk isn't transferred.to nontraditional or loss-mitigation insurance products from its General Re unit and the unit's affiliates. .

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