Last month, New York’s State Attorney General Eliot Spitzer shocked the world by filing a civil suit regarding corrupt practices of New York-based Marsh & McLennan. Investigation has found fraud and anti-competitive practices throughout the insurance industry. This action was just the tip of the iceberg.

The complaint alleged bid rigging, price fixing and steering business toward those that paid the highest commissions. Spitzer said: “Conflicts of interest are the major legal and ethical dilemma facing such industries.”

California, Pennsylvania, Massachusetts, Minnesota, Florida, Illinois and Connecticut jumped on the bandwagon and some will soon file lawsuits against a number of brokers and providers of automobile, property, medical and other types of insurance. Richard Blumenthal, Connecticut’s attorney general, has sent 35 subpoenas to insurance companies and brokers.

The New York lawsuit implicated America International Group and ACE. Companies must explain how they quote bids for customers. AON, Cigna, MetLife, Unum Provident, Aetna and others all received subpoenas. Three unnamed insurance executives, two from AIG and one from ACE, have pleaded guilty to criminal charges.

Wall Street reacted. The Dow closed at an 11-month low in the wake of the investigation. Marsh’s shares dropped 16 percent immediately and another 37 percent over the next two days, resulting in a $9 billion market value loss. AIG’s shares fell 3.4 percent, ACE’s fell 4 percent, Cigna Corp. fell 10.3 percent, Aetna fell 11.8 percent and Hartford’s fell 3.6 percent. Even shares of those not named in the indictment fell. AON Corp.’s fell 6.2 percent and Willis Group Holdings fell 2.7 percent. The fallout was likewise felt overseas. Shares of Germany’s insurer Munich Re fell 4.4 percent.

Corporate greed has emerged as the main culprit behind this fiasco. The demand for even higher profits than the prior year became addictive, according to insiders. Brokers became increasingly greedy, as personal income soared and unprecedented bonuses were earned. A former Marsh employee said, “The money was like heroin. Once you got the taste of it, you were hooked.”

Marsh earned $845 million in contingent commissions in 2003. Although only around 7 percent of total revenues, it’s impact on the bottom line was significant. Contingent commission is almost pure profit, as it does not carry much overhead.

Beginning in 1990, William Gilman, one of Marsh’s top brokers, led Marsh in illegal practices. Gilman brought to unprecedented heights a practice around since the beginning of 1970. Insurance company’s pay, besides a regular commission, a “contingent” commission based on volume of business generated. Gilman directed business not toward those with the lowest quotes, but toward those paying the largest commission.

The insurance industry is in reality an interstate business and is subject to state supervision. In the face of this scandal, federal regulation of the industry may be in the offing. A dual regulatory system, resembling that of the banking industry, could possibly be created.

Blumenthal of Connecticut is ready to introduce new insurance regulation laws to the state legislature. Johan Garamendi, California’s state insurance commissioner, proposed new regulation. Oxley, chairman of the Congressional House Financial Services Committee had sent, before Spitzer’s allegations, a 308-page draft of a bill to insurance companies and state insurance officials, seeking comments. This bill is a move toward federalization.

Companies that were the victims of the alleged bid rigging and kickbacks, which possibly lost millions to this scheme, have kept a low profile. Corporate clients of Marsh, such as IBM, Fortune Brands Inc. and Brambles Industries, were blind-sided and are closely monitoring the situation. None have spoken with the press yet.

Intel employees filed in the San Diego U.S. District Court a class action suit, alleging that California’s broker did not seek competitive bids for supplemental life and accidental death insurance under Intel’s employee benefit program, resulting in higher premiums to employees and the company.

Many unsuspecting corporate clients of insurance brokers and providers became victims of those behaving unscrupulously. Investors were blindsided and sustained large losses. The shockwaves of this scandal are still reverberating.

Dr. Malhotra is a financial analyst of foreign and U.S. public and private sector entities for the U.S. government. She concentrates on Asian and African countries, but also has an extensive background in other geographic areas.