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Marsh & McLennan's 'Data Entry Error' Could Curtail Buying Spree

Once the king of the world in terms of insurance brokers, Marsh & McLennan had finally conjured up some of the old magic under CEO Brian Duperreault. But now an old "data entry error" could come back to haunt the company, cost it billions, and curtail its newfound success.

After some tough years during which:

  • it got caught with its hand in the cookie jar by then New York Attorney General Eliot Spitzer who made the insurer pay $850 million in fines and restitution;
  • it gave up nearly $1 billion a year in lucrative "contingent commissions;"
  • it went through internal turmoil under former CEO Michael Cherkasky, who was eventually fired; and
  • it lost its position as top dog to Aon Corp.
Marsh seemed to be on the rebound. Earnings improved and Duperreault announced that Marsh was ready to continue its strategy of gobbling up smaller brokers to enlarge itself, a plan that worked quite well in the go-go '90's and the early years of this decade.

But not so fast. As any insurance executive knows, decisions made in the distant past, like insuring for asbestos exposure, can have long-term consequences in the future. And, as we've also seen, financial companies that get too big and have too many units all vying to be the most profitable, such as American International Group, tend to lose control of them.

And that's apparently what happened at Marsh's Mercer unit, the broker's human resources consulting firm. Mercer provides help for companies that want to manage their pension programs. To accomplish this companies need actuaries, those who calculate how much money should be set aside to pay for the plans.

Mercer ran the program for Alaska's Retirement Management Board for much of the last decade. Back in 2002, when Marsh & McLennan was playing fast and loose, it made a "coding error." But it didn't say "mea culpa" and correct it. Instead, it covered it up in a "subsequent valuation." Mercer now says it regrets the mistake.

It may regret it a lot more after the trial in July. Alaska is seeking damages of $2.8 billion and, because company executives pulled a Watergate, those damages could be as much as $8.4 billion, the New York Times calculates. When you consider that an $850 million fine nearly brought down the company, that has to sting.

Marsh is putting on a brave front, saying that the cost assumptions it provided for Alaska's pension programs were reasonable and no different from what other actuaries said at the time. "The plans have not been damaged," a Marsh spokesperson tells BNET Finance. In other words, no harm, no foul.

But outside actuaries consulted by BNET Finance aren't so sure. Bad calculations create future shortfalls, and deliberate errors are even worse. The case is already roiling the market for liability insurance for actuarial firms, reports the Times, and Marsh has admitted it can't estimate possible losses on this case.

Duperreault might want to make a New Year's Resolution to scale back 2010 expansion plans, at least until July. He might also want to shred a couple of credit cards.