WASHINGTON – American International Group, the largest American insurance company, will pay more than $1.6 billion to settle allegations of fraud, bid-rigging, and improper accounting, state and federal regulators announced yesterday.

AIG apologized for its conduct and agreed to make internal reforms to settle investigations by the U.S. Justice Department, the Securities and Ex change Commission, the New York Insurance Department, and New York Attorney General Eliot Spitzer.

Under the settlement, AIG will pay a $100 million penalty to the SEC and turn over $700 million of allegedly ill-gotten profits. The SEC plans to distribute the $800 million to investors injured by the alleged fraud and will submit a proposed distribution plan for court approval in a few months, an associate director in the SEC’s New York office, Andrew Calamari, said.

AIG will pay a $25 million fine to settle Justice Department charges of filing false financial reports and pay a $100 million fine to the New York attorney general. It also will turn over $375 million to AIG policyholders, chiefly those who bought excess casualty policies through Marsh Incorporated, a unit of Marsh & McLennan. Another $344 million will be paid to states to resolve charges AIG underpaid workers’ compensation premiums between 1985 and 1996.

The SEC’s complaint, filed in federal court in Manhattan, alleges that AIG used reinsurance deals with General Re Corporation in 2000 and 2001 to give the appearance of a $500 million increase in its loan loss reserves after analysts complained its reserves were too low. It said the sham deals gave a falsely rosy picture to investors for at least five years. AIG later restated its earnings by more than $3.5 billion.

Mr. Spitzer and New York’s Insurance Department began investigating AIG in the fall of 2000 for bid-rigging and brought fraud charges last spring against the company, a former AIG chairman and chief executive, Maurice Greenberg, and a former chief financial officer, Howard Smith. Bid-rigging allegedly allowed AIG to win business by beating artificially inflated bids submitted by others.

“AIG was and is a solid company that didn’t need to cheat,” Mr. Spitzer said in a statement. “It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators.”

AIG settled without admitting or denying the allegations. A spokesman for AIG, Joe Norton, wasn’t immediately available to comment.

Criminal and civil charges were filed last week against a handful of former AIG and General Re executives who allegedly took part in the sham reinsurance deals. Regulators said that their investigation into others is ongoing.

Anthony Sabino, a law professor at the Tobin Business College at St. John’s University, in New York City, said the settlement “closes a chapter for the corporation,” and will shift the focus to individuals such as Mr. Greenberg, who has promised to fight any charges.

“AIG regrets and apologies for the conduct that led to the action brought today,” the company said in a written statement. “Providing incorrect information to the investing public and to regulators was wrong and is against the values of our current leadership and employees.”

Besides levying a hefty fine, the settlement with the New York attorney general calls for AIG to consider simplifying its complex organizational structure and for its board and audit committee to solicit competitive bids for its outside audit work, now handled by PricewaterhouseCoopers. Mr. Spitzer isn’t forcing AIG to replace PwC but wants it “to at least get proposals” from other Big Four firms, according to an official in the attorney general’s office.

AIG also must curtail its use of “contingent commissions” that reward brokers and agents for selling a company’s products, and support legislation to reform practices that critics say can create conflicts that harm consumers.