NewYork Attorney General Eliot Spitzer sued Marsh & McLennan Cos. and arrested two American International Group Inc. executives in a fraud probe that taints “virtually every line of insurance.” Insurance shares had their biggest decline in more than four years.

Mr. Spitzer alleged Marsh & McLennan, the world’s largest insurance brokerage, took “lucrative payoffs” for steering unsuspecting clients to certain insurers, resulting in “jacked up” rates for customers. He also said American International, Hartford Financial Services Group Inc., Ace Ltd., and Munich Re participated in “steering and bid rigging.”

The allegations mark the third leg of Mr. Spitzer’s push to rid financial-services companies of corruption. Since June 2003, Mr. Spitzer and other regulators have imposed about $3 billion in fines for improper trading in the mutual-fund industry. Last year, he wrested $1.4 billion in settlements from securities firms he said were issuing biased stock research.

“Where is the ethical compass of this industry?” Mr. Spitzer said at a news conference. He wants Marsh to return all profits obtained through “deceptive acts,” halt such practices, and pay unspecified punitive damages, according to the suit.

The 22-member Standard & Poor’s 500 Insurance Index fell 6.9%, the biggest decline since April 2000. Fitch Ratings put Marsh on review for a possible cut in its A+ debt rating.

Shares of Marsh & McLennan had a record decline, falling $11.28, or 24%, to $34.85. American International fell $6.99,or 10%,to $60,the stock’s biggest drop in 17 years. Hartford declined $3.78, or 6%, to $58.40, and Ace declined $3.84, or 9.5%, to $36.47.

“We are committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing,” Marsh & McLennan said in a statement. “This is our highest priority.”

Mr. Spitzer’s probe may pit him against three executives from the same family. They are Maurice “Hank” Greenberg, chairman and chief executive officer of American International; his son Jeff Greenberg, CEO of Marsh & McLennan; and another son, Evan Greenberg, who is CEO of Ace.

“It’s in the Greenbergs’ nature, especially Hank’s to stand up for their rights in this kind of situation,” said Bert Ely, a consultant in Alexandria, Va. who runs Ely & Co. “They are not the types to get bowled over by Spitzer.”

Mr. Spitzer, who began investigating conflicts of interest in the insurance industry six months ago, said the American International executives pleaded guilty and are expected to testify in future cases.

Karen Radke, a manager at AIG’s American Home unit, and Jean-Baptist Tateossian, head of the American Home division that dealt with Marsh & McLennan, pleaded guilty to a single count of “scheme to defraud” today before New York Supreme Court Justice Michael Ambrecht, court documents showed. Calls to Roland Rippelle, Mr. Tateossian’s lawyer, and Jason Brown, Ms. Radke’s lawyer, weren’t returned. Both were released on their own recognizance.

American International said in a statement that it was “saddened” by the news of the charges because the company holds itself “to the highest ethical standards.”

The company said “any breach of those standards is unacceptable.”

An Ace spokesman, John Herbkersman, said he hadn’t yet seen the complaint. Munich Re said in a statement that it was cooperating with Mr. Spitzer’s investigation.

Insurers pay fees based on the amount and profitability of business that brokers steer to them, an arrangement brokers have said their clients are aware of. Marsh & McLennan received $800 million in the fees last year, Mr. Spitzer said.

“The Hartford does not condone bid rigging or any other illegal activity,” said Hartford spokeswoman Cynthia Michener. “Our corporate policy is very clear.”

Mr. Spitzer, 45, said he won’t negotiate with the current management of Marsh and urged its board to “look long and hard” at the leadership of the company. He has subpoenaed Aon Corp., Willis Group Holdings Ltd., Hub International Ltd., Chubb Corp., and others and said “numerous civil and criminal cases” are to come.

His investigation became public in April after the Washington Legal Foundation, an advocacy group and law firm, said earlier in the year that it was concerned that the fees from insurers compromise the brokers “fiduciary duty to represent the best interests of their clients.”

Mr. Spitzer said the companies were involved in rigging bids so that companies buying insurance would think there was a competitive process. The guilty pleas by AIG executives will “permit this case to run higher at AIG” and other insurance carriers, he said.

American International “needs to find some way to address the charges against their business integrity,” said Thomas Russo, who holds 1.3 million shares of the insurer among the $2.8 billion he helps manage at Gardner Russo Gardner.

The fees will probably contribute about 30 cents, or 10%, to Marsh & McLennan’s 2004 earnings per share, JPMorgan’s Sheusi said in a September report. For Aon, he estimates 29 cents, or 13%, and at Willis, 11 cents, or 4%. Hub will probably get 19 cents, or 23% of profit, while U.S.I. Holdings Corp. is forecast to get 18 cents, or 29% of earnings from the fees.

The Risk and Insurance Management Society Inc., which represents the risk managers who buy corporate insurance, in August revised a 1999 policy statement that had supported the disclosure of the fees at the request of a risk manager. Now the group says brokers should tell clients about the fees even if they’re not asked.