On April 3, Risk & Insurance® editors Jack Roberts and Cyril Tuohy traveled to New York to interview Maurice "Hank" Greenberg at the Park Avenue offices of his company, C.V. Starr & Co. Inc.
In a spacious, sunlit corner of the 17th floor, in an office filled with photographs of meetings with world leaders and art objects from the Far East, Greenberg shared his thoughts about risk, risk management, the brokerage community and the capital markets in a wide-ranging interview lasting more than 90 minutes.
Greenberg, still trim and fit at the age of 81, also talked about working for a private company, after more than 40 years at the helm of AIG, one of the largest insurance companies in the world, and the changes in the regulatory environment since he was forced out by AIG's board of directors following charges by former New York Attorney General Eliot Spitzer. Two of six civil charges against Greenberg were dropped in September. Four are pending.
In March 2004 remarks to the National Committee on American Foreign Policy of the Council on Foreign Relations, in honor of accepting the George F. Kennan Award, Greenberg called on corporate America to be more nimble and creative in developing new industries and products. He also called on corporate managers to be less risk-averse. "Corporate America has become more reluctant to take risk in response to new rules and regulations of Sarbanes-Oxley. The environment is not conducive to creativity," he said.
Editors: Do you still think along those lines?
HG: I do.
Editors: Has anything changed in the last few years?
HG: No, I think what you're seeing is the beginning of a realization . . . that the regulatory environment has made companies more risk-averse and forced them to keep their heads down which is not in the best interest of America.
Editors: Do you think insurance companies can be creative? How can they be creative?
I've spent my career doing that. It depends on who the individual is and what kind of tone you set in the company. You don't punish people for doing something wrong because then you kill creativity. Of course you do many things creatively. We're living in a changing world. There are new products being developed by industry all the time and we expect the insurance industry to meet the needs of a growing world economy.
Editors: When you were at AIG, you were known for being able to identify areas of risk that other people may have overlooked and be able to go out there and price it correctly, underwrite it profitably. Do you see that kind of strategy still being done in the marketplace or at your former employer?
HG: Look, why did AIG grow . . .? Because there weren't too many other competitors doing the same thing.
Editors: I want to ask you about risk management. I wanted to know first of all, what you thought about the current state of risk management. Traditionally risk managers initially were insurance buyers and now the position is much more broad, much more professional. What's your assessment of risk managers today?
HG: Look, I feel it's an essential part of any major company. Any major company that's well run, it had better have a professional risk management department. And there's a big opportunity because in the emerging markets, like China for example, risk management is just beginning to be thought about. It's a long ways from being totally professional and implemented but it will be. You'll see many Chinese companies, as an example, buying companies outside of China. They'll become global and risk management will grow. So I think the profession has got a long way to go for growth yet, and I think it's an essential part of industry.
Editors: Do you think business in general, or companies, look at risk in a strategic sense?
HG: It depends on the company and the CEO. If the CEO doesn't pay attention to risk management he's missing what he should be doing.
Editors: I would think that more CEOs these days, because of just what's happened, would have risk more on their minds?
HG: Good corporate governance would mandate it.
Editors: Certainly, with the requirements under Sarbanes-Oxley, they have to sign off to the risks.
HG: There's no question about it.
Editors: And do you think that has penetrated down to the risk management people at the company, that they look at their job not just in a tactical sense but in a more strategic sense.
HG: You can't generalize. It depends on the individual. A professional individual, of course, has done that. Some will always be just buyers of insurance and some will grow beyond that into being professional risk managers and those who are just buyers I don't think they have a great future.
Editors: You don't think so.
HG: No, I think they've got to become more professional.
Editors: What kind of traits do you think a risk manager needs to have today?
HG: I think they've got to understand the business they're in and constantly looking at what the exposures are in that business, in that industry, to make sure they are at their leading edge. They've got to be inquisitive. They've got to be thoroughly professional in what they are doing. If it's an engineering company they better be an engineer.
Editors: And they'd better be familiar with what's currently going on and not stick to the past.
Editors: So you've just said that risk managers are becoming more professional and have been, and the trend is in that direction. Where does the brokerage community fit in to this equation?
HG: In two ways, it seems to me. Some brokerage firms have a pretty good risk management department of their own and are a substitute for a professional risk management department in the company itself.
Editors: Many smaller companies don't have risk management departments.
HG: They can't afford it. They don't think they can afford it so they pay for that service to a broker. The broker performs that service for them. But that's been true for a long time.
Editors: Do you think there's any kind of inherent conflict in the role of an intermediary here in terms of how the compensation is structured right now?
HG: No, as long as there's disclosure as to what they are charging for what services.
Editors: Do you think that the commission structure itself then, is appropriate as long as it's disclosed?
HG: A broker represents the insured. If he's on a fee basis, the client obviously knows what he's paying, as his broker. If the broker is also getting a contingent commission from the insured for various purposes, for volume of business or profitability of business, that was viewed in some states as improper. Although, if the broker disclosed it to the insured I personally see nothing that's improper about it. I understand there's a new acceptable method that you do it prospectively.
Editors: . . . right, based on your past profitability.
HG: I don't see the difference, quite frankly in the two. Maybe I'm missing something but I don't see where it comes out any different. The argument was that well if you had a contingent commission retrospectively you were steering business to the company. I find that if you get it prospectively, aren't you going to steer business to the company? I don't quite understand the difference. In any event, the practice of contingent commission has been around longer than I've been around in the insurance industry. If it wasn't always disclosed, it should have been disclosed. That I have no argument with. But if you want to change a practice that's been going on for 50, 60, 70 years or whatever it may be, I would have thought the better way of doing it is calling the industry together. We do have insurance departments who regulate the insurance industry. Call them together and say we want to set up rules that are somewhat different than they are now. If the industry didn't agree, we could appeal that. If the appeal were rejected, we'd go to the legislature. And if that were rejected, then you'd have a new law. That's the way a democracy is supposed to work. But I think to impose a change by threat; I don't think that's the right way of doing it.
Editors: From the point of view of the buyer there are a number of risk managers who may have in the past either found a problem with it but who now say that when the payment comes either in the form of a commission, there's a certain inherent conflict there.
HG: Most risk managers knew about contingent commissions.
Editors: Some of them fired their brokers because of it.
HG: Listen, I went to the New York Insurance Dept. in 2004 and early 2005 and said clarify the rules on contingent commissions. I went to see the insurance superintendent. Get it in writing and I believe they issued some circular letters and so it wasn't as if it was done in the dead of night.
Editors: Right. But there's a risk that suddenly it's beyond your control, the rules change and that's something you have to look at now and then.
HG: Well the rules shouldn't change that way by threat. I don't think that's the way to retroactively change rules.
Editors: In your experience, do you think that buyers are astute enough as a whole; were they aware enough of the contingent commissions?
HG: I think it varied. I think some brokers disclosed it, but some brokers may not have.
Editors: But did the risk manager specifically do a good enough job of asking that of their broker?
HG: In most cases, I think the risk manager knew.
Editors: But don't you think that in some cases, the risk manager looked and said, 'Oh, it's a commission, I'm not paying for this.' In one sense they looked at it like that.
HG: I don't think there's a uniform answer to that question. I think that if there was a contingent commission that the broker was getting that the insured did not know about and they were getting a fee, then they had an obligation, in my judgment, to disclose it to the insured.
Editors: When you were at AIG for example, AIG had a strong reputation of being very tough on the commissions.
Editors: Brokers would come to you all the time and say, well you know, give me a few more points and that kind of stuff.
HG: We insisted that the broker disclose to the insured.
Editors: One question I wanted to ask you is, we're talking about risk and there are some really wild risks out there right now.
HG: There always has been.
Editors: But there are billion-dollar risks out there like product liability issues and all kinds of things.
HG: But that's always been true.
Editors: But how do you insure those kinds of risks?
HG: Well, that's the job . . . if you're in the risk business. If you're trying to avoid risk get out of the insurance business. The job of an insurance company is to find ways to insure what people need to have covered. That's why we're in business. I didn't want anybody around me who kept telling me you can't do this, you can't do that. If you can't do that, fine, find another job.
Editors: But I mean, you look at some of the risks today and even the catastrophe risks are at the point now . . .
HG: If you get the proper price your job is to provide coverage.
Editors: You think there's enough capacity out there right now in the market in the insurance field?
HG: Yes, I think there's enough capacity. The only things you can't cover are weapons of mass destruction. You can't cover a risk where there's not enough capital in the insurance industry to cover the risk, and so I've always fought to get TRIA through the first time because with insurance you can't provide that kind of coverage. It's impossible. That's a government risk.
Editors: There's actually been talk of a catastrophe fund in general.
HG: I disagree with that. If you're going to get out of all the tough risks, then what are you in business for?
Editors: And that's where you can make the best money.
HG: You make money, you lose money. That's what you're in business for.
Editors: How about this trend with the ratings agencies to look at risk management and risk analysis of the insurance companies. Do you think that's a good direction?
HG: I've no problem with that, except I think that sometimes they go overboard. I think you need enough capital in order to assume the risks that you're assuming. You have to understand what your loss potential will be. It's like saying I'm covering a major property and I'm doing it not on a possible maximum loss, but using some estimate of what the loss could be and the whole building burns, you have to look at your total exposure, not on a P.M.L. basis, but on a maximum loss basis.
Editors: It seems to me odd that the ratings agencies would just be coming to this kind of thinking?
HG: Well they came to it after Katrina. And after three, four or five years with no Katrinas they'll loosen up.
Editors: Four years ago I heard CEOs of insurance companies saying, well we've gotten the light. There are going to be no more cycles. We're going to make sure that we underwrite risk profitably.
HG: You believe that and you believe in the tooth fairy.
Editors: So you think the industry has yet to get the message?
HG: It's not a question of the industry. It's a question of human behavior. Everybody after a while, when the market gets more competitive everybody begins to look at how they are going to grow so they start rationalizing risk.
Editors: How about on an international basis. What do you think about the requirements like extending Basel II to the insurance industry?
HG: What would you gain out of it? If you're looking at the potential risk of a financial institution we handle that in the industry by reinsurance essentially, assuming you choose solvent reinsurers. That's worked pretty well over the years but if the industry can only take on the risk of the financial institution as an underwriting risk, that's another matter. That's a very difficult risk to take on in blanket form.
HG: Because you have no knowledge really of all the risks that are undertaken by that financial institution. You really don't. If you look at all the derivative risk being taken today, almost in the billions and billions of dollars, I don't think the industry is capable of underwriting on a blanket basis. They may take some segments, but not on the blanket risk.
Editors: But is it ever possible?
HG: No. That's why financial institutions have to resolve that with their own regulators.
Editors: Is there a particular kind of culture in a company that you favor or that you have found works best?
HG: As I said earlier, those willing to take risk and who can bring in people who can understand what you're trying to do with risk and be creative in introducing new products all the time.
Editors: That could give you a huge advantage in insurance markets?
HG: In any market.
Editors: But I mean particularly in insurance. You can respond to changes in risk presumably much more quickly.
HG: That's it.
Editors: The ability to respond with speed has gotten more important or less important?
HG: More important. The whole environment is different. I enjoy it.
Editors: What is it about insurance? I mean, if you were going to talk to some kid coming out of college, what would you tell him?
HG: I never believed I would be in the insurance business. I ended up in it purely by accident. Would I have liked working in a traditional insurance company? Absolutely not. I'd be bored to tears. I'd rather have an environment that is exciting, and that's conducive to doing something new and different and looking at risk as a challenge and how to satisfy the individual or the company that has the risk and how do you manage it for him and for you to both come out in a satisfactory way, and opening markets around the world. I remember during the Cold War, whether in China, or in Russia, or in Korea, or in Japan when it was . . .. a challenge.
Editors: Sometimes I almost feel as if I could not use the word insurance and just say risk all the time.
HG: It's an adventure doing this.
Editors: Is there anything you might like to add about your experience, about leadership, about insurance, about risk management.
HG: Change is always constant. Change should not be an enemy. You should not fear change, whether it's within risk or even within regulation. But if regulation is harsh and unfair, then fight it. We have due process in this country. If a regulation is imposed that you believe is unfair then the industry should fight it. The unfortunate part was, the industry, most of all, caved in and you can't blame anybody else if you do that.
Editors: There's been a lot of discussion lately of the capital markets coming into the insurance business.
HG: They have been.
Editors: They have been, but they've not been able to syndicate risk.
HG: Particularly hedge funds and wherever you need catastrophe reinsurance and the capital markets, there was some of that coming in.
Editors: But do you think that's going to expand. Do you think there's opportunity there?
HG: I think it depends. If we have a couple of Katrina's then you'll see more and more capital markets creativity coming into that and price won't matter because price will go up.
Editors: Do you think the insurance industry can compete effectively against the capital markets in offering products and services?
HG: Yes, I think it can.
Editors: Insurers have the talent; they have the wherewithal to do that?
HG: I didn't say that. Not all companies do. I think one of the advantages the capital markets have is they've got the intellectual capital that's pretty good.
Editors: Is that a big issue in the insurance industry?
HG: Absolutely. You need it in any business. I mean if you're just going to have people who are going to read a manual and pick a rate, that's not intellectual capital.
Editors: And what's your assessment then?
HG: Some companies have it and some companies don't.
Editors: Which has always been an issue, at least more lately, the industry's ability to attract new talent has always been a bit thin.
HG: It depends on the leadership.
Editors: Of the company?
Editors: So a big company that can hire the hot Ivy League graduate . . ..
HG: It doesn't have to be a big company. It depends on the leadership of the company and the culture of the company.
Editors: What's the environment like for investment in China right now?
HG: Well, you know, the economy is growing at 10 percent a year. It's the 4th largest economy in the world now. It'll be the No. 2 in about 10 or 12 years; massive, massive change going on.
Editors: And when you look at investments, what kind of risk issues do you look at in terms of investments?
HG: It depends on who you know. I've been going to China for a long time. You have relationships and you have to look at things that, in your judgment, have risk but also opportunities. You have to pick the right people. You have to make sure companies you're invested in have management skills and strategies that are good.
Editors: And where do you see your investment going? In the financial services area?
HG: There are several areas. Financial services, the health care that has to be created, environmental, real estate. There's a lot of real estate that needs to be built. Urbanization is massive in China.
Editors: That potentially would be a huge investment.
HG: Yes. I'm not doing the whole country. There are a lot of people doing it. But I have a lot of relationships that go back many, many years. That gives me an advantage.
Editors: How have risks changed in China over the past 40 or 50 years.
HG: A number of things have changed. First of all, the regulatory environment is more professional than it's been before. So, to an extent, the risk is diminished in some ways for some. On the other hand for those who are inexperienced in China and don't know how to get around the regulatory bureaucracy, if you will, there's great risk.
Editors: So it makes it difficult for them?
HG: For some it will be difficult. But things are moving so rapidly in China. They've come up the technology ladder very rapidly. Not long ago they were a country manufacturing textiles. Now, they will probably one day be the largest manufacturer of automobiles in the world.
Editors: And they have just as strong capital needs, I presume?
HG: They have huge capital needs. The have a trillion dollars of reserves and growing rapidly every month. So, yes, there's risk any place that you invest. The biggest risk probably, and it's not a risk right now, but potentially, is relationships with other countries.
Editors: China's relationship with other countries?
HG: Well, and other countries' relationships with China. We've always had an on-and-off again relationship. It happens to be quite good right now. But every time you get a new administration the relationship starts off kind of negative. It takes several years for them to learn that we need a good relationship with China and they with us and it takes time to work that out and I work hard on the relationship and have for years. It's in our national interest.
Editors: What do they think in terms of investment from the U.S.?
HG: They encourage it. Last year there was $60 billion in direct foreign investment in China. That's a significant amount, compared to $6 billion in India, so clearly China is ahead. But it comes from many sources. It doesn't come from just the United States. It comes from many, many countries. And China needs the foreign investment. We talk about the trade deficit with China which is very, very significant. On the other hand China needs to become, in due course, a consumption society so they don't have to rely on foreign investment or exports to grow their economy. It'll take time. But if you go to any of the major cities on the east coast you can buy anything, from any major store in the world. Any boutique, you name it. And they are buying a lot of brands. So it's going to be a major consumption society.
Editors: You're saying it already is.
HG: It already is. It's going to be massive.
May 1, 2007
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