By DAN REYNOLDS, senior editor of Risk & Insurance®
Everyone knew, or had to have guessed, that once the severity of the subprime mortgage hemorrhaging at American International Group Inc. became clear in September 2008, that sharks from far and wide would be drawn to the scent of so much blood in the water.
Now, two of the many questions being raised by the AIG debacle are these. Does the near-collapse of AIG's parent company translate to weakness in the insurance operation on the ground? And are AIG's efforts to preserve its insurance business translating into a pricing war prolonging a soft market that should have turned already?
In a Dec. 30th report, Advisen Ltd. reminded us of the words of Edmund Kelly, CEO of Boston-based Liberty Mutual, who, in a conference call with analysts, quipped, "AIG has intensified its efforts to increase its market share, or at least preserve it. In fact, it's fair to say that they are doing some very stupid things in the market."
According to Advisen, Kelly wasn't alone in coming down hard on AIG. Other CEOs and chief financial officer were saying similar things in the rarified, albeit recorded, spaces of their conference calls.
But Advisen's researchers, led by David Bradford, think that AIG isn't alone in being responsible for keeping prices low in some lines and thereby extending the soft market.
"AIG appears to be competing vigorously, but not irresponsibly," Bradford and his team concluded in their report.
One broker, interviewed by Advisen, said that other insurers are so hell-bent on picking up business from AIG that they could be just as responsible as AIG, if not more so, for driving down prices.
RISK MANAGERS SPEAK
Risk managers are giving the indication that AIG is too big and is too important to their programs to drop entirely, even if risk managers wanted to drop them. But make no mistake, the damage done to AIG's reputation, regardless of how well the insurance operation is insulated from the financial follies of the parent company, has been substantial.
Some risk managers aren't doing away with AIG in their programs altogether, but they are limiting their involvement in cases where, previously, including them in a tower or two would have been done without too much thought or worry.
"At this point the way we are approaching it, we are not going to expand our opportunities with them unless either we are pushed into a corner or without a lot of evaluation," is the way one automotive-sector risk manager put it.
But a different sentiment was expressed by Greg Kildare, the risk manager for the Los Angeles Unified School District.
"Everybody uses AIG, and in some sense, they are too big to fail," said Kildare.
"They offer the most competitive pricing that we can find in ... property/casualty. I hate to say that because I am not a real fan of their claims administration unit, they are very tight. But they are also really cheap and they run a pretty good shop in terms of their P/C business," he said.
"So, I can't do without AIG.I mean the capacity that they bring to the marketplace is unequaled really. So, in some sense, there is not a heck of a lot that we can do about it other than just wait and see."
(Read the rest of the Jan. 13 R&I One.)
January 9, 2009
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