Insurance Post

Not so arrogant now

AIG has faced an unprecedented level of turmoil over the past two months, embroiled as it is at the very centre of the worldwide financial crisis. Mairi MacDonald looks at how the UK business is holding up under MD Alexander Baugh

Since Post last met Alexander Baugh for his first interview as managing director of AIG UK (Post Top 100 Supplement, 23 September, pp4-6), he has had an interesting two months.

His ultimate paymaster AIG has spent $70bn (£39.9bn) of its $85bn federal government bailout on filling a black hole of debt and a further $37.2bn had been made available to the company again through a US government-backed transaction (see page 2).

And while damage limitation is occupying most of AIG's time, with unfavourable media reports of tens of thousands of pounds being spent on corporate jollies on both sides of the Atlantic, every broker knows the insurer's problems stretch beyond a matter of market perception.

Today, Mr Baugh is at pains to convince brokers their interests are still best served by AIG.

Commenting on the global brokers that remained vocally supportive of AIG throughout, Mr Baugh noted: "Because of their size and infrastructure, it takes the bigger brokers a lot longer to determine and change their position based on evolving facts."

However, he claimed smaller UK brokers also reacted to the news of AIG's near collapse "with surprising support", continuing: "We did have a few second-tier brokers that came out on the morning before the bailout, saying no more new business with AIG but I believe they have now changed their positions.

"It has resulted in very high retention within the middle market and small to medium-sized enterprise business. Up until mid September we were holding a retention rate of about 95%, which is roughly what we look for in a normal period, and in the first week of October it's looking pretty similar."

Mr Baugh also claims AIG UK wrote more solicitors' professional indemnity at the 1 October renewal than last year, with significant business coming from its "sweet spot" of second and third-tier brokers.

He added: "From that Tuesday night (16 September) when AIG was pretty much out of options before the Federal Reserve stepped in, we have had to build back the position.

Subsidiary issue important

"Many of our competitors don't operate as local subsidiaries within the UK market and there probably isn't much differentiation right now between standalone subsidiaries like AIG UK and branch operations (which AIG UK used to be) although I think there will be more going forward. Historically, I don't think people really cared if an insurer is operating as a branch or a subsidiary. But obviously there are differences and that's been our main message."

Meanwhile, other companies' problems have come to the fore, including US life insurer Hartford and bancassurer Fortis with similar announcements expected, is there a sense brokers are taking a 'better the devil you know' attitude and staying with AIG for fear the rot will spread?

"I still say the insurance industry is in a better condition than the banking industry. But having said that, it's clear from discussions with brokers that insurance company security in terms of doing due diligence for their clients will be much higher up their agendas than it has been historically," Mr Baugh admitted.

He continued: "Having a placement with only one carrier is probably not a position they want to be in so they'll do a better job of selecting companies based on their strengths.

"My hunch is brokers are more concerned about solus agreements where they only have access to one market for any given line of business."

Mr Baugh insisted most lines of business in the UK remain competitive although the "broad consensus" is that motor rates overall are too low.

"This has more to do with loss costs inflation than with rates coming down any quicker than in others areas of general insurance. What has happened in terms of law and social environment means the loss costs are rising at a faster rates that the growth in GWP for motor insurance."

Mr Baugh said the credit insurance market is also undergoing significant change with more selective underwriting, rather than a noticable change in rates.

Elsewhere, Mr Baugh said now is not the time to change AIG's position in terms of where it sits in the marketplace. "If there are cases where competitors decide to considerably undercut our rates, we have a walk-away price and we let those pieces of business go," he continued.

"My gut feeling is that the areas where we are most vulnerable are those where we can easily be signed out (as one of many carriers on a slip) like in excess casualty line business."

Addicted to AIG service

"Because it is not integral to the way an insurance risk management programme is run, we don't have a particularly intimate relationship with the customer; they haven't experienced our claims service; it is much more in a commodities zone there and that's probably where we're weakest.

"In areas like financial lines - where we tend to be leaders - our customers tend to become more addicted to our service proposition. It's tougher but business is more sticky."

He concluded: "We need to recognise where we are and what has happened to AIG but also understand what we are as an insurance company operating in the UK and as a global general insurance player, which is still certainly one of the leading players in the overall market.

"Benchmark us against others operating in the market and we believe we still come pretty high in terms of those markets, although we are not quite as arrogant as maybe we were."

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