Just weeks before AIG went into meltdown, ultimately being bailed out by the American government, Jonathan Swift spoke to its UK managing director Alexander Baugh about his plans for the business. Here he outlines a blueprint to win back brokers' and insureds' faith in the business
AIG UK managing director Alexander Baugh returned to the UK for a third time in his career in December 2007, succeeding Dan Glaser, who returned to his former employer Marsh.
But while his predecessor had to annually answer questions about acquiring the likes of RSA to grow the business, the poser Mr Baugh will be fielding for the foreseeable future will be what is the impact of the Federal Reserve Bank of New York's decision to step in and give AIG an $85bn (£47.2bn) revolving credit facility to ensure the company meets its liquidity needs.
Among the challenges Mr Baugh faces is winning back the trust of brokers - Jelf for one ceased doing business with AIG last week - so he can live out the vision for the UK business he spoke to Post about before the turmoil that engulfed its New-York- based parent.
"These are unprecedented times and we are grateful to the Federal Reserve for their support in resolving the liquidity issues that we faced. We are also very grateful to our brokers and clients for their support at this time, and we realise that they have many questions about structure and organisation that we cannot answer at the moment," responded Mr Baugh last week.
"They can, however, be absolutely reassured that in areas like writing new business and paying claims it is very much business as usual here in the UK. AIG UK is a standalone company, regulated by the Financial Services Authority and we have £900m in capital to meet policyholder obligations, which is in excess of the required minimum. Virtually all our assets are admissible for solvency purposes.
"On average we pay out £4.5m in claims every working day, and the last week or so has been no exception. Recent events do not change our commitment to provide our clients with world-class coverage and the highest levels of service.
"For example, we have been working hard with policyholders affected by recent floods to get them back in business as soon as possible. We will continue to communicate with our insureds and brokers as soon as we can, as the situation develops."
Starting as a management trainee with AIG in New York in 1983, Mr Baugh first moved to London in 1988, initially to develop financial lines, including directors' and officers' business, outside the City. Within six months he took over management of financial lines for the UK and Ireland on a temporary basis, a stint that lasted five years. In 1993, he went back to the US to work on financial institutions business, travelling across the Atlantic again in 1996 when an opportunity arose in London to work again in the financial lines business, which was by now a "bigger operation".
By 1998 Mr Baugh had put down roots in Paris, but maintained responsibility for the UK and Ireland financial lines, picking up continental Europe and Central/Eastern Europe, too. In 2000 he took on the general management role for French operations, which he carried on for four years until he became regional president for continental Europe.
So, having spent so long in France, was it a difficult decision to return to London? "I think the London/UK operation has always been the jewel in the crown with regards to the AIG international general insurance arena," Mr Baugh says. "So when I was offered the opportunity, I jumped at it."
As to how the UK business had changed in the decade he had been in Paris, Mr Baugh adds: "I was aware AIG had seen some very strong growth in the UK and the recognition of the company has also changed.
"It was not too many years ago that you would talk about AIG and people would say, 'AIG who?' - especially if they were from outside the industry. It was remarkable when I came back to see that AIG's profile has risen significantly, which means that this role is now a much more outward facing role than the one I had previously in Paris."
It would appear Mr Baugh's and AIG UK's profiles are indeed very much intertwined, given that his ascent to the MD role has mirrored that of the influence and standing of the insurer in the UK. "If I go back two posts to the first time that I was in London in 1988, at that point, even within the industry, outside London we were blazing new trails. And that was an interesting experience in that not only was I trying to introduce the concept of directors' and officers' in the regions, which was considered to be a bit foreign, but I was also representing a company that was not a household name in the UK market outside London," he says.
"When I came back the second time, that had already changed, in that within the insurance industry, even out in the branches, there a strong recognition of AIG as a player in the market, and this time even in circles outside the insurance industry, there is a stronger recognition and understanding of AIG than I experienced in the past."
One of the largest changes, which will no doubt help raise AIG's profile further, is its decision towards the end of Mr Glaser's term in office to phase out its former UK trading names Landmark Insurance and New Hampshire under a Part 7 transfer. This saw New Hampshire's business folded into Landmark, at which point the name was changed to AIG UK.
Mr Baugh is open in admitting that previously "it was a confusing structure", adding: "We were operating a branch operation, where Landmark was the local subsidiary we used, but in the public perception there was very little linkage between AIG and Landmark. With (agency) New Hampshire there was more connection. And then we had another agency that underwrote on behalf of New Hampshire and that was called AIG Europe UK.
"So the issue of what kind of structure we should have in the UK is something that had been discussed for years. The old agency structure with multiple companies was very capital intensive, and it was difficult in transparency terms to communicate with the ratings agencies, brokers and with compliance - it was a complex structure. Certainly, a second consideration in terms of the Part 7 transfer was to try and capitalise on a growing recognition of the AIG brand, and take advantage of that."
As to what the immediate impact has been, and the benefits to AIG, Mr Baugh says: "We have seen an uptake on direct and internet sales. We have also certainly seen some capital improvements that have flowed through as a natural effect of the transaction. As we are in the integration phase of the restructure, I would not say that it has presented us with a lot of cost savings, but there will be savings to come as we run in the new structure and close down the vestiges of the past."
With regards to reducing its cost base, Mr Baugh insists: "There is no plan as part of the Part 7 to reduce the staff numbers," adding that the cost savings will flow through from having less duplication. "It is as simple as having two or three processes before that will become one. It won't be material in terms of the changes that it brings, but it is ultimately better than what we have had in the past," he adds.
Of course, AIG's reputation and recognition is helped by the parent's decision to sponsor Manchester United football club and the exposure that has given the brand since 2006. "We track it in terms of statistics and at last count when surveyed, 40% of the population recognised the AIG brand. It was higher among football fans, but it was not low among non-fans, where a third recognised it," he adds.
With the increase in the profile of the brand, AIG has been able to develop more personal lines spaces, with the positioning of AIG Direct, which operates a panel arrangement in both household and motor insurance.
"The brand gives us the opportunity to do more in the consumer space," Mr Baugh agrees. "In the past, we were more limited to white labelling and affinity business. But now we have a very viable direct proposition. Certainly in the online space, in order to have a complete proposition for the market you need to build some choice in, and that choice is best fulfilled - for us today - by having a panel.
"We are interested in increasing our consumer base, but we want to do so in a profitable way and the history books are full of companies that have lost money on personal lines in the UK and it is not our goal to go down that path. The panel has been very effective in allowing us to build some direct business through the use of the AIG brand, and we can decide if we want to introduce a product, without really having an impact on the end consumer. We look at it every week. It is very dynamic in terms of the portfolio."
Higher brand awareness has also helped AIG in its decision to work with some aggregators, a model that is not totally alien to Mr Baugh, despite his living on the continent for the past 10 years. "I was only aware of aggregators tangentially so that has been a learning experience since arriving here in terms of understanding the dynamics of the model," he says.
"Interestingly I worked on a project in 1998 at the AIG group level where we talked about an aggregator model and ended up doing a launch in the US market, which was a little ahead of its time.
"Many of the observations that we had then hold true today and those are principally that it is a very accessible model for those people comfortable making pricing decisions online as it allows people to do very simple price comparisons."
Ultimately, Mr Baugh says that AIG's brokered personal lines business through areas such as non-standard motor and high net worth is still larger than that which comes direct or through aggregators.
"There is going to be a place for aggregators - and it is the fastest growing segment of the market at the moment. However, we are very committed to broker distribution because we think that there is a lot of value in an independent adviser role in insurance distribution. And the support service that comes with that is not easily replicated through an aggregator solution," Mr Baugh explains.
To underline this commitment to brokers, AIG opened its 11th branch office this year with a base in Newcastle, and Mr Baugh is a firm believer that intermediated business is best done locally. "Since my first stint here in 1998 when I was working around the branches, doing D&O business, I realised that business wasn't going to gravitate into a centralised market, like a London or Manchester hub.
"So, if we wanted to be successful in an area with innovative products, then we had to have the expertise on site to work with the local brokers as some of the aspects are very different outside London, than inside London.
"So that it is a long-standing strategy of AIG to get closer to the source of the business. Newcastle is off to a great start and we continue to evaluate other areas where we could add value by adding local expertise," he says.
So, having first stepped into the UK with an AIG hat on to sell D&O, what progress has Mr Baugh seen in regional financial lines? Are areas like D&O still niche or are they making headway with regional small- to medium-sized enterprises and brokers?
"I think it takes time for people to see the value of some of the newer products and what those liability risks are that are being created. But I think the growth of interest is not a flat progression - it is an arithmetic progression over time - and that means people are more interested in D&O cover and the take-up rate continues to grow. In fact, people are more interested in liability covers per se, whether it's environmental risks or something else, and that will continue apace."
Two of the most high-profile issues to dominate the UK insurance market space recently have been those of insurers buying brokers and the commission being demanded by some of the major consolidators. On the first point Mr Baugh says: "Ultimately it is not my place to comment on that, as it is up to the clients whether they see that as a conflict and whether they are happy with that type of consolidation.
"What we clearly see is broker acquisition by insurers going on and in a soft market it is a way to get access to additional distribution. But we have also seen prior phases of that combination of broker/underwriter that have not survived in previous soft markets. This one looks deeper and only time will tell how it plays out. But if it is play for disintermediation I don't see it. And I don't see the marketplace being ready for it."
Asked how AIG would react if insurer-owned brokers starting creaming off the best business for themselves or using the brokers to place more of their own business with, Mr Baugh says: "We would have to respond to that if it happened, but in actual fact what we are seeing in the short term, in the current governance environment of treating customers fairly, is that these companies acquiring brokers are bending over backwards to be seen to be going through due diligence and offering all the different markets, and thus far we have not seen any kind of risk to our business."
As to whether AIG might take an interest in brokers, by buying them outright or a stake, he explains: "I'm not convinced it (buying brokers) is a viable structure. That is not to say that if one of our investment arms saw a potentially good return from that type of investment, they would be banned from doing so. But in terms of being a strategic acquisition or strategic investment, I don't see that."
Another route to market that is used by many of AIG's competitors is the managing general agent one, and again Mr Baugh has serious reservations. "We have not agreed to sign up with any of the MGA agency agreements with large consolidators because we look for a proposition that we believe is sustainable and we don't want to put a lot of investment into an initiative that we don't believe is going to be able to withstand the forces of normal competition. We have seen those types of structures over the last few decades and they don't seem to stand the test of time."
On the issue of the changing levels of broker remuneration in the 10 years since he left the UK, Mr Baugh notes: "Commission levels in the market have dramatically been driven up since I was last here. When it comes to the question of commission there is an issue of value, and that has to be evaluated on a segment by segment, business by business, or product by product basis. It will differ depending on the sourcing of the business, the administration, the assistance in terms of the underwriting, how much of the work is being transferred, how much is been done by the broker.
"There are many factors that come into play but I would like to think that, with our portfolio, the commission bears some resemblance to the value that is being presented to the ultimate client."
And so with its new emphasis on the branding and building up regional business, how would Mr Baugh position AIG against the long-standing and larger - in UK terms at least - players? Is it now a fully fledged rival to the likes of Norwich Union, Axa and RSA?
"In commercial general insurance we are there. Many major players have much bigger personal line portfolios than us and their appetite is greater in that segment of the market. But in it is our goal to be the insurer of choice for commercial general insurance, and that would mean against all comers."
With the small and medium enterprise market such a large component of that overall commercial space, how is AIG looking to differentiate itself in the crowded market? "It is a question of getting the model right, and that means having the right portfolio, the right control over processes, an efficient production of business, and learning from past experiences that it is not a case of one size fits all," responds Mr Baugh. "And that is clearly our focus as we want to go in with a differentiated proposition, where we can add value."
Mr Baugh estimates that about 20% of AIG UK's commercial revenue now comes from the SME segment. "And that is work that has taken place over the past five years, mostly from a standing start, and so it is an important business for us, but we think there is more potential. There is more ground for us making the case that AIG is the right market to go for that type of business and there is a lot of space in terms of product development and expansion."
Trust in AIG
He continues: "And that includes how we can make our mid-market products relevant for the SME market. At the smaller end it is unlikely people are going to see a need for a standalone environmental impairment liability policy, but if you can give them an element of cover in a combined package then as they grow we can offer them more relevant cover. I also believe the likes of employer practices liability cover is relevant in that segment of the market because one wrongful dismissal case can be damaging to a smaller enterprise."
What is certain is Mr Baugh's third stint in the UK will be his hardest yet, due to events ultimately out of his control.
It will be weeks, even months, before it becomes apparent whether any lasting damage has been done to AIG UK.
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