AIG's Near Fall Ripples Through Industry Pricing, Underwriting, Competition

A year after the near-fatal fall of powerhouse insurer American International Group Inc., the industry is still feeling shock waves. The ripples that resulted from the financial crisis and subsequent government bailout of AIG have impacted pricing, underwriting, competition, risk management and regulation.

Some say a wounded AIG (NYSE: AIG), always a tough competitor when it came to pricing, became even more aggressive in an attempt to retain business, which may have prolonged the current soft market.

Edmund "Ted" Kelly, chief executive officer of Liberty Mutual, has been one of the more vocal critics of this cut-throat pricing. He said the federal money given to AIG gave it an unfair advantage, allowing the struggling enterprise to be "overly aggressive." In November 2008, Kelly said, AIG was trying to increase or at least preserve market share by "doing some very stupid things in the market."

However, a report by the U.S. Government Accountability Office found state insurance commissioners have "seen no indications of inadequate pricing," by AIG.

David Duclos, executive vice president and chief executive of XL's insurance operations, said other markets are trying to dislocate the behemoth. "AIG is trying to fend off their competitors, who are trying to aggressively go after their business."

But, while AIG scrambled to retain business -- and its competitors circled like sharks hoping to lure away clients -- the soft market was extended longer than many thought it should be, said Joseph Paduda, principal of Health Strategy Associates.

"That may have...contributed to the industry's woes as a whole," Paduda, a former AIG employee, said.

W. Marston (Marty) Becker, chairman and CEO of Max Capital Group, said the turmoil at AIG, which in early August got a new CEO in Robert H. Benmosche, held back what was "a recognized and overdue momentum to increase pricing in some lines, particularly in the casualty space." Becker expressed hope that because AIG has stabilized, they will recognize that the casualty world would benefit longer term by some enhanced pricing.

But, Becker stopped short of criticizing AIG. "They are trying to do what they think is right. If I was running a company facing that turmoil, I would probably have done the same thing," Becker said.

AIG, which rebranded its property/casualty operations as AIU Holdings, before rebranding it again as Chartis, has managed to keep more of its business than some competitors expected.

"In the high-net-worth space, people thought it would be easier to beat them than it has been," said Ross Buchmueller, president and CEO of Privilege Underwriters Reciprocal Exchange. "Customers sought alternatives, found [AIG's] pricing was extremely keen, and stayed."

David Pagoumian, CEO of Napco, a New Jersey-based wholesale broker of property insurance for commercial accounts, said, "Speaking from experience -- and we had our own moment of darkness in 2001 -- you do what you need to do to preserve your franchise. If there were situations where they were being more aggressive, I have to believe their underwriting gave them the support to do so."

Mirror, Mirror

AIG's vulnerability provided a reality check for other insurers, said Dan Weedin, a Seattle-based insurance and risk management consultant. Insurers are "looking at AIG, the largest insurer in the world. If that could happen to them, what could happen to us?"

Weedin said companies are being more stringent in reviewing financial records of potential clients. "That has not always been the case in soft markets, when companies would take whatever they could get. Rates are still low, but unlike other soft markets, you aren't seeing lax underwriting."

Bill Hartnett, director of insurance solutions at Microsoft, said AIG's meltdown "was a shock to everyone. A lot of the innovations that AIG took were highlights of the industry. They had one of the most respected names in the industry. To have them suddenly fall apart in front of our eyes was really a shock to the psyche."

Insurance companies are reassessing where they are going with nontraditional insurance products and separate them from the traditional operations, said Thom Salane of Turner Padget Graham & Laney.

Changing the Rules

Most large commercial buyers of insurance had AIG in their portfolios. AIG was the second-largest property/casualty insurer and the third-largest life insurer in the United States in 2008, according to A.M. Best Co. data.

Risk managers looked to spread their insurance business to additional carriers in the wake of AIG's troubles. Insurance buyers are also doing more of their own due diligence. This new caution "is a silver lining," Weedin said.

Many in the industry are pleased to see AIG is still a viable insurer, still writing new business and paying claims.

"AIG has been over the last, at least 50 years, an incredibly significant leader in understanding risk management, taking risk, evaluating risk and taking on risk that other people have difficulty understanding. They have substantially changed the industry in many positive ways across the board. They've been the incubator of thousands of people who have spread throughout the industry, and changed a lot of the best underwriting," said Ken A. Crerar, president, the Council of Insurance Agents & Brokers. "We are relieved that AIG has kept it together."