Gorillas, Elephants, & AIG

In the United States insurance market AIG is the proverbial “800 pound gorilla” or, to use another animal reference, “the elephant in the room”. They are a big deal, a gigantic company and as such as AIG goes so does much of the US property casualty insurance industry. 

During my nearly four decade career AIG has long been America’s largest commercial insurer, a global business with operations in 80 countries and an important personal lines insurer through its AIG Private Client Group.  Founded by an American in China in 1919 and today based in New York AIG’s clients range from high net worth individuals to large, international, and mid-sized companies, small businesses, entrepreneurs, and non-profits found around the world. 

As I said, as AIG goes, so goes much of the domestic industry (thus the reference to gorillas and elephants) or, for that matter, America’s financial system. And speaking of our financial system you might recall that at the peak of the Great Recession in 2008 it was AIG that nearly went into court-ordered bankruptcy and instead required perhaps the largest federal-government bailout by taxpayers (you and me) in history. The thinking in offering that bailout was that AIG failing would worsen our already terrible economy in significant, perhaps catastrophic ways given the impact of its business to individuals, commercial enterprise, banking, real estate and so forth. 

And while AIG survived the Great Recession they have since struggled to deliver the profitable results that their shareholders and executives demand. At the end of 2015 AIG was forced, for example, to increase its loss reserves for claims by $ 3.6 Billion. And just when they thought that they solved the claim problems they announced another increase at the end of 2016, in that case by a whopping $ 5.6 Billion. 

These results led AIG to “clean house” and in May of 2017 they installed a new CEO (Brian Duperreault) who went about hiring dozens of new executives to overhaul the insurance they offer, reduce expenses, purchase more reinsurance to lessen the impact to AIG on volatile coverage and more. An early indication of the many changes AIG is undertaking are the large number of personal insurance clients its Private Client Group is non-renewing as it pushes its minimum premium to ever higher levels.  

Despite all of these changes the insurer announced early this year that they had found more claim concerns and, yet again, increased loss reserves (by $ 365 Million). That news along with hurricane losses and wildfires in California led to a $ 622 Million loss for the quarter and continues to suggest that AIG is not yet where it needs nor wants to be. Here’s what the Wall Street Journal wrote about all of this in February:

“AIG said the reserve build mainly related to policies written before Mr. Duperreault took over. Part of the problem, Mr. Duperreault said, was with a “go large” mentality under previous management, who figured AIG’s big balance sheet allowed the insurer to underwrite big risks that others couldn’t. He stressed the changes AIG has made to reduce risk, including writing policies with lower exposure limits and adding more reinsurance protection.”

Like I said, what AIG does in my experience impacts the entire marketplace including the cost of insurance that consumers pay and the available capacity within the market. Case in point is the excellent article entitled Strategic Change at AIG is ‘Unprecedented’ With Impact Rippling Across The P&C Market (Likely Through At Least 2020) from my friends at investment banker’s Dowling-Hales, LLC. Here’s what they wrote recently in The Hales Report:  

This last table, Exhibit 13, is particularly telling so I’d like to decipher a couple of things from it including: 

  1. In the first row entitled North America Retail Property (property insurance individuals and businesses purchase) we see that in the first quarter of 2019 the insurer decreased the available limits by 49%, increased their average deductible by 25% and increased rates by the high single-digits. In effect this is a core part of the current strategy; reduce the coverage limits at risk, increase deductibles so as to further reduce AIG’s cost at the time of a loss and increase rates. 

In the second quarter it appears that they became even more aggressive with their strategy by reducing limits by 60%, increasing deductibles by 60% and increasing their rates by 20%

And in the most recent (third) quarter it was more of the same; reducing limits by 37%, increasing deductibles by 27% and increasing rates in the high teens

  1. You can see the same types of changes on all lines of coverage including financial (such as for director’s and officer’s liability), casualty and so forth. As such, the insurer is changing not only their property rates and underwriting but most everything they do and the changes are dramatic. 
  2. And while one might think that when a company changes its business in such dramatic ways that its competitors will, of course, swoop in to happily replace them the reality is that AIG is SO big that their competitors either follow their lead, have similar challenges or simply can’t easily fill the hole that AIG’s capacity reductions cause within the marketplace. 
  3. Amidst all of this Lexington, AIG’s non-admitted Excess & Surplus insurer, has seen a large increase in applications (submissions) between 20% and 75% even though it too has dramatically reduced the limits it is willing to write (50% to 74%) while increasing its rates (high teens to as much as 31%).  So despite increasing its rates the number of submissions illustrates that other insurers are not always easily able to take on the coverage that AIG is jettisoning.    

What does all of this mean? 

An increasingly volatile market will likely continue to “harden” over the next year or so as prices increase and insurer capacity to write certain lines or limits decreases.  The type of changes that AIG is making combined with AIG’s pre-eminent role within the marketplace has already begun to cause disruption and that disruption will, at least in some cases, continue in the near term. 

Thankfully Morris & Reynolds has seen this sort of market many times over our 70 years in business and we know what to do. We represent and have access to the market of leading insurers and have an established, aggressive request for quotation process to shop our clients’ renewals each year throughout the entire marketplace. 

By annually scouring and testing the market for competitive options we are able to establish and then negotiate the best insurers, coverage and cost. And, as our long term clients who have been through both “hard” and “soft” markets with us can attest, as the market improves (and it always does) our process allows us to find those insurers that are most competitive so as to negotiate reductions in costs and improvements in coverage.

If you have any questions about what AIG or the market is doing at this time please contact your professional Agent or Underwriter here at Morris & Reynolds as we are most happy to assist. And for the honor of providing your protection, as always, thank you kindly.

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