AIG's Hancock Tackles Emerging Risks, NFIP and TRIA

Peter D. Hancock, who became chief executive of AIG's global P&C business when it split into separate commercial and consumer groups, shared his worldwide view of the industry's true hurdles in 2014.

“History doesn't repeat itself; it rhymes,” quoted Hancock, CEO of AIG Property Casualty, drawing a parallel between Mark Twain's words and the changing global risk landscape.

In fact, one ancient remnant made the first impact of its kind on AIG Property Casualty last year in the form of a meteorite claim filed by a Siberian warehouse insured against earthbound space debris.

Hancock was speaking on a panel outlining emerging risks and opportunities within insurance. He cited climate change, cyber insurance, alternative capacity and public-private risk transfers as trends watched by AIG's P&C executives.

Cyber attacks also rated high on Hancock's list as a “real risk that is massively underinsured” despite the significant risks to businesses great and small. Some 525 breaches occurred so far in 2013, he noted, affecting companies required to contend not only with various privacy and notification laws in nearly every state, but also with impending protocols for government action.

Hancock said public-private risk control mechanisms may ensnare the insurance industry and wider economy as the National Flood Insurance Program “is renewed every year despite its costs and the distortions it creates to the building industry” by allowing real estate development in flood-prone areas.

Tapping into Emerging Markets

World Bank consultant Rodney Lester gave tips on ensuring sustainable insurance growth in the fertile but foreign soil of emerging markets.

Emerging markets (EMs) are the seeds of the future, accounting for most of the world's growth—and Lester, senior consultant with the World Bank, focused on the opportunities and risks of cultivating them.

For example, in Latin America, increased economic development and improvements in wage levels and living standards has made capitalizing on this region a necessity, not a luxury, for insurance organizations.

Other indicators of a good regional opportunity are a country's level of private credit and infrastructure development, as well as a healthy regulatory system that discourages potentially insolvent insurers. But not all EMs are created equal—and great care must be taken in the development of an action plan appropriate to the region being considered.

“You must carefully think through your entry tactics once your target markets have been identified,” Lester added. “You can't enter an emerging market with a traditional insurance model.”

A 'ginned-up' way of thinking

Regulatory scrutiny that followed the financial crisis is forcing insurance CEOs to spend an inordinate amount of time on compliance to solve problems that do not exist and satisfy regulators who “don't understand the industry,” said Hanover Insurance Group's chief executive.

CEO Fred Eppinger said the need to view insurance companies like banks is a “ginned-up” one, and as a result, “I spend two to three times more today on regulatory issues than before.”

Although the low-yield environment has driven some insurers to take on more investment risk, he said one of the biggest differences between insurers and banks is insurers' small scale of debt and leverage, which helped the industry weather the recession without putting companies out of business.

“What problems are we trying to solve?” asked Eppinger, stating that the industry is well-financed and has substantial levels of capital. “I worry that we'll change a system that works, for the sake of consistency.”

U.S. Regulators Taking a Cue from International Orgs

Deputy secretary general of the International Association of Insurance Supervisors George Brady discussed the task of leading increasingly interconnected economic systems toward common goals.

Overseas regulatory bodies are increasingly guiding the work of their U.S. counterparts, Brady said, while the association's influence in developed and emerging markets also is growing.

Brady said the IAIS, a voluntary membership-driven organization of insurance supervisors and regulators from more than 190 jurisdictions in more than 140 countries, aims to use the increased interaction to “bring global solutions to global issues.”

Among the IAIS' initiatives is a confidential web portal enabling insurers to exchange information, and a methodology for identifying systemically important financial institutions. It also stands behind Solvency II, the EU directive to regulate insurance companies in order to ensure their solvency.

“The U.S. is becoming more cooperative internationally at a time when there has been a great deal of activity to guard against a repeat of the [2008 to 2009] financial crisis,” Brady added.