In search of a virtuous circle – Peter Hancock, AIG

Peter Hancock took charge of AIG’s global property casualty business in March of 2011 when AIG announced a major reorganisation of Chartis, the name of its global property casualty business before it rebranded back to the AIG name earlier this year. Mr Hancock had formerly held the title of AIG Executive Vice President, Finance, Risk and Investments. AIG had just come through a very tough ride that saw the US government make an investment of just over $182.2bn in the company because it was deemed too central to the US economy to be allowed to fail. Thankfully the government bailout proved a success. AIG chairman Robert Benmosche and his leadership team last year completed the company’s repayment, including a $22bn profit on the loan, while at the same time keeping its business on track.hideAIG’s customers in the commercial and large corporate sector proved remarkably loyal during the difficult period and retention rates remained high. Ninety-seven per cent of Fortune 500 customers stuck with the insurer. Rivals accused the company of using taxpayer money to undercut competition and save the business. Others said that customers were actually left with little choice but to back the US-based monolith because options remained so few on the ground. Whatever the reason for customer loyalty, it was clear to Mr Hancock and his colleagues that if the company was to prosper it would have to offer customers a much more rational and unified offering—one AIG, rather than a collection of diverse and often confusing operating units across the globe. Serious change was needed, he told CRE 24 months ago. “We have a very geographically diverse, global company with offices in over 90 countries. The business was managed historically in two divisions: international and domestic [US]. But these divisions were also split into many, many different brands and individual legal entities such as American Home and AIU,” he explained at the time. Mr Hancock’s property casualty unit was reorganised into two major global groups—commercial and consumer—with the supporting claims, actuarial and underwriting disciplines integrated into the two major business operations. “Our top priorities for our property casualty businesses are to strengthen all aspects of our underwriting, claims management, reserving and risk management so that we consistently earn the right risk-adjusted returns,” Mr Benmosche said at the time of the restructure. Mr Hancock said in 2011: “The creation of Chartis was done partly to stitch together, under one brand, the two divisions and their multiple brands and entities. But this didn’t eliminate the fact that customers were still dealing with many different areas within Chartis. The reorganisation and creation of global commercial and consumer insurance lines of business was, therefore, part of an attempt to rationalise underwriting decisions and simplify decisions for customers.” Prior to joining AIG, the British-born Mr Hancock had established the Global Derivatives group at JP Morgan, ran its Global Fixed Income business and Global Credit portfolio and served as its Chief Financial Officer and Chief Risk Officer, before founding his own advisory firm specialising in strategic risk management and asset management. He told CRE that in many ways ensuring customers’ expectations were met during AIG’s difficulties was a greater achievement than paying back the taxpayer. AIG also managed to add new customers, lines and territories to the business during this tricky period. “So momentum is good. There has been a strict focus on the core business and we have shed the non-core assets. Property Casualty is the largest subsidiary within AIG and has done well. We have had 10 straight quarters of improved accident year loss ratios resulting from improved underwriting and claims management,” explained Mr Hancock. An interesting part of the AIG story over the last five years is that, while it has clearly been highly focused on survival and the achievement of immediate tactical goals, it has not taken its eye off long-term strategy. Mr Hancock and his colleagues are determined to retain and use the lessons learned in recent years to ensure that the company continues to grow on the back of a deep and committed adoption of state-of-the-art risk management principles and strategies. One example of this commitment is AIG’s approach to risk analysis and innovation, was its decision to hire a large team of scientists to help understand the exposures that it and its customers are running on a daily basis, explained Mr Hancock. INVESTMENT IN PEOPLE “We have created a science team, reporting to a chief science officer, with a staff of 100 people. Combined with the even larger investments we are making in our claims and Property CAT engineering capabilities, we are really building a new property offering for existing and new clients on a truly international basis. We are offering large limits on a highly engineered basis and this is very, very exciting for the long term because of the wealth of insights we are able to gain and share with our customers from our data that is married with external data. These analytics enable us to collaborate with clients and manage risk better,” explained Mr Hancock. AIG is certainly not alone in waking up to the power of data and analytics to support rational and risk-based underwriting decisions that should create a much more robust and less volatile market for all. But given Mr Hancock’s capital markets and derivatives background it comes as no surprise that he is a big fan of the rational, data-driven risk decision-making approach. “Our science team promotes data-driven decision-making across the company. We have seen unbelievable benefits from a better understanding of claims leakage for example,” he said. “We deal with about $100m in claims a day, so any marginal improvement that can be found will be felt fast because of our scale. The key point is that you have to invest in the right people, technology and the best minds in academia. This again helps you to come up with much better pricing and risk differentiation. The risk is then better underwritten,” continued Mr Hancock. It is logical to assume that if the whole market has bought into such a philosophy to differing degrees then the underwriting cycle will surely have finally been conquered. Combine this with the levelling in the barriers of entry for capital into the insurance market surely one can assume that the cycle is well and truly extinct. “Partially,” postulated Mr Hancock. In his view there are a number of factors that are at play and flattening the cycle. First there is capital fluidity. “There are a number of reasons for this [flattening of the cycle]. When the market begins to harden, fresh capital arrives much faster than it did in the past because the market is more accessible. There is much more fluidity than in the past,” he said. Second, there is the fact that most decent insurance and reinsurance groups have worked out that quality is actually more profitable than quantity. “Most insurance companies are now focused on underwriting good risks rather than volume and the need to assert discipline in a soft market. This means that there is a better matching of supply and demand,” said Mr Hancock. And third, there has been a significant improvement in the way risks are internally analysed, managed and allocated within most insurance groups. “Internally things have changed. We have changed the governance of AIG so that it is now much more one group rather than a collection of somewhat disparate units. This means that if there is any sign of hardening in certain sectors we can move our capital internally to make the most of the opportunity,” he said. These factors inevitably combine to smooth the cycle, said Mr Hancock. The positive impact of this shift in emphasis—away from the former obsession with the price of coverage on renewal—is that attention is now shifting to service. If price has diminished as a key competitive differentiator, or edge, then the focus on service has to sharpen. It also means an increased focus on frictional costs. If insurers cannot rely on fat price hikes and juicy investment returns to boost the bottom line then they have to get serious about frictional costs such as distribution. The big question from the customer’s perspective is: How can insurers ensure that all their good work on risk analysis and frictional cost reduction can actually be put to good use and fed down into discussions with customers? And then how can this result in more accurate pricing and risk differentiation? “Exactly by removing the deadweight cost,” argued Mr Hancock. “We met with our major customers and held sessions with product and claims experts to rethink the value chain to optimise those areas that create frictional costs,” he said. CROSS-MATCHED From insurers’ perspective this makes sense because after time has been spent with the biggest customers, the clever insurer should be able to use the insights and apply them to other customers. “This is true knowledge-sharing that gives benefit for everyone. This requires very close collaboration with core clients to unlock insights and requires a team effort with claims and underwriting,” said Mr Hancock. This makes a lot of sense of course and it is certain that the vast majority of CRE readers would welcome such an approach, if they could spare the time themselves to go through such a process. The danger is that if not pursued vigorously, such effort may end up becoming, in itself, another corporate frictional cost. “It’s all about focus,” said Mr Hancock. “There’s a focus on a small number of insurance providers on the part of the customer, and for us it is about focusing on our largest customers where there is a big payback if we create efficiencies. We then look to generalise these insights with other customers,” he continued. The pursuit of this strategy is one of the reasons for the decision to simplify the AIG business, explained Mr Hancock to CRE 24 months ago. He said that such simplification had really helped to support this strategy. “It was very helpful and here’s a good example. We created a global property practice, whose head, George Stratts, is based in London and controls property underwriting for AIG all over the world. So when a multinational comes to us with a global programme this creates a very different and superior customer experience with AIG, and they feel they are dealing with one company,” said Mr Hancock. The simplification, or de-federalisation, of the group has also helped AIG to better balance its risk concentration and use its capital more effectively, said Mr Hancock. “The new system, whereby we can offer a single capacity, worldwide, in very big volumes, on a highly risk engineered basis, in places where local risk appetite was historically limited, is a big step forward. We are able to do this as ‘one AIG’,” he explained. The more rational structure of ‘One AIG’ is also a big help in the important area of global programmes, an area that the group is very keen to focus upon. It allows for a consistent and smooth workflow across many borders that most risk managers really want when they plan and organise their cross-border coverages. “We have very stable capacity and offer complex underwriting ability, but it’s also about service and the ability to provide information in a timely manner and in a consistent form. So again it involves focusing on IT infrastructure and data, and adding value in the way the programme is structured. Global programmes are complex and require consolidation in the way we operate in all of our countries. I am pleased with the progress so far but this is something that needs continual attention,” said Mr Hancock. Global programmes are not made easier by rapidly changing underwriting conditions. The debate over supply chain and business interruption following the Thai floods stresses again how important rich and relevant data can be for insurers when they assess and price risks. “Supply chains are changing and we have to help customers manage their ongoing business interruption risks. You have to ask how to get the data cost effectively and reflect the real needs of the underwriter. This can take a lot of time and effort so it needs to be proportionate,” said Mr Hancock. The proportionate point is an important one to recognise. As Mr Hancock is more than aware, the allegedly excessive and apparently random demands for new information from insurers in such tricky lines in recent times has upset a lot of risk and insurance managers in Europe. Many of the risk and insurance managers that CRE has interviewed on this topic want to have a much more grown up conversation with their insurers about supply chain and what information is really needed to deliver robust Contingent Business Interruption (CBI) coverage that works when needed. “Part of the challenge is to acknowledge centrally how to get the data and be more specific about what data you are looking for,” said Mr Hancock. “There has to be an element of explanation. You have to carry out data mining at first to see what data has the best predictive power. You gain insights on both sides by doing this. The data you gathered ten years ago may have been valid but that may well have changed. You need to be smart,” he continued. The annual renewal cycle does not make life easier for anyone, especially as data demands rise. So multi-year deals are an option, according to Mr Hancock. “Customers are buying into this. The challenge is to make sure that there are no regrets from either side in the second or third year,” he said. Mr Hancock said that the debate over supply chain and CBI is a great example of the problems encountered by risk managers and insurers in the international market. “The CBI debate has been very interesting and is very much still a frontier in terms of data. Our science team in Europe, led by Ashley Hirst, has looked very closely at this topic and why customers are, and are not, willing to share data to understand this risk better,” said Mr Hancock. Interestingly, Mr Hancock said that risk managers could regard the insurance tender process as a useful way of focusing on the real risk fundamentals and the point of buying coverage in the first place. “The company may be happy to take the risk based on a cost/benefit analysis. But this does need to be better understood and priced. Insurance is one way that customers can benchmark and assess the trade off between shorter and longer supply chains,” said Mr Hancock. At the end of the interview Mr Hancock was asked to summarise what he regards as the big three objectives for AIG in the large corporate sector in coming years. He identified these as, first, the achievement of balance between risk, profitability and growth. Secondly, a focus on capital and investment in promising markets and delivering lasting innovation. Thirdly, ever-improving service standards. Mr Hancock explained: “First, you have to maintain a good balance between profitable growth and risk. We are improving profitability and we have our risk within acceptable parameters.” “I would like to see more growth. Clearly there are still some challenges in the eurozone. But if the European economies start to recover it will be helpful given our major commitment in Europe. Emerging markets have had a rocky year but there are still tremendous opportunities. We have entered into a second joint venture with PICC in China, and we have recently announced a 10-year joint venture in Turkey with HSBC. “Second, we will continue investments in innovation and take full advantage of data science. We have to constantly look at how we can be a more valued insurer for customers, focussing on value not volume. We have to focus our capital in the sectors in which customers value the role and input of insurers and brokers and in which we can work together to the common benefit. This is challenging, but we have to deliver it,” concluded Mr Hancock. The AIG man’s hope that the insurer becomes a ‘more valued’ insurer for its customer is surely the telling objective. If any insurance company can genuinely work out how to make itself more valued, and thus competitive, through service delivery rather than price, at the same time as meeting shareholder returns, it must be on to a winner. In AIG’s case it would do well to retain the memory of the experience of the last few years for as long as possible. The main reason that the property casualty business was able to pull through was customer loyalty. Future AIG executives should bear that in mind when all seems to be swimming along nicely and the temptation to seek stellar growth in exotic new markets may appear again.

In search of a virtuous circle – Peter Hancock, AIG

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