AIG Edict On Re Gets Mixed Reactions International Editor
London
American International Groups recent decision to ask for collateral from some of its reinsurers is bringing mixed, sometimes worried, reactions from the marketplace.
"Reinsurance is a long-term business, and we will not place reinsurance, particularly so-called long-tail business, with a reinsurer that doesnt have adequate financial ratings unless they post collateral that meets our standards," said Maurice Greenberg, chairman and chief executive of the New York-based AIG during a recent annual shareholder meeting.
He said this will apply to both domestic and foreign reinsurers, which means that alien companies, which have to post 100 percent of their gross liabilities in a U.S. fund, will have to put up another collateralization for AIG, sources said.
Theyve now decided that fundamentally, they dont want to have exposure to certain reinsurers, according to a reinsurer underwriter who didnt want to be identified. "Theyve gone from having a broadly placed reinsurance program with lots of reinsurance recoverables out thereand some of them looking a bit dubiousto a situation where theyre focusing on a limited number of players," he said.
The problem with this is that AIGs reinsurance recoverables will become even more concentrated, he said. Therefore, if one of those on the approved list get into trouble, "theyre presented with an even bigger problem," he said, explaining why AIG has decided to impose the extra requirement of having reinsurers that have been downgraded put up collateral.
Generally, AIG also doesnt want to have any primary insurers with reinsurance operations as reinsurers because of AIGs perception of what the pecking order would be for recoveries in the event of an insolvency, the source said. He explained that this is an issue because some jurisdictions put a reinsurance creditor after an insurance creditor.
The reinsurance underwriter said he didnt think the request had been received with overwhelming enthusiasm by those companies that have been chosen to be on AIGs approved list. "The cost of doing this and the strain on companies for doing it is potentially huge. And then if you agree to it for AIG, why would you refuse it to anybody else," he questioned.
"It certainly takes away what the broker would perceive to be one of their greatest strengths, which is the power to syndicate. If you can only work with a handful of reinsurers, low and behold youve lost your power of syndication," he said.
As part of U.S. regulatory requirements, alien reinsurers will put up letters of credit on outstanding losses, rather than incurred but not reported claims, the underwriter said. But Mr. Greenberg expects an LOC on everything, including unearned premium reserves, he added.
AIG officials were unavailable to comment on the nuances of the move.
According to a broker source who didnt want to be identified, the following markets are approved for casualty facultative and treaty: Converium, Everest, General Re, Swiss Re and XL Re.
In addition Hannover Re, Allied World Assurance Corporation, Chubb Re, and PartnerRe are approved for casualty treaty only, the broker said, while in the United Kingdom, Faraday and HSB have been approved for casualty treaty.
At a recent meeting of the International Underwriting Association, Stephen Cane, the associations chairman, said AIGs move to require collateral represents a "very worrying trend."
"What sort of message does this send to our regulators, that we ourselves dont trust the people in our industry or we cant work out who are the good guys and who are the bad buys from a financial perspective," he said.
"Weve got to be careful as an industry if we pursue that without thinking about the implications then we could actually shoot ourselves in the foot," he said during an interview.
"We could actually harm ourselves, as an industry, and [harm] the public confidence and the commercial buyers confidence in our ability to pay," he said.
"Theres not a professional insurer or reinsurer who buys reinsurance or retro cover that doesnt have its own security lists nowadays," Mr. Cane continued. "We vet all the security thats provided but we dont necessarily ask for collateral for everyone; for some we do," he said.
The broker said the edict from AIG also covers property business for Lloyds. "As far as cat business is concerned, AIG has said they would seek a letter of credit [from certain markets] for outstanding losses, excluding IBNR," he said.
He explained that if there is another Hurricane Andrew and AIG has a $200 million loss, "when they present their first claim, excess of a certain amount, they will ask for a letter of credit on the outstanding balance."
"So theyd actually be talking about a double call for financial commitments," to meet current U.S. regulatory requirements plus the LOC that AIG will require, he said.
The broker was less concerned about the AIG move. "I think if I were at AIG, Id probably do something similar from time to time," he said.
It may, in part, be a reaction to those AIG reinsurers that have capital, but are non-active and are offering only 70 cents on the dollar, he speculated.
Brokers throughout the market suspect that they will gradually be able to get the approved list expanded for certain instances, for special relationships, the broker said.
One benefit of this action is to "shake out some of the stickier cash flow on their existing business," he said.
Secondly, because AIG is one of the strongest marketing groups around, this helps "to put pressures on regulators, auditors and internal compliance officers to consider doing something similar," the broker said.
(For more of Mr. Greenbergs comments about reinsurance from the annual meeting and earlier investor conferences see May 14 and April 29 stories on NUs Online News Service at www.nationalunderwriter.com.)
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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