Industry Needs Optional Fed Charter: AIG Chair

Mr. Greenberg, who delivered his remarks at the Property/Casualty Joint Industry Form in New York last night, also noted his powerlessness in changing the individual behaviors of underwriters who perpetuate insurance cycles, while imparting some positive news on the headway that he's made on issues like tort reform.

Advocating the option of a federal charter, he said: "We have been regulated by an 18th Century regulatory structure. We need to be in the 21st Century," highlighting the costs and administrative problems faced by commercial insurers that cover risks countrywide.

"It's not in keeping with what's really required in a market economy," he said "I would have very stiff capital requirements [and] no guaranty funds."

A company in Corporate America wishing to buy cheap insurance should take the credit risk, he said. Instead, solvent competitors are losing twice under the current system?once when weak companies "cut our prices and [again] when they go broke and we have to pay to bail them out" through guaranty fund assessments. "We shouldn't have to pay for the failures," Mr. Greenberg complained.

Later, sharing the conclusion of Fitch Ratings that the industry's reserves could be inadequate by as much as $70 billion, he noted: "One thing is clear. The industry needs some more stability if it's going to be healthy?It just makes no sense to go through this roller coaster every few years, where the downward spiral is much longer than the up-cycle."

But, he said, "I don't have any words of wisdom" to change this. "You have to change people," he said, sarcastically noting that those who do the most damage in perpetuating cycles "get fired?and then go on to a bigger job."

He did, indeed, impart some words of wisdom, saying that "the graveyard of companies" that relied on investment cash flow rather than underwriting strategies to make long-terms profits "is quite large." He added: "You've got to have your own strategy. Don't copy somebody else's strategy, [and] don't cut somebody else's rates 10 or 15 percent. There's nothing I can say that's going to make the industry operate differently."

While the overwhelming sentiment at the Forum seemed to be one of unqualified optimism, Mr. Greenberg hedged a bit. "I'm a little optimist about 2004," he said, predicting a "reasonably good year barring unforeseen catastrophes."

"Just don't get too enthusiastic, people," he cautioned the room full of industry executives.

Mr. Greenberg, who said he would put asbestos reform on the top of his wish list of issues to be resolved in Washington, also talked about how insurers struggle to get their voices heard in the nation's capital.

"We employ thousands and thousands of people [and] invest $915 billion in the capital markets"?an amount that exceeds banks. But while there is a Senate banking committee, there is no insurance committee, he said, adding that most federal legislators "know very little about insurance."

As for the asbestos reform issue itself, Mr. Greenberg suggested that a focus on medical criteria and caps on legal fees?without a trust fund component?was the way to go, because of the difficulties involved with getting different parties to agree on the allocation of shares.

Explaining why asbestos reform is the issue he is most concerned about, he said that "the most massive tort issue this country has ever encountered" doesn't just affect the insurance industry. "It's an economic problem. It's a problem that's hurting the country," since thousands of jobs are lost when companies go bankrupt.

Repeating some familiar themes, Mr. Greenberg also offered observations on tort reform and international accounting standards.

Tort reform is "both a good and a bad story," he said, noting that progress had been made in some states noted as judicial nightmares for insurers, including Texas and Mississippi.

"State by state, county by county, judge by judge, the battles are going on. But we haven't won the war yet," Mr. Greenberg said.

At the federal level, the battle is tougher to fight "because we don't have the structure we need," he said, again alluding to the lack of an insurance committee. But, "I think we'll get class action reform," he said noting that it's likely to be the second issue on the agenda of Senate Majority Leader Bill Frist, R-Tenn, with the federal budget being the only issue taking precedence.

As for international accounting standards, "mostly we're opposed to it?violently." In particular, AIG opposes a standard that would have every asset and every liability on the balance sheet stated at fair (market) value every quarter.

"You can't have one accounting protocol for all industries," he said, calling the notion "particularly offensive for the life industry."

It's appropriate for an investment bank trading securities to mark those to market everyday. In contrast, in the life insurance business, "when you're writing a policy for 20 years out, what do we care what happens to that investment up and down over the [course] of the 20 years?"

And, on the property-casualty side, "how would you mark liabilities to market everyday?" he asked.

The International Accounting Standards Board "doesn't understand anything about our industry. Other than that, it's a great idea," he quipped.