Don’t blindly deploy capital in a softening market: AIG CEO

In a softening insurance or reinsurance rate environment it’s especially important not to blindly deploy capital, according to Peter Hancock, President and CEO of major global insurance firm American International Group (AIG).

Speaking at a Deutsche Bank conference recently, the AIG CEO explained that in the currently softening insurance and reinsurance market, as pricing begins to deteriorate, AIG is particularly conscious about ensuring that its capital is put to work for a good return for its shareholders.

“We’ve been writing a lot less U.S. property cat, because the pricing environment has been severely impacted by lower prices in the reinsurance market,” Hancock explained to questions from analysts at the event.

Hancock explained the importance of getting the balance right between profitability, growth and risk assumed. He said that companies with premium targets are most at risk in a softening rate environment, as insurance or reinsurance companies targeted purely on premium volume written might be tempted to take on more risk in that environment.

The same is of course true for insurance-linked securities (ILS) funds and their managers. The need to deploy capital should not outweigh discipline in the business underwritten. Hence, despite the continued attraction that investors have for ILS, some of the larger ILS fund managers have been downsizing or keeping their portfolios static, rather than accepting new capital which they would have to put to work in the softened market.

Hancock went on to say that rather than incentivise underwriters on a premiums written basis, which can result in lower quality business being underwritten, AIG prefers to remove that incentive and to reallocate capital within its business.

Hence, at the same time that AIG has been reducing its underwriting of U.S. property catastrophe exposed insurance business, the insurer has expanded its international property practice, particularly where the focus is on highly engineered property, where Hancock said “we’re getting well paid.”

Rather than having local teams that each controlled a pool of capacity for underwriting, AIG has taken the approach that a single person has responsibility for allocating capacity within its global property business. This allows capacity to be deployed where clients need it, Hancock said.

The bottom line, according to Hancock, is that “as pricing deteriorates in one market or improves in another, we really are quite conscious about shifting our capital to where it’s best rewarded.”

If capital is not being rewarded well then AIG’s surplus would increase, as it wouldn’t put the capital to work, and the likely result would be to buyback more shares, Hancock explained, adding “We don’t want to just blindly deploy our capital in a softening market.”

Hancock’s comments are excellent advice for reinsurance companies, ILS funds and managers, collateralized reinsurers and any of the other alternative capacity providers in the insurance or reinsurance sector.

Understand the return appetite of your capital. If you can’t meet it, with the opportunities that are currently available to you, perhaps it’s time to either look elsewhere to find new opportunities which have better returns, or to return some capital to your investors.