When American International Group (AIG), the world’s biggest, meanest, and supposedly safest insurer, collapsed into the government’s arms in September 2008, there must have been a few cheers from its rivals. Many hoped to win its customers, particularly large firms paranoid about having high exposure to one (dodgy) counterparty. It also seemed possible that the model for insuring companies’ big risks-buildings or a mine, for example-might change. Instead of placing them with a few insurers, it might be better to syndicate out those risks to many, not least through Lloyd’s, the insurance market founded in a London coffee house in 1688.
Eight months on, the revolution has yet to arrive. There has been no stampede of corporate customers from AIG, says Andrew Rear of Oliver Wyman, a consultancy. Loyalists reckon this reflects the fact that its insurance operations were safely ringfenced from its kamikaze derivatives adventures. Sceptics point out that since the bail-out it has the backing of a government that (for now) retains a AAA credit rating. Yet despite AIG’s refusal to die, the instinct of customers to diversify is still alive. Sally Bramall of Willis, an insurance broker, says that big insurers are no longer assumed to be safest or best, and that clients are prepared to put their eggs in more baskets.
How they do this is, however, less clear. One possibility is that traditional subscription markets do better, most noticeably Lloyd’s. There, the end customer enlists a broker to place his risk among multiple syndicates (which are, in turn, often dominated by outside insurance firms). The customer gets a single contract, but the potential losses are spread. And because the market is partly mutually owned, the customers have the security of both syndicate members’ capital and, as a last resort, a shared cash pool funded by all members.
Mark Gregory, chief executive of Bowring Marsh, a unit of insurance broker Marsh, says clients particularly admire the skill of Lloyd’s underwriters at dealing with unusual and complex risks (try Ugly Betty’s smile). Most observers note its improved risk management too, which should prevent individual syndicates from losing their discipline, or falling victim to the “herd mentality” that one industry veteran says is Lloyd’s’ historical weakness.
Furthermore, even by the relatively hygienic standards of most insurers, the asset side of Lloyd’s’ balance-sheet is squeaky clean, while the toxic claims that brought it to its knees in the 1990s are now parcelled off to Warren Buffett’s Berkshire Hathaway. And, for the customer, the benefits of having a single contract with one set of wording and terms should not be underestimated. After the September 11th terrorist attacks, some insurance companies, which had written slightly different contracts, disputed whether one or two events had occurred, says Chris Hitchings, an analyst at Keefe, Bruyette & Woods.
Yet for all that, a big shift towards subscription markets does not seem imminent. In part that reflects the relative lack of scale of Lloyd’s. Europe’s leading insurance companies rival it in terms of non-life premiums written and balance-sheet oomph. Such firms’ big books of business should allow their customers to benefit from diversification. And just in case they “do an AIG”, there are other ways to spread risk. Brokers already take big bits of business and split them among individual companies, Lloyd’s, and other markets such as Bermuda (where rather than using a subscription model, the lead insurer often subcontracts risk to peers). In the future many clients may just instruct their brokers to divide up the business even more-and sort out the resulting complexity.