With the eyes of Wall Street on troubled insurer American International Group, a former insurance company CEO-turned-business school dean on Tuesday offered his insight on the industry.
Terry Broderick, dean of the McColl School of Business at Queens University, worked 30 years with Royal & Sun Alliance USA, the last two as chief executive. He retired in 2002. Based in England, Royal & Sun Alliance last year sold its Charlotte-based U.S. operations to Arrowpoint Capital Corp.
Broderick has observed the recent activity with AIG. His comments have been edited for brevity and clarity.
Q: What's going on with AIG right now?
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The property and casualty parts of the business are substantially well-capitalized. There's as much as $30 billion in capital available to them. The interesting thing in the last 24 hours is that AIG has been attempting – after attempting to secure capital infusions from other sources – to move capital around the company.
Regulation prevents the holding company from moving on those assets and redistributing them to other parts of their enterprise. But the New York governor is seeing if the state insurance department will allow AIG to redistribute some of that capital to other parts of the business, or to make that capital available as collateral for securing other infusions from the likes of JPMorgan Chase or other institutions.
Q: What is the role of AIG and the insurance industry in the economy?
It's pretty straightforward. The economy doesn't run without insurance. It is an indisputable fact.
If you're financing or leasing a car, you're going to be required to have insurance. The same thing with your house, the same thing with any piece of commercial property. All of those investments depend on the provision and availability of insurance to guarantee to the lender that there is support behind those assets.
Q: What's the ripple effect of struggles at an insurer?
Hurricanes and natural disasters have an impact on insurance prices. That's direct.
If there is capital impairment at a company, then they have less scope to write business. The availability of insurance won't be as great, and that can be a direct impact on a potential purchaser.
If a company's results are turning poor, they're going to tighten underwriting standards, again affecting availability and likely raising prices. There really are a lot of ways a consumer can be affected by the current state of affairs.
Q: What happens to policy holders if an insurer can't pay?
There are some guarantees. Unlike other industries, insurance regulation is very much on top of the capital position of a company. When the red flags start to appear, the regulator can get directly involved in the management of a company, and there have been cases when the regulator will take over the management of a company to make sure there's a favorable outcome.
To my recent memory, there haven't been any major failures I can recall in the insurance industry, unlike what we've seen in investment banking.
Q: What is the insurance presence in Charlotte?
You've got Arrowpoint Capital, which is successor to Royal & Sun Alliance. You don't really have any other major carrier, but Wachovia has a not insignificant insurance brokerage operation.
Then you have any number of insurance agencies and brokerage operations around the region. If there isn't the availability of insurance, then they're not selling insurance. That has consequences for their employment situation.
Q: How does the AIG situation compare with your time in the industry? Have you ever seen anything like this?
In my time, to suggest that AIG could go under would have been really far-fetched. AIG was viewed as capable, expert, successful, well-managed and as strong as any insurer in the business. To think of that sort of insurance icon coming to this point is really quite unbelievable to me. It's quite shocking.