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AIG's President of Property: No Tolerance for Ambiguity of Risk

Source: A.M. Best - Meg Green

Posted on 19 Oct 2012 by Neilson

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AIGThe devastating catastrophe losses of 2011 were a game changer for the insurance industry, said George Stratts, president of AIG Property Casualty's Global Property Division.

In a typical year, two-thirds of catastrophe losses stem from the United States, but 2011 reversed that trend, and two-thirds of the cat losses came from outside the U.S., Stratts said. "So the industry learned a lot of valuable lessons and has to look at the rest of the world, from a cat perspective, differently," he said.

Also, some in the insurance industry were surprised by the number of contingent business interruption claims. For instance, after the Japan quake and tsunami, some factories that were damaged were unable to produce products not just for a single customer, but for an entire industry.

"The globalization of industry...and the interdependency you see around the world has changed the footprint of insurers' exposure basis," Stratts said.

Business interruption and contingent business interruption underwriters are now asking for more detailed information about clients' key suppliers and the suppliers of suppliers.

"Where there is not certainty, the coverage is being limited and the deductibles raised," Stratts said. "The tolerance of ambiguity has dissipated with the losses, and evidence that manufacturers have grown more complex. The nature of risk has changed, so the nature of understanding that risk and the coverage around it has to change as well."

Devastating earthquakes in Japan and New Zealand, plus unprecedented tornado, wind and hail activity in the United States and flooding in Thailand resulted in record insured losses for 2011. Insured losses were $105 billion, topping the previous record of $101 billion from 2005, the year that hurricanes Katrina, Rita and Wilma struck, , according to Munich Re and the Insurance Information Institute. Insured losses from natural catastrophes in 2011 were three times higher than the 10-year average annual insured loss.

The insurance industry used to believe that diversifying business "on any basis was good," Stratts said. "That pure credit given to diversification needs to be rethought."

"Diversification is only good if the underlying data is understood, and the models that help you interpret the underlying data are robust and their interconnectedness is clearly understood. And that wasn't the case in 2011," Stratts said.

For instance, 30 years ago Thailand had rice paddies, not factories. "By putting all those factories in the middle of a flood plain, how does that impact the land? How does the flood behave differently? How does it impact normal rain? That's not just in Thailand, but in China, and in other parts of Southeast Asia where there's been rapid industrialization," he said.

Emerging markets may not have the same quality of data or modeling available as for risks in the U.S. or Europe, Stratts said.

"If we've learned anything from 2011, it's that there needs to be a standard of data that we would expect regardless of location. Just because an asset is in a developing country that is seen as emerging, and economic activity is growing at a much faster pace than the U.S. or Europe, doesn't mean you forgive the data or discount the need to understand the risk," Stratts said.

"There clearly needs to be a greater understanding of that going forward, and a greater transparency around that data," he said.