Insurance business models called into question
AIG Chairman and CEO Edward Liddy provided an interesting insight as the company gratefully caught hold of another US Government lifeline last week.
Mr Liddy said the company’s conglomerate structure is “too complicated and unwieldy” to be well managed as a single corporation.
His comments dovetail neatly with business commentators Forbes, which described AIG as “too big to fail, too complicated to succeed”.
As part of the latest $US30 billion ($47 billion) package, AIG announced the global group will be divided into smaller business units, with a holding company overseeing all general insurance businesses.
AIU Holdings will host commercial insurance, foreign general units and other property and casualty operations including the Australian and New Zealand businesses. An independent board and management team will steer the company.
Clearly a leaner and more focused structure is expected to lead the business to greater glory.
Confirmation that the AIG brand won’t be used by the new company also reveals the irretrievable damage done to a previously glittering name. The US Government has now provided $US180 billion ($280 billion) in federal aid to AIG in return for a 79.9% stake. AIG reported a $US61.7 billion ($96.1) loss in the fourth quarter, bringing full-year losses to a catastrophic $US99.3 billion ($154.6 billion).
Given AIG’s near-fatal addiction to credit default instruments, there are increasing noises in both international and domestic markets that insurers need to revisit their core operations – the business of underwriting.
Consider Allianz, driven to a full-year €2.4 billion ($4.7 billion) loss by former subsidiary Dresdner Bank this month, despite continued profitability in its core insurance business.
Closer to home is Queensland-based insurance, banking and wealth management company Suncorp. This month it delivered a $230 million insurance profit in the six months to December 31, while the bank contributed $97 million. Though rising insurance claims haven’t exactly lined Suncorp’s pockets, there’s speculation the bank is holding the general insurer back.
Mr Liddy’s comments suggest there is a point at which economies of scale are saturated and a company’s size begins to work against it.
Each case is of course different, a point made by Allianz Board of Management executive Clement Booth during a visit to Sydney last week.
“This whole notion of being too big to fail is relatively new and driven by the economic crisis,” Mr Booth told insuranceNEWS.com.au. “I don’t think efficiency or inefficiency is a function of size. There is a certain scale benefit for a large company, but if you are not efficient size becomes a potential negative and can make for an unwieldy situation when decision-making must flow down the organisation.”
Despite Allianz bidding farewell to Dresdner Bank, the German-based insurer still maintains banking operations and Mr Booth claims insurers don’t have to be a one-trick pony.
“Bancassurance is as powerful as it’s ever been,” he said. “There’s a distinction between owning a bank and distribution. While banks are different to insurance companies, where they share a common customer base and value system, a bank offers great connections.”
Consider Australian insurer IAG’s tie-up with the State Bank of India, which gives the company access to 100 million customers through 10,000 of its partner’s branches.
Morningstar insurance analyst David Walker points to the Commonwealth Bank of Australia as another example.
“I wouldn’t rule out the allfinanz model,” he told insuranceNEWS.com.au. “The Commonwealth Bank of Australia has something going on, and has had some success selling its own general insurance policies.
“I don’t think allfinanz will ever offer the greatest profits around, and you are not going to see double digit growth every year,” he said. “The problem for Suncorp is that it hasn’t worked. We think Suncorp should sell the banking and wealth management divisions.”
Mr Walker says it’s crucial the right people are appointed to lead a company that relies heavily on general insurance income.
“Suncorp shouldn’t be run by bankers,” he said. “If it were separated, then you would see career general insurance specialists run the business.”
Analysts point to the success of former chartered accountant-turned insurance expert Mike Wilkins in turning around the fortunes of IAG after former Westpac Bank executive Mike Hawker quit. But such arguments are just too simple – Zurich Australia CEO David Smith, for example, also cut his managerial teeth at Westpac.
And no one was more an insurance man than the legendary Maurice “Hank” Greenberg, who over 40 years built AIG into such a dominant force the group had to be propped up by government capital. Yet the move into subprime investments happened during Mr Greenberg’s reign.
But the US Government seems to support the notion that only “insurance people” can truly make insurance companies work. When it needed someone to sort out the AIG mess, it chose Mr Liddy, who was formerly the CEO of Allstate, the largest personal lines insurer in the US.
In the end it would be foolish to ignore one other business truism: wherever they come from, good managers are, simply, good managers.
Mr Liddy said the company’s conglomerate structure is “too complicated and unwieldy” to be well managed as a single corporation.
His comments dovetail neatly with business commentators Forbes, which described AIG as “too big to fail, too complicated to succeed”.
As part of the latest $US30 billion ($47 billion) package, AIG announced the global group will be divided into smaller business units, with a holding company overseeing all general insurance businesses.
AIU Holdings will host commercial insurance, foreign general units and other property and casualty operations including the Australian and New Zealand businesses. An independent board and management team will steer the company.
Clearly a leaner and more focused structure is expected to lead the business to greater glory.
Confirmation that the AIG brand won’t be used by the new company also reveals the irretrievable damage done to a previously glittering name. The US Government has now provided $US180 billion ($280 billion) in federal aid to AIG in return for a 79.9% stake. AIG reported a $US61.7 billion ($96.1) loss in the fourth quarter, bringing full-year losses to a catastrophic $US99.3 billion ($154.6 billion).
Given AIG’s near-fatal addiction to credit default instruments, there are increasing noises in both international and domestic markets that insurers need to revisit their core operations – the business of underwriting.
Consider Allianz, driven to a full-year €2.4 billion ($4.7 billion) loss by former subsidiary Dresdner Bank this month, despite continued profitability in its core insurance business.
Closer to home is Queensland-based insurance, banking and wealth management company Suncorp. This month it delivered a $230 million insurance profit in the six months to December 31, while the bank contributed $97 million. Though rising insurance claims haven’t exactly lined Suncorp’s pockets, there’s speculation the bank is holding the general insurer back.
Mr Liddy’s comments suggest there is a point at which economies of scale are saturated and a company’s size begins to work against it.
Each case is of course different, a point made by Allianz Board of Management executive Clement Booth during a visit to Sydney last week.
“This whole notion of being too big to fail is relatively new and driven by the economic crisis,” Mr Booth told insuranceNEWS.com.au. “I don’t think efficiency or inefficiency is a function of size. There is a certain scale benefit for a large company, but if you are not efficient size becomes a potential negative and can make for an unwieldy situation when decision-making must flow down the organisation.”
Despite Allianz bidding farewell to Dresdner Bank, the German-based insurer still maintains banking operations and Mr Booth claims insurers don’t have to be a one-trick pony.
“Bancassurance is as powerful as it’s ever been,” he said. “There’s a distinction between owning a bank and distribution. While banks are different to insurance companies, where they share a common customer base and value system, a bank offers great connections.”
Consider Australian insurer IAG’s tie-up with the State Bank of India, which gives the company access to 100 million customers through 10,000 of its partner’s branches.
Morningstar insurance analyst David Walker points to the Commonwealth Bank of Australia as another example.
“I wouldn’t rule out the allfinanz model,” he told insuranceNEWS.com.au. “The Commonwealth Bank of Australia has something going on, and has had some success selling its own general insurance policies.
“I don’t think allfinanz will ever offer the greatest profits around, and you are not going to see double digit growth every year,” he said. “The problem for Suncorp is that it hasn’t worked. We think Suncorp should sell the banking and wealth management divisions.”
Mr Walker says it’s crucial the right people are appointed to lead a company that relies heavily on general insurance income.
“Suncorp shouldn’t be run by bankers,” he said. “If it were separated, then you would see career general insurance specialists run the business.”
Analysts point to the success of former chartered accountant-turned insurance expert Mike Wilkins in turning around the fortunes of IAG after former Westpac Bank executive Mike Hawker quit. But such arguments are just too simple – Zurich Australia CEO David Smith, for example, also cut his managerial teeth at Westpac.
And no one was more an insurance man than the legendary Maurice “Hank” Greenberg, who over 40 years built AIG into such a dominant force the group had to be propped up by government capital. Yet the move into subprime investments happened during Mr Greenberg’s reign.
But the US Government seems to support the notion that only “insurance people” can truly make insurance companies work. When it needed someone to sort out the AIG mess, it chose Mr Liddy, who was formerly the CEO of Allstate, the largest personal lines insurer in the US.
In the end it would be foolish to ignore one other business truism: wherever they come from, good managers are, simply, good managers.