AIG’s Greenberg Predicts ‘Leaner, More Responsive’ Insurance Brokers in Wake of Investigations

December 2, 2004

The chairman and chief executive officer if AIG said he thinks the ongoing broker investigations will cost large insurance brokers some of their top people and eventually make brokers leaner and more responsive to customers.

Speaking at Lehman Brothers Global Reinsurance Briefing, Maurice Greenberg said that large brokers under scrutiny will survive but will be “leaner and more responsive to the fiduciary relationship they have with their” clients in the future.

He suggested the exodus of leading brokers from some of the larger brokerage houses has already begun.

Greenberg compared the brokerage industry to the airlines.

“There’s the old model and the new model: The old model firms are in bankruptcy or constantly working on how to cut expenses,” Greenberg said. “The new model — the Jet Blues of the world — are leaner, working for less fees and commission and doing quite well.”

“Like it or not, many insureds are unhappy” with some of the practices that New York Attorney General Eliot Spitzer and other officials have uncovered and that to the extent this makes the industry “leaner and more responsive,” the changes that flow are welcome. “I’m not unhappy about that,” he said.

He said that disclosure of broker commissions would become the “rule rather than the exception” in the industry, even if it were not mandated. Exceptions may depend upon the state and the type of business.

One of the targets of investigators has been the practice, known as “tying” which occurs when a broker ties the placement of business with certain insurance companies to the promise by those insurers to use the broker for reinsurance.

Greenberg suggested that such tying practices will probably come to an end and that other changes in terms of broker relationships to reinsurers are possible.

“Will a broker be able to own a reinsurance brokerage firm that is getting business from the same insurance company that it wrote a retail account with?” Greenberg said. “I don’t know. It’s hard to say. There are a lot of changes under way.”

AIG is the world’s largest buyer of reinsurance, Greenberg pointed out, noting that his firm will only do business with sound reinsurers.

“I’d rather retain the premium than give it away to someone who won’t be there in five or 10 years,” he said.

He suggested that some insurers and reinsurers in the industry have been too quick this year to lower prices on directors & officers (D&O) policies.

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