The keynote speaker told the professional liability insurance underwriters that regulation is not the enemy of business growth, the plaintiffs’ bar is their ally, deleveraging of financial institutions is a good thing, financial firms have not learned the lessons of the 2008 financial crisis, some cherished actuarial methods are obsolete, and insurers should incorporate more poetry in their thinking.
He also addressed global poverty.
Words from some left-wing, anti-business, Occupy Wall Street type?
The speaker happens to occupy an office near Wall Street but he’s not anti-business, and he’s not anti-insurance at all.
Peter Hancock, CEO of Chartis, the big global property/casualty unit of even bigger American International Group (AIG), delivered the keynote address at the recent Professional Liability Underwriting Society (PLUS) meeting in New York and used the occasion to recast some of the traditional villains and methods of the P/C industry in some unusual light.
“No way do I believe that banks, brokerages or insurance companies have learned the lessons of 2008,” said Hancock, whose company’s parent firm, AIG, was among those that were bailed out during the financial crisis.
Hancock said the insurance industry, while remarkable in its ability to absorb major catastrophe losses, is currently “acting like capital is free and will always be there” when it needs to be acting smarter about where to deploy its capital now.
“We are cruising for another financial crisis and so we as an industry need to be prepared for that,” he told the PLUS audience. “2008 was a dress rehearsal for the big one.”
He said another financial collapse is inevitable, as are more natural catastrophes.
Hancock, who has been mentioned as a possible successor to current AIG CEO Robert Benmosche whenever he steps down, was named CEO of Chartis, AIG’s global property/casualty business, in March 2011 when Chartis was reorganized into two major global groups, commercial and consumer. He had joined AIG just a year earlier to serve as executive vice president for finance, risk and investments.
Hancock has spent his career in financial services, including 20 years at J.P. Morgan, where he established the global derivatives group, ran the global fixed income business and global credit portfolio, and served as the firm’s chief financial officer and chief risk officer. He co-founded and served as president of Integrated Finance Limited, an advisory firm specializing in strategic risk management, asset management and pension solutions. He joined AIG in 2010 from KeyCorp, where he was vice chairman, responsible for Key National Banking.
Hancock was raised in Hong Kong and attended Oxford University where he earned his Bachelor of Arts degree in Politics, Philosophy and Economics.
In his PLUS remarks, and a later interview with Insurance Journal, the veteran financial services executive defined the mission or “unifying theme” of insurance as being to “make the world a safer place” and said he thinks both regulators and the plaintiffs’ bar play important roles alongside insurers in carrying out this mission.
The plaintiffs’ bar helps identify dangerous practices and products and “even though there is dead weight costs,” the role these lawyers play is essential, he said. “We need the balancing effect of litigation,” he said.
He said regulation, including that for cars and products, is also meant to promote safe practices.
“But regulation can only go so far to promote safety,” he said, maintaining that insurance is an important complement to this effort.
Similarly, he said, the government requiring banks to deleverage is “smart” policy.
“I don’t buy that regulation will delay economic recovery,” he said. Rather, he said, unwinding derivatives and leverage of big banks will help restore confidence in financial markets and reduce the fear that is hindering investment and business growth.
He said one of his own fears is that there will be attempts in the current economic and political climate to reverse globalization, which while not without problems has helped reduce poverty around the world.
He said the deleveraging of big banks should continue and may present an opportunity for P/C insurers in that they can be recipients of some of these banks’ assets, which could “help in the repairing of confidence in long term asset prices.”
At the same time that regulation can aid insurance and business, some of it is poor and misdirected, he said. But he encouraged business leaders to not just oppose regulation but to ask how they can “work with regulators to get it right.”
Focus on Expenses
Hancock said that as a P/C insurance executive he is very focused on fixed costs and ways to reduce them. But he finds that the traditional metrics of expense and loss ratios do not help address these fixed costs. He suggested that these metrics be retired in favor of some new ones.
“[A]s we change our business mix and focus on the highest value added and growing parts of our business, that expense ratio can move around a lot and it, to me, is not a particularly useful metric to tell us how well we’re doing,” he said.
A higher expense ratio may be acceptable depending on the business, whereas fixed expenses have to be controlled, he said.
He recommended a new metric he calls RAP, for risk adjusted profitability, that helps account for variable costs.
Science and Art
In addition to expressing views that other P/C insurer CEOs might not share, Hancock has shown himself to be a bit unorthodox in another way. He created a new position, chief science officer, or CSO, at Chartis.
The CSO at Chartis, former Farmers Insurance executive Murli Buluswar, is in charge of coordinating all research and development within the company as well as tapping into research outside both the company and the insurance industry from actuarial science to econometrics, finance, statistics, physics, engineering, medicine, meteorology, geology and more.
“There is an enormous opportunity to leverage data and science in insurance,” Hancock said, yet he feels the industry under-invests in research and science and depends too much on traditional actuarial approaches.
But more science may not be enough to successfully manage today.
“So as we look at how do we take data from one industry and apply it to another, or data that is obtained in one country and applying it to another, we have to use a lot of judgment, and not a literal application of the statistics to understand when regimes or their context is different, how do you use that data in a practical sensible way to make good decisions? So it is a blend of art and science. We need poets as well as scientists,” Hancock told Insurance Journal.
To listen to a podcast of the complete interview with Hancock, click here.
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