AIG to Implement New Third-Party Capital Structure for HNW Business: CEO

American International Group (AIG) is seeking to gain control of its reliance on and access to reinsurance capital for its high net worth real estate business, and plans to implement a new third-party capital-backed structure to support a shift in cat- subscription of goods exposed to the non-admitted market.

AIG Chairman and CEO Peter Zaffino spoke at length about insurers’ planned strategic changes to high net worth underwriting during his second quarter earnings call yesterday.

Zaffino explained that AIG is committed to the high net worth insurance business, which includes the AIG Private Client Group, but noted that the business has become increasingly difficult, especially with its headquarters. in the recognized insurance market.

“This is a business we will continue to invest in, where there are exciting opportunities to improve profitability,” Zaffino said.

He explained that AIG intends to position the high net worth business to be less volatile and more balanced, with less risk density as well.

Reinsurance is a key factor, given the peak risks often associated with insuring the assets of high net worth individuals.

Zaffino explained: “Currently, the level of reinsurance we are buying and the proportionate modeled ceded profit is a barrier to growth in net premiums written and improvement in the combined ratio.

“This was intentional, as we are not willing to take volatility on frequency or tail risk on the cat in our high net worth businesses.

“In addition to this, the inability to pass on increased losses and reinsurance costs through rate increases or limit management, largely due to regulatory constraints, further deteriorates the margin to short term.

“But we’ve made a conscious decision to keep writing this case because we believe the compromise is appropriate in the short term, given the opportunity we see in the long term.”

He continued to say that reinsurance costs are unlikely to come down for AIG’s high net worth underwriting portfolio, seeing him instead putting even more pressure on that segment of the business going forward.

“For a business that is primarily underwritten in peak areas, with high insured values, reinsurance costs will likely increase and in some cases significantly,” Zaffino said.

Here, Zaffino moved on to an explainer in the retrocessional reinsurance market, why he’s been so challenged and tied to AIG’s troubles getting reasonably priced reinsurance for his high net worth property books.

Retro markets provide about $60 billion in capacity but only $20 billion in retro compensation, Zaffino said, largely backed by alternative capital providers.

The dynamics of retrocession have “changed significantly”, he said, higher costs that have grown faster in retro than in reinsurance, a shift to occurrence retro structures with less available aggregates, the fact that retro-aggregate and low-attachment structures have been under significant stress lately, attachment points have generally increased by 50% or more in retro, while at the same time risk-adjusted rates have also increased by more than 50%, even though the retrocessional exposure has technically decreased.

Zaffino said the retro market and how it has changed provides a good insight into the complexity of peak risk reinsurance areas, where high-net-worth AIG books are largely concentrated.

“When you combine those factors with the additional adjustments coming in for inflation, model changes, capital trapped, you have a very complicated and difficult market,” Zaffino said.

Adding that, “If you look at the retrocession losses of nat cats insured around the world over the past decade, nine out of ten years have had larger contributions from overall secondary risk losses than peak risk losses. This highlights the complexity of catastrophe modeling.

Due to the dynamics of reinsurance and retrocession, AIG concluded that “to continue to provide wealth customers with comprehensive solutions to their emerging risk issues, we needed to move product from property owners to the non-admitted market. , especially in cat-prone states,” Zaffino said.

AIG exited the admitted personal property owners market in some states, he explained, saying the assumed level of aggregation, the inability to pass on rising reinsurance prices or rate increases, as well as limiting how the cover itself could be changed, makes it less appealing.

Moving forward with AIG’s high-net-worth strategy, Zaffino said the insurer is shifting its landlords and possibly other products in more states to the unadmitted market.

But key to AIG’s goals, it seems, is to better control the availability and usefulness of reinsurance capital to support its high net worth underwriting business, which continues a trend at the carrier, as it already tried it, in a way.

AIG launched Lloyd’s Syndicate 2019 in 2020, which was designed to provide capital support to third parties exclusively to provide reinsurance to the risk portfolio of AIG’s Private Client Group (PCG), a division of the insurer with a market leading position in the attractive High Net Worth Access Segment.

This syndicate was backed by insurance-linked securities (ILS) capital, with Hudson Structured Capital Management Ltd. (doing insurance investment business as HSCM Bermuda) as a primary funder alongside other investors and we understand the funds.

As we said at the time, the Lloyd’s syndicate could act as a sort of reinsurance sidecar for AIG’s portfolio of private clients, allowing investors to share in the performance of its underwriting and origination, while AIG could control more of its reinsurance capital requirements. for this part of its activity.

On the AIG Q2 earnings call yesterday, Zaffino explained that this ambition, to leverage third-party capital’s appetite for risk to help reinsure his private client and high-net-worth portfolio, remains with AIG.

He explained, “We plan to put in place a structure that over time we expect to be supported by third-party capital providers, in addition to AIG.

“This structure will provide more flexibility to manage aggregation, price, limit, terms and conditions, and to innovate to meet changing customer needs.”

Which is very similar to the original strategy with Lloyd’s syndicate 2019.

Although, perhaps in a more traditional sidecar or insurance-linked securities (ILS) structure.

So it’s not really a change in strategy, but it’s a clearly stated objective to leverage the efficiencies of third-party capital and capital market investors to help moderate overall exposure and provide reinsurance to a property insurance portfolio exposed to maximum catastrophe risk. Company.

The appeal this might have will depend on the perspective of investors, as well as how the portfolio to be backed by third-party capital is constructed.

Syndicate 2019 was not particularly successful for third-party backers in its first two years, with reported combined ratios of 118.2% for 2020 and 113.6% for 2021.

Third-party investors lost money backing this private client group business syndicate, so for this newly planned third-party capital structure, maybe the design is planned to be different, to take a slice of the Reinsurance tower for high net worth owners book, rather than a portfolio of risk at base.

It is perhaps notable that AIG previously purchased catastrophe reinsurance to support its private client group, or high net worth business, which covered the 2019 syndicate portfolio. So maybe that’s the layer, or the kind of opportunity for third party capital.

Either way, it’s encouraging to see AIG continue to recognize the efficiencies that can be gained by tapping into third-party investors’ appetite for catastrophe insurance-related returns, as well as the benefits of financial markets to achieve this.

Of course, AIG also has its AlphaCat Managers Insurance-Linked Securities (ILS) asset management unit which could manage investors’ capital and establish this high net worth sidecar type structure, ultimately making its operation even more efficient.

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