AIG cutting prices, may burn taxpayers
Posted On: Dec. 12, 2008 6:32 AM CST
NEW YORK (Reuters)—American International Group Inc. is cutting prices to win new business and boost market share, competitors and others in the industry say, but taxpayers could again be stuck with the tab.
Since a U.S. government bailout, which last month swelled to more than $150 billion, industry executives say AIG has been lowering prices — even as market fundamentals indicated insurance rates need to rise.
In one example of aggressive rate-cutting, a unit of its commercial insurance division slashed its premium by 60% on some coverage for the Las Vegas McCarran International Airport.
Last year, the airport paid $3.54 million to a consortium of seven insurers led by Travelers Cos. Inc for an insurance policy covering $1.7 billion in property, boilers and machinery, an airport spokesman said recently.
This year, Lexington Insurance Co., a large AIG unit, sold the coverage to the airport for just $1.4 million. The insurer agreed to take on the airport coverage with one other insurer, leaving fewer carriers to shoulder any potential losses.
John Doyle, chief executive officer of AIG's commercial insurance division, defended the company's business decisions, saying underwriters do not provide coverage if the premium is too low to cover losses.
Mr. Doyle declined to discuss individual policies, but said in an interview Thursday the company has avoided situations that didn't make business sense.
He cited U.S. workers compensation policies with guaranteed costs. The company walked away from $700 million in premiums on this business alone through the first nine months of the year.
His division, which sells 400 different products and services, checks on a weekly basis to make sure that strict underwriting controls have not been infringed, he added.
While AIG Commercial Insurance has lost some customers since its parent company was hit by financial losses, Mr. Doyle described the declines as "modest," and said he is fighting to win customers back.
'Stupid moves'
AIG, once the world's biggest insurer by market value, was rescued by the U.S. government in September after it nearly went bankrupt trying to meet obligations on bad mortgage bets.
In the wake of the bailout, it has been aggressively cutting rates, some say. "AIG has intensified its effort to increase its market share, or at least preserve it," said Edmund Kelly, chief executive of Boston-based rival Liberty Mutual.
"I think it's fair to say they're doing some very stupid things in the market," Kelly told investors on a quarterly conference call last month. "If (AIG units) are not reined in, it could be very destabilizing for the market."
By selling policies for less while taking on more risk, AIG raises the chances it could be hit by large losses. It also makes it harder for other insurers to sell policies priced high enough to cover potential losses.
"Cutting rates at a time when rates should be strengthening is a quick way to going out of business," AIG's former CEO, Maurice "Hank" Greenberg, a frequent critic of the company's management, told Reuters.
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