Few business sectors were harder hit by the horror of September 11 than insurance. Companies spent much of 2002 recovering from losses related to the attack, while grappling with a slew of new litigation related to workers' exposure to asbestos dating back to the 1950s. Already, 2003 is looking bleak -- ACE Ltd. (ACE) and Travelers Group, among others, have already added hefty reserves to cover asbestos claims.
The latest bad news for the industry: On Feb. 3, American International Group, (AIG) the world's largest insurance company, took a $1.8 billion charge to add to its reserves for losses in casualty claims and for paying off directors and officers (D&O) policies related to the flurry of corporate scandals that erupted in 2002.
Investors were severely shaken. AIG, after all, is considered one of the better run, most conservative insurers, and they suddenly wondered if the company has been mispricing its policies for years. In a conference call with analysts on the charge, AIG CEO Maurice "Hank" Greenberg, 77, blamed the U.S. court system for the magnitude of the losses and vowed to take the fight to Washington.
Greenberg later spoke with BusinessWeek Finance & Banking Editor Heather Timmons in an exclusive interview. He explains why he wants Congress to pass legislation that would limit lawyers fees, awards, and asbestos suits. And he dismisses critics who contend AIG may have been underpricing business. Here are edited excerpts from their conversation:
Q: In your view, what would legal reform look like?
A: First off, I would eliminate "venue shopping" for class actions, where you find a [court] that is most lenient and a relationship that's a little incestuous between the court judge and plaintiffs lawyer.
Next -- we do a lot of international business. There are a number of publications that rate countries by political stability, the legal system, the attitude toward foreign investment. We ought to do the same thing by states here. States all have budget deficits. Why would you want to invest in a state where if there's a lawsuit, you're taken to the cleaners? I mean, you wouldn't invest in a foreign country that did that. Why would you invest in a state that did that? I'd like to see that ranking done.
Overall, there has been an explosion of litigation. The cost to the economy is a 1.8% reduction in our GDP. [The cost] runs about $180 billion a year, and it's rising. In many class actions for example, legal fees run $2,000 to $4,000 per hour, and in one of the cases I just read, the winning plaintiffs got coupons for some cereal. It's just outrageous.
I believe that people that have been injured, legally injured, are entitled to compensation for their economic loss. But the pain and suffering component has almost become a prize. The legal system was never intended for that. The biggest beneficiaries are now lawyers. I would have some caps on legal fees, particularly in the class actions.
We should not have a country where no one takes responsibility for anything that happens to them. You can't have a riskless society, where if I trip, someone has to pay for it. That's wasn't the attitude of the people that built this country.
Q: In the arena of D&O policies, why blame the legal system? Aren't the directors and executives responsible for the lack of corporate governance that led to falling stocks, bankruptcies, and suits?
A: Well, the company buys the insurance in the event of a suit. There are questions, of course, about what is covered or what is not. Fraud, for example, is not covered. Nor should fines be covered. If you commit a crime, you don't have a proxy go to jail for you, do you? You should hardly be able to have a fine that's paid off by an insurance company.
Q: This is a gray area? Are banks arguing their insurers should pay those fines?
A: They may be arguing it, but it's not a gray area in my mind.
Q: In instances where AIG is on the hook for, let's say, a bank's dealings with Enron, will you be putting up a fight?
A: It depends on the facts, but fraud is always a defense [for us]. When you underwrite a D&O policy, you expect to get facts that you can rely on.
Q: The market seems concerned that AIG's need to take reserves may signal that the rest of the industry will follow. What's your forecast for the insurance industry in 2003?
A: I don't think it will be a tough year for AIG. We're a global company. With all of the budgeting we've done, it doesn't make me think at all we'll have a bad year.
I think the industry on a whole is much different from AIG. They don't have the same global franchise. They don't have the diversification. If you're a monoline company, you may have some problems. It's not the problems of today you'll face, it's the problems coming forward from the past.
Other insurers may already have addressed asbestos. But we thought reserves in other areas for 1997-2001 needed to be addressed. Anyone who has written a lot of business in the classes we reserved in [casualty and D&O] will need to address those, too.
We didn't write a lot of business in those areas because rates were too low for us. If it were too low for us, and our competition wrote it, guess what problems they've got?
Q: There's some concern among AIG investors that your need to increase reserves means that AIG has been competing on price.
A: That's just not true. We got rid of $2 billion of business that we refused to write in the soft part of the cycle. That has never, never, never been a strategy of AIG.
Q: Time for your least favorite question: The markets are jittery in general, AIG's stock is down nearly 50% over two years, and this charge doesn't help matters. Would it hurt to just name a successor?
A: I think that this is something that the board has to do, and we've said that. First of all, I don't think age, the number, is the issue. Some people are old at 50, and some people carry on at all different ages. Look at a lot of world leaders.
If I didn't have the passion or energy to do what I do, I wouldn't do it. Besides, the board knows who the successor is, and in the proper time the board will name that person.