Interview: Anthony Baldwin, AIG

One of the largest risks facing the insurance industry today is that of remaining relevant, according to CEO of AIG Europe and AIG UK Anthony Baldwin.

“As technology begins to change business models and change risk types, we need to make sure that our products are fit for purpose and that we evolve our products in line with changing business models. All of our clients are changing because of technology in some shape or form and we’re trying to stay attuned to that,” explained Baldwin.

As such, his first action in the role he took on 18 months ago was to encourage co-creating of products: “I’ve really tried to be a strong advocate for co-creating products with clients and brokers as a better way to develop long-term valuable solutions.”

Historically, insurers have thought about innovation in house but by partnering with firms and individuals with specialist knowledge, AIG has developed a new way of working, Baldwin said. “An example of this is our recently developed pilot with Standard Chartered and IBM, which effectively uses Blockchain technology to issue multinational policies.

“Likewise, in the broking world, we’ve partnered really well with Willis Towers Watson,” he added. “We’ve developed an offering called Cyfly, which is for cyber insurance and the aerospace world.

“It’s bringing an industry lens to a risk type and partnering with a broker to come up with a new offering. Over the last 18 months, we have listened more, and when we’ve understood the needs that are out there, we’ve solved them in a more joined-up fashion rather than solving for them by ourselves. This has added an extra level of depth in terms of our solutions.”

Outside collaboration

AIG has also used collaboration outside the industry. “We have also worked with the University of Chicago and jointly developed a white paper that highlights the risks of the future with the Internet of Things. The risk landscape is changing because of the technological revolution, and we need to think about risk and how to mitigate risk and respond to those risks.”

He explained: “As an insurance company, there are three types of capital a firm carries: it has its expertise through its people capital; it has its hard capital, the capital that allows us to underwrite the business that we underwrite, but the third factor is its data banks. The insurance industry has used that data largely for risk selection and risk pricing. We’ve realised through feedback from our customers that that data should also be used to help reduce the cost of risk, and ideally even to prevent risk.

“We can help highlight root causes for future losses and hopefully prevent risk, or certainly structure insurance programmes with greater insight in terms of probability. This is increasing the relevance of the insurance industry.”

One area that is becoming increasingly relevant, with attacks such as Wanna Cry and Petya earlier this year, is cyber.

“Risk managers are seeing cyber if not as their top risk, a top-three risk. Our portfolio is doubling year-on-year,” explained Baldwin. “The product itself is evolving rapidly. It’s iteration after iteration and cyber products now are probably changing as rapidly as a six-month cycle or less.

“There is deep engagement with customer groups and brokers about getting the product right. Some of the larger carriers in the space are recognising that not only is it important to have a cyber product that covers the very specific cyber risks itself, but also helps to bring a more joined-up approach in terms of how a cyber policy responds relative to the other exposures.

“That conversation is starting at risk first as opposed to starting at product first and what’s rapidly changing is how we’re innovating. It goes back to the question of ‘is the insurance industry relevant’? It needs to be relevant to the risk of our clients.”

As well staying relevant, AIG is also a leaner business than it was before Baldwin took over after a $500m (£327m) cost-cutting drive saw senior management, including then AIG UK managing director Jacqueline McNamee, leave the firm.

“While I don’t think we’re alone in having to evaluate our resource model in order to stay competitive, to stay financially strong, that doesn’t mean that’s an easy decision,” he admitted.

“We have lost some talent that, given the choice, we would have wished to retain. Where we are now, as a consequence of that, is we are a healthier company, able to move from that position of greater strength to grow.”

In March, however, the company reported a $2.8bn loss in the fourth quarter of 2016 and president and CEO Peter Hancock tendered his resignation after lack of shareholder support.

“When people comment around Q4 or 2016 in general, the overarching takeaway story is what hit profitability – not exclusively but the bulk of the reason – was prior development and it was a reserve strengthening that was largely centred around liability classes and predominantly US liability classes,” explained Baldwin. “We have limited the downside of that risk recurring through one of the largest reinsurance deals in history and the likelihood of volatility recurring because of prior development is quite remote.”

The firm bounced back to some extent returning to profit in the first quarter of 2017 despite some poor underwriting performances and a £100m hit from the Ogden discount rate.

“In Q1 there was a market event where the discount rate change  caught a lot of people by surprise,” Baldwin said. “The degree of change was more extreme than many of us would have expected. It’s under review but if you start removing that market event and prior development, you can look at the underlying operating performance of the company. In Europe, our results are not only back to profit, we anticipate modest growth in the region of 4% to 5% during the course of this year. There is also an improvement in our more traditional combined operating ratios, seeing a mid-90% performance level and that was largely driven because of the shift of mix of business. I’m cautiously optimistic that we’re on a good path.”

Backing for growth

Incoming president and CEO Brian Duperreault has talked about investments and his backing is key for growth, said Baldwin: “Brian’s track record speaks for itself. He’s here to help us grow the business. And we grow the business by investing in talent, in our capabilities and in technology. Ultimately, you will see in AIG an insurer that, in a responsible way, looks to get much more onto the front foot again and onto a growth agenda.”

Duperreault has been candid about looking for acquisitions and Baldwin picked up this theme: “Growth for the sake of growth isn’t necessary. What you should expect to see is continued rapid growth in areas like multinational, and accelerated growth in some of our specialty areas like credit lines.

“I don’t see us having an acquisition strategy of acquiring something that feels and looks very similar to us and just gives us scale for the sake of scale. I do see us, however, saying we’d like to be in different market segments or like to have a different form of technology and that’s complementary to what we do, and the fastest way to actually get there is through an acquisition.”

Working at the firm for over 20 years, Baldwin has already seen significant growth and he said he had always aspired to be in a leadership role: “AIG rewards individuals and for me this last role has been extremely rewarding because not only is it a position of leadership but it also gives you a broad scope and it has allowed me to learn about different product segments.”

Unlike many, Baldwin didn’t fall into insurance, as his father had worked in the sector. Although he spent the last 20 years working his way up, he was not guaranteed the role at the top: “I had the opportunity to understand different markets and different product segments. But it always comes as a surprise to a certain extent when you’re given a position of broad responsibility. AIG is great as it encourages you to learn and to develop and gives opportunities to people, if you want to take them.”

Baldwin believes this is huge motivation for anyone who works at AIG, or anyone who is thinking about working there. He has been vocal in the past about bringing women into the boardroom: “A few months ago, I did a pledge for He for She,” he explained. “It was simple, but it was challenging. It was to increase the percentage of women in the leadership pipeline to achieve gender equality. We were approximately around 23% within our pipeline in the past and we’ve improved that by about five points but we still have a lot of work to do.

“We’ve also more deeply committed to the graduate programme and next year we will be bringing in 40 to 50 graduates. In 2016, we probably had about 20 graduates, so we’re more than doubling our commitment. It’s about not only bringing in new skills and technology, but bringing in different perspectives and understanding the perspectives of our younger population as well.”

Investment in talent will not only be seen in the UK but also as the firm moves its European base to Luxembourg. AIG was one of the first UK insurers to declare its post-Brexit location and Baldwin said this is because the firm had established a working group well before the June 2016 vote.

“We wanted to make our decision early because the way we’re doing this is setting up two separate legal entities, one in the UK and one in Europe. Broadly speaking, our capital follows our business and around 50% of our business is in the UK,” he explained.

“We’re in constructive talks with the regulator. We hope to start operating during the course of next year and then the full legal entity split will probably happen in Q1 of 2019.”

He added: “We used the five principles approach. We started with the fact we’re famous for serving our multinational clients and so we need to be able to serve our clients. Second, we asked ourselves where we want to have our talent, ensuring that we had continuity of talent as well. Third, from a sustainability perspective, we looked at the reputation of the regulator, and also the track record of that regulator dealing with large multinationals like us, along with the potential risk of future European Union fragmentation. Then, we looked at Solvency II and finally looked from an expense perspective – we’ve been through a lot reorganisation to reduce our expense.”

Heavy scrutiny

The European Insurance and Occupational Pensions Authority has made it clear those setting up operations outside the UK are going to come under heavy scrutiny but Baldwin said he wasn’t concerned about this.

“One of the requirements in Luxembourg is that you have to have senior people actually physically resident in the country and so our CEO and senior leadership team will be residents in Luxembourg.”

Although the firm will be moving roughly half of its business overseas, Baldwin said that won’t diminish its offering in London, a place he feels proud to work in: “If you’re going to work in insurance, what better place to work than in a centre like London? It’s a fabulous place to work. I love being part of the London marketplace.”

He concluded: “We are a healthier, stronger business than we were a couple of years ago and we’ve brought in some really great talent into the organisation, whether in the specialty areas or through partnerships. I see a stronger emphasis on innovation and I’m keen for us to get back on the front foot and be a team that realises that to remain relevant, it needs to continuously innovate. We’ve got more work to do but I’m excited about the future.”