Sam Friedman asked an interesting question, in the wake of criticism of AIG’s pricing by its competitors:
What he should have said is that it’s not Liberty Mutual’s and ACE’s place to browbeat a competitor over its pricing decisions. If they can’t or won’t match AIG’s price, walk away from the business. But it borders on abuse of McCarran-Ferguson protections for carriers to gang up on a competitor and try to verbally bully them into charging more for coverage.
Is AIG being more aggressive on quotes to get and keep business after the damage to their reputation and credibility following the $150 billion in bailout loans given to its parent firm? They deny it, but even if such speculation turned out to be true, that’s just part of life in the free market, isn’t it?
Do you think carriers are stepping over the line with their criticism of AIG’s pricing?
My day job is with a few niche operations at a carrier that is significantly smaller than AIG. I don’t normally get to see AIG accounts since the appetites of AIG’s operations and the business that I’m most hands-on with have little overlap.
However, I have to admit that on the couple of prospects I’ve been asked to kibitz on, where AIG is the incumbent…I’ve wondered how the heck AIG could come up with such an aggressive price.
The most likely explanation is that whatever pricing model I’m competing against generates a heckuva lot of investment income on reserves held, and that is where the money is made.
If that’s true…well, does such logic work when the carrier’s piggy bank has evaporated in the mushroom cloud of market collapse?
Even for exotic products, insurers are governed by a statutory requirement in every state in the U.S. – rates shall not be inadequate, excessive, or unfairly discriminatory. If someone spots an inadequate rate, is it appropriate to whistle-blow…especially when you might be saddled with the cost of funding losses in the event of insolvency due to inadequate pricing?
(Note: As far as I know, no insurance subsidiary of AIG is at immediate risk of insolvency due to the woes of their parents. I’m generalizing – companies that price inadequately over the long term tend either to go insolvent, or to implement sharp disruptive corrective measures when they realize their plight.)
I agree that it is rather bad form to publicly whine about being undercut by a competitor. And I agree, in a free market, the best response to a competitor pricing prospects at rates lower than you think adequate is to walk away.
But haven’t the past couple of months taught us that this isn’t really a free market? Participants lack perfect information (either due to inefficiencies in assembling that data, or due to institutional nearsightedness), and the nature of insurance contracts and guaranty funds mean that exiting due to ruin can be an extremely messy outcome with adverse impacts to the industry as a whole.
Given the reality…whistle-blowing might not necessarily be an inappropriate action.
