As AIG’s Brand Fades in Asia, Local Insurers Get Their Chance

The financial storm created by American International Group Inc. [18540] has brought subtle changes to the insurance industry across the Asia-Pacific region, where transformed consumer attitudes, regulatory trends and business strategies have immense implications for local markets.

In the past century, AIG constructed an ubiquitous footprint across Asia, with a pervasive legacy in both life and nonlife insurance. But AIG's financial meltdown, begun a year ago, has abruptly altered perceptions about the group's place in the insurance market.

As AIG attempts to distance the group corporate brand from its vast network of operations in Asia, its local subsidiaries face a dilemma on how to present themselves with a new identity and revitalize their position against a long heritage.

The financial upheaval of the past year brought about a change in consumer attitude toward brand value attached to the multinational group's strong heritage, said Jin Chuan Duan, director of the risk management institute and professor of finance at National University of Singapore.

Tarnished Brand

People bought products from American International Assurance, the ubiquitous AIG subsidiary in the region, because of belief in AIG's strong brand and corporate support. Many came to conclude that this was a "mistake in value" in multinational companies. This change of attitude will give local companies an "equal footing" in competing for business with international players, said Duan.

"AIG is now viewed more as the U.S. government-owned organization," said Ashvin Parekh, national leader of financial services at Ernst & Young India. "There is not as much enthusiasm about and being respected as a private company as before," he said.

Parekh noted Indian consumers have associated more with the Tata brand than AIG in the first place. Tata AIG is a joint venture for life and nonlife insurance between AIG and local conglomerate Tata Group which holds 74% of shares at Tata AIG Life Insurance Co. Ltd. [90169] and Tata AIG General Insurance Co. Ltd. [90168].

In India, Parekh said there is "lots of speculation" on the future of Tata AIG. Shareholders have been keeping quiet, while AIG has an "exclusive agreement" with Tata for any shares transaction.

A re-branding campaign has been rolled out to change AIG's life units under the name of American International Assurance [55661], which is planning for an initial public offering through an Asia stock market.

"Although we've come a long way, we're just getting started," said AIA in its new advertisement. Despite its unique history in the region, the insurer is opting to cut the connection with its parent group in Asia.

The IPO of AIA would create a new Asian entity that would no longer directly report to the parent in the United States, said Terry Mezger, principal and practice leader at Deloitte Actuarial and Insurance Solutions.

This structural separation will make AIA a new entity in Asia, where most markets still offer great growth potential, said Mezger. He added it is a doubtful if the AIG brand would still exist in Asia.

AIG and the U.S. government quickly segregated the Asian units from AIG group shortly after the financial stumble. The move was crucial to enable AIG's businesses to remain viable in Asia. This immediately relieved concern of many consumers and helped lower the business impact, said Neil Katkov, managing director of Asian research group at Celent, an international management and business consultancy.

In the past year, some European insurance groups also suffered huge losses in their home markets. Unlike AIG's quick segregation strategy, Katkov noted most European insurers' response was to close down certain businesses in Asia to save money. This was partly because of structural difficulties of putting their Asian units, which are more integrated with the group, into a separate basket as AIG did.

Mega-Model

What made AIG so strong with an extensive markets presence was its complex structure with inter-relating entities, which could also tactically operate as independent companies, in not just the core insurance business but also a wide array of financial services, asset management, securities and training and client support.

This mega-corporate business model will continue to be successful if the company can manage the complex structures well, said Duan. The attractive nature of this model comes with the advantage in building up economies of scale and scope. However, Duan noted not many companies can manage such size and complexity.

"Growing in size is not a bad thing. But rapid growth through improper process and insufficient governance would be an issue," said Michael Sherris, executive committee member and former president of the Asia Pacific Risk and Insurance Association.

Individuals lost a lot of wealth in the financial crisis last year. Insurance has a lot of importance for the real economy, said Sherris, a professor of commerce and economic at University of New South Wales in Australia.

A vigorous risk management process is important, said Sherris. Regulators need to better understand the scope of financial services that insurers are exposed to and the debts they might have in other markets.

Overall, AIG's local subsidiaries like AIA should not have operational issues in Asia as regulatory supervision is very strong in the region, said Arthur Hau, associate professor of finance and insurance at Lingnan University in Hong Kong. If these branches had any insolvency issues, the regulator should already have stepped in.

The spinning off of AIG's subsidiaries may affect the business stance of the local units, which are disconnected from bundled support of the parent group, according to Hau. Insurance companies carry out syndicated purchases in the markets, one advantage for giant insurance group like AIG. Reinsurance prices may also become more expensive, along with worsening capital market conditions.

Insurance companies may face tighter supervision by regulators that are more cautious not just because of AIG but also the financial crisis as a whole, which led to consumer issues such as the default on mini-bonds sold by Lehman Brothers, according to Hau.

The regulator's role is to protect public interest, said Duan. There would not have to be much change in direction within the current regulatory framework.

In the view of AIG's financial crisis, regulators may be more concerned about a mega-size corporation as a threat to "systematic risk," said Duan.

Previously, Duan said governments might have seen home-grown corporations expanding in global platforms as "a national pride" for the country. Now, the regulator has a new perspective on this mega-global corporate model.

"It realized the size just became too big to be handled," said Duan. Regulators are no longer inspired by uncontrollable corporate expansion.

The mega-size corporate group may make sense for the company's business, but it does not make much sense for the economy and country. "For this concern, a regulator unlikely wants a corporate group to grow in the way they used to," said Duan.

AIG's growth into other financial products such as credit default swaps ultimately put the insurer into a "speculative position," which deviated from traditional insurance principles on pooling risks from death and accidents, said Duan. AIG was successful in underwriting life and nonlife products. It was the pooling of speculative credit risks that led to the group's financial meltdown.

Reshaping the Market

AIG's financial upheaval will lead to a "re-shaping" of insurance market scene after the past three or four decades of internationalization in insurance, said Bill Chang, commissioner with the Financial Supervisory Commission in Taiwan. This change is more obvious in life sector, while nonlife sector tends to be more stable.

A lot of foreign insurers have moved out of the Taiwan market in the past year. In Taiwan, Chang noted domestic insurers have taken over more market share through mergers and acquisitions. Consumers now have more focus on brand recognition with a long-term commitment to the local market. Their favored attitudes toward foreign insurance companies have been weakened by the financial crisis as well.

Last October, Fubon Financial Holding Co. Ltd. acquired ING Life Insurance Co. Ltd. in Taiwan to make its life subsidiary, Fubon Life Assurance [77804], the second-largest life insurer in the market.

For many Taiwanese insurance companies, the "cross-strait business interaction" with China is one area for strategic development in the long term, said Chang, who is also professor of risk management and insurance at National Chengchi University.

In Singapore, domestic insurers are zeroing in on opportunities from financial crisis to enhance their local commitment and trust with customers. Duan cited the redemption initiative taken by Great Eastern Life Assurance [89106] for investment-linked products, which suffered losses from the crisis as a goodwill effort to win back consumers.

The insurer suffered a short-term loss for the redemption exercise, through which policyholders got refunds for the original purchase price. In the long term, Duan said this is a good chance to gain local customers whose perceptions of foreign insurers have changed. This is an opportunity for Asian insurance companies to emerge in Asia as there would be a "tremendous move" in the market position of local insurers, noted Duan.

AIG's financial crunch last October immediately led to a lot of policy withdraws in Asia. Duan said the lapse and withdraw rate has been stabilized after consumers had realized that proper regulatory protection was well in place.

In marketing, Duan said multinationals have lost their competitive position in coming up with sophisticated and innovative products. Demands for investment-linked products have been diminished by risk concerns of consumers who became more skeptical of these complicated products and tended to look for more basic needs.

The financial crisis made people re-think the complexity of these financial products. This competitive positioning on product "sophistication" became a disadvantage for insurers, said Duan.

Insurance companies need some sort of sophistication to deal with changing demographic dynamics in Asia, said Duan. Attitudes and behavior changes triggered by the crisis was a "short-term phenomenon," but the demographic change is undeniable more important.

Unlike mature markets, the need for sophisticated products is not as great in most Asian markets. As insurance penetration is still low in many Asian countries, Duan said there should be room to grow.

Out of the crisis in the past year, Mezger said risk management is one area that financial services companies need to play more focus on in the long run. Most of the issues with crisis was a balance sheet crisis. This demonstrates the need to put proper risk management for assessment on potential risk and magnitude of impact and volatility of invested values.

(By Iris Lai, Hong Kong bureau manager: [email protected])