Head of U.K. Broker Group: AIG Crisis Will Help Harden Market

LONDON, Sep 17, 2008 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- The crisis within American International Group Inc., coupled with the continuing credit squeeze, is likely to contribute to a hardening of the U.K. underwriting market, according to Eric Galbraith, chief executive of the British Insurance Brokers Association.

Galbraith, who described the situation created by AIG?s problems as ?very, very serious indeed,? said BIBA has been ?inundated by inquiries from our members.? The association has responded, Galbraith said, by providing telephone numbers, including that of AIG.

The problems of AIG (NYSE: AIG | Quote | Chart | News | PowerRating) must be seen against an overall market that, despite some storm damage, is not producing massive claims, Galbraith said. The overall result in the United Kingdom, he suggested, will be ?a potential hardening of the market quicker than some people have expected it, perhaps later next year.?

BIBA members and their clients ?have got to assess the position and see if they believe that [AIG] is the right market to be in,? Galbraith said in an interview in his office.

Galbraith took some encouragement from the decision of the Federal Reserve Bank of New York to lend AIG $85 billion in exchange for a transfer of 80% control of the group to the U.S. government.

?The worst thing would be for the AIG to fold,? Galbraith said.

AIG?s problems have been met with caution in the London market. Lloyd?s declined to offer comment on the grounds that the situation is not yet clear.

?The AIG is a big player in the U.K., and has been very active in getting into the large commercial and now the small commercial [market],? Galbraith said. ?The whole idea of this happening to the AIG is quite extraordinary for many members to think about how this could possible happen.?

BIBA has tried to work out the possible position of AIG in the United Kingdom against the liabilities of the wider group, Galbraith said.

It is not BIBA?s role as a trade association to intercede on behalf of its members, Galbraith said. Nor can brokers, despite their commitment to the best interest of clients, be expected to guarantee the creditworthiness of insurers, he added.

Brokers and clients who have AIG business, Galbraith said, must ensure ?as far as is possible? that security is in place. Pulling coverage from AIG and moving it to another insurer would be costly. ?That?s a market decision that they have to make,? he said. ?And that, unfortunately, is the big problem about this whole thing. It creates a run on the market.?

One priority, Galbraith said, is figuring out the areas where AIG might be facing liabilities and credit stresses. Where it can be established that the insurance side is secure, business ?could continue quite easily.?

Brokers with AIG business that is coming up for renewal may feel particular pressure, Galbraith said. Wordings might have been worked out in great detail. ?They might be making the decision at this particular moment: ?Will I take this???

Galbraith sees no signs at the moment of a ?huge hardening? of the reinsurance market. He noted a restructuring in this sector as a result of catastrophe retentions by primary insurers.

Galbraith is uncomfortable with what he sees as a central role for the insurance sector within what is regarded as a troubled economy. The result could be a loss of public confidence in the industry. ?Most of the time, the insurance companies are standing at the back of all this,? he said.

Asked if he could name any precedents for AIG?s problems, Galbraith cited Independent Insurance Co. Ltd., which went into liquidation in the United Kingdom in 2001. Michael Bright, Independent?s founder and chief executive, was subsequently jailed for seven years for fraud. Two other senior Independent executives were also sent to prison.

The lesson for brokers from the Independent collapse, Galbraith said, is the importance of looking after clients? interests and understanding how business is placed.

Galbraith sees no direct role for the U.K. government in the current crisis. ?The government should recognize the value that the insurance sector provides and also the broking sector,? he said.

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)

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