Peter Zaffino, CEO of American International Group (AIG), said the company’s ongoing analysis of the increased frequency and severity of natural catastrophes has led to a decision to move the high-net worth homeowners business to excess and surplus lines in multiple states.
“The business model simply needs to change,” Zaffino said during a fourth-quarter earnings call Feb. 17.
A look at the portfolio over the last five years resulted in a realization that catastrophe levels are 10 times greater than the prior 10 years, for losses of over $50 million, Zaffino said.
“By nature of the business, it’s exposed to peak zones and is susceptible to increased frequency and severity,” Zaffino explained. Secondary perils are now primary perils and changes are not reflected in models, putting the “profitability of the business under pressure.”
In addition, Zaffino pointed out as factors in the decision a recent increase in exposure in many peak zones in the U.S. and a rise in total insured values—in some cases greater than 100%—plus supply chain and reinsurance availability issues.
“Recognizing these realities, after careful review, we decided to take meaningful steps to address this risk issue in our high net worth business to allow us to continue to offer comprehensive solutions to our clients that are more consistent and sustainable,” Zaffino said during the call. “Aggregation and profitability challenges led us to the conclusion that we have to offer the property homeowners product through excess and surplus lines on a non-admitted basis in multiple states.”
In December, AIG notified California that it would stop offering admitted high net worth homeowners insurance due to an unsustainable level of aggregation, Zaffino said.
The comments about this line of business were made following Zaffino’s take on the impact of climate changes to the overall book of business. AIG has looked to reduce exposure and decrease volatility but, “changing weather patterns and increased density in peak zones have caused stress on aggregation,” making it harder for property underwriters to achieve returns on capital deployed.
AIG has been engaged in a years-long strategy to reduce unpredictability in its portfolio, where “fundamental changes” were needed and underwriting standards were overhauled, Zaffino said. AIG has reduced gross limits by over $1 trillion in Property, Specialty, and Casualty segments, he added.
About Chad Hemenway
Chad is National News Editor at Insurance Journal. He has been covering the insurance industry since 2007, reporting on trends and coverage in most lines of insurance as well as natural catastrophes, modeling, regulation, legislation, and litigation.