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Proactive Brexit Preparations Promise Seamless Service for Insureds

Plan ahead for this major European shift to limit your multinational exposures.
By: | April 10, 2018 • 5 min read

Since the day the term was coined, “Brexit” has been synonymous with complexity and uncertainty.

UK businesses don’t fully know what to expect once the break becomes final, but U.S. multinationals may feel even more in the dark. Unlike in the UK, media coverage of developments is sporadic in the U.S.

After UK voters decided to exit the European Union in a referendum held on June 23, 2016, the UK government triggered Article 50 on March 29, 2017 — the only law governing the process of separation. Article 50, signed at the Treaty of Lisbon in 2007, gives any member of the EU the right to leave the Union and allows the seceding nation two years to negotiate an exit deal.

With one year down and one still to go until the Brexit becomes final, nothing is yet set in stone.

“Two years is simply not enough time to unravel the decades spent working in a single market,” said Lulu O’Leary, Major Initiatives Office Director, AIG. “The decision was made with very little legislation in place to set a foundation for how this process would go. There was no real framework for what would change and how.”

Over the past year, leaders, legislators and regulators have hashed out initial negotiations around past ties and commitments regarding trade and immigration, but much work remains.

Acknowledging this, negotiators will spend this year building a provisional transition agreement to be ratified in Q4 2018 or Q1 2019 and become legally binding when the break is official in March, 2019. This proposed transition agreement would essentially establish a ‘standstill,’ during which time whatever is in place — immigration rules, financial regulations, trade arrangements — would remain that way while discussion around the details continues.

The timeline above demonstrates how the process will move forward over the next year.

“The Article 50 withdrawal agreement will include transitional arrangements along with a framework for a future trading relationship and key terms for unwinding the UK’s past ties and commitments,” O’Leary said. “But as the EU’s chief negotiator Michel Barnier often repeats, nothing is agreed until everything is agreed.”

While the provisional agreement extends the timeframe to finalize negotiations, it’s no reason for companies to rest on their laurels or stall contingency planning. Many regulatory questions still await an answer.

The Impact of Reinstated Regulatory Barriers

Lulu O’Leary, Major Initiatives Office Director

While any legal decisions are far from final, there are a few regulatory changes set to complicate the way multinational companies do business.

Loss of Freedom of Establishment and Freedom of Services may require institutions to create entirely new procedures to transact international business legally. Freedom of Establishment grants insurers the right to establish a network of branches or subsidiaries in other EU member states outside the UK and underwrite local risks from those offices. Freedom of Services also gives financial institutions the right to sell services across the EU without regulatory barriers. In the financial services sector, these ‘passporting rights’ are a key building block of what creates the single open market within the European Economic Area (the “EEA”).

Without these rights, UK-based insurers will typically no longer be able to write coverage for risks located in EU member states. It should remain possible for a UK insurer to have branch in an EEA country to write risks located there, but that branch would have to be fully capitalized and prudentially regulated by the local regulator. The ability to conduct cross-border business will depend on the relationships established between the UK’s Prudential Regulation Authority and Financial Conduct Authority and regulators throughout the EU.

Although the UK government has shown some willingness to be flexible around enabling EU insurers who have written policies in the UK to continue to administer those policies on a cross-border basis following the expiry of transitional arrangements, the European Insurance and Occupational Pensions Authority (“EIOPA”) has so far remained rigid in its public statements around UK insurers’ ability to do likewise into the EEA. In a worst case, this could impact the ability to pay claims.

Nuno Antunes, Head of Multinational – EMEA

Multinational companies who rely on the London market to insure their entities and operations overseas throughout Europe may have to re-structure their programs to comply with revised regulations.

“Right now, a U.S. company can come to London and cover all of their risks throughout the UK and the EU with a single policy. Post-Brexit, that likely won’t be possible,” said Nuno Antunes, Senior Vice President, EMEA Head of Multinational and Captive Fronting, AIG. “They’ll have to place separate policies for UK and EU entities, written by insurers with proper jurisdictional authorization.”

“The general view is that a UK-based company will not be able to freely set up branches in Europe, or write business for the European market,” O’Leary said. “If UK-based carriers don’t restructure properly, they may not legally be allowed to pay claims on losses incurred in Europe once the separation is complete.”

Best-in-class carriers aren’t waiting to see how the negotiations play out. Even before the vote was decided, AIG began assembling a structure that would be resilient through the transition period and beyond, without disrupting customer experience.

A Resilient Restructuring

“Even before the referendum, we asked ourselves ‘How do we set up our infrastructure so we can continue to operate across borders in an environment where the existing legal structures may no longer be available?’” Antunes said.

To continue writing international coverage without freedom of establishment or freedom of services to fall back on, AIG recognized the need to establish a separate entity in Europe. Working with regulators in both regions, the company created two new firms — one based in the UK, and one based in Luxembourg.

The Luxembourg company, AIG Europe SA, includes 19 branches across Europe and will continue to underwrite European risks, while AIG UK will cover UK-based risks. This new structure is expected to be operational December 1, 2018.

“We will transfer our back-book of business – anything written or renewing by December 1 – into these new entities to ensure business continuity and contract certainty,” O’Leary said. “In other words, we aren’t relying on grandfathering rules. We are prepared for the hardest of Brexit scenarios.”

UK and Luxembourg regulators have already approved licenses for the two new companies. In early March, the High Court of England and Wales approved AIG’s plan for communicating the changes to its policyholders and other interested parties. The year ahead will involve working with regulators to create and license branches throughout Europe and preparing to operate from the two new companies.

“We’ve created a solution that’s seamless for clients. They can continue to work with us as they always have,” Antunes said. “We will have the flexibility to interact with clients how they want to interact with us and do what’s best for them in terms of the structure of their programs, in a fully compliant and legal way.”

Multinational corporations operating in the UK and Europe will have a laundry list of factors to consider as Brexit approaches, but their insurance coverage doesn’t have to be one of them.

“We haven’t shied away from the complexity and we have taken a leadership position in the industry in tackling Brexit head on,” O’Leary said. “Regardless of any political upheavals, AIG will be ready to serve our customers.”

To learn more, visit https://www.aig.com/brexit

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.




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More from Risk & Insurance

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Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]