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To The Point The historic mission—Covering the risk Despite enormous challenges, John Bogardus remains optimistic about industry's future By Emanuel Levy
“Risk protection has been a primary goal of humans and institutions throughout history. Intelligently protecting against risk is the essence of insurance.” These two sentences sum up the intrinsic nature of one of the most significant contributions to safeguarding the challenges and values of virtually every enterprise and endeavor in business and commerce, as well as life itself. These sentences, taken from the very first paragraph of the book Spreading the Risks, Insuring the American Enterprise, set the tone for the story of the foundation of the history of insurance from the Code of Hammurabi to today. And while the way the system was first launched and managed so many centuries ago is literally worlds apart from current sophistication in the all-encompassing operations, the concept, or “essence,” is unchanged. That’s a remarkable premise but it might escape us as we fulfill each day the vast and often daunting demands facing the entire industry and all its customers. Yet, the name of the game remains risk and protection. First published in 2003, and now in paperback, the book is a history of the business that traces developments, events and linkages, with insurance brokerage as a focus. The author is John A. Bogardus, Jr., in concert with a long-time associate, Robert H. Moore, Ph.D. Bogardus got into the history project as a consequence of his writing a biography of Alexander & Alexander, of which he was president, CEO and chairman for more than 30 years, until it was acquired. But the information gathering process led him and Dr. Moore to the inexorable conclusion that the real story was the “saga of American insurance,” with a look at the very beginnings of the business of risk going back many millennia to “benevolent nobles and nervous merchants” in Babylon and the Middle East. Bogardus came into the business as a trainee with A&A on July 1, 1950. The insurance business was not an unknown for him. His grandfather was an agent for The Hartford. Two uncles and his father were also in the business. An interview with Bogardus in mid-July left little doubt about his deep regard, even love, for the business and its accomplishments. The book lauds the accomplishments and dedication of all parts of the industry in meeting goals, but it does not gloss over the negatives, even those that erupted in the operation of Alexander & Alexander, and especially the disaster surrounding its acquisition of the huge and venerable British insurance brokerage, Alexander Howden. Once a family business, Howden had developed, through acquisitions and its own growth, into a major enterprise. That included the operation of a syndicate at Lloyd’s. Howden and the syndicate, run by Ian Posgate, were consumed with financial chicanery and dishonesty, so that Alexander & Alexander, in its first merger venture for an overseas partner, ultimately paid dearly in money, time, embarrassment and anxiety before it could extricate itself. When asked if A&A had left something out in its extensive due diligence efforts prior to the Howden acquisition, Bogardus said that was probable; and he emphasized the vital importance of careful review of all the financial details and personalities prior to an acquisition or merger. During his tenure, A&A was involved in many acquisitions and mergers. Some brokerage and agency firms, as observers in the industry are well aware because they are publicly announced, have catapulted relatively small firms into ones of impressive size and influence. Alexander & Alexander, as Bogardus points out in his book, grew to its mega-size by gathering in other insurance offices of varying sizes, to enhance its volume, influence and geographical reach. The 1970s was a banner decade for acquisitions. He said it is extremely important in acquiring small firms that the principals remain on board until customer loyalty is earned by the new management. In 1997, A&A was acquired by Aon, in biblical terms that may be described as the fatter “kine” eating the fat “kine.” A&A was created in 1870 by Richard A. Alexander, a dealer in fertilizers in a rural area of West Virginia. In his book, Bogardus describes Alexander as possessing “noble qualities,” several of which “were essential gifts for a successful insurance agent—sound business judgment, compassion for others, good humor and persistence.” The qualities haven’t changed very much, except for the depth and quantity of knowledge and managerial skills that during the past several generations have become the hallmark of the successful insurance producer. The present and the future In the final paragraph of his book, Bogardus looks to the future. He notes that insurers may be facing the “most daunting challenges” since the 18th century, but he softens the blow by asserting that “fortunately for the industry and its clients, most leading companies have strong and innovative management teams.” He adds: “Thus, the industry moves into the 21st century with both enormous challenges and great possibilities for serving the public good while achieving financial success.” In our telephone interview, I cited some of the future challenges, such as the incidence of disastrous storms and other catastrophes, increased litigation and terrorist attacks. But he held his positive ground, asserting that “the industry will respond” as it has historically, citing specifically the response to the 9/11 World Trade disaster. He said the industry pulled together and that needed capital was raised. Recent financial results seem to support the optimism. For example, the Insurance Information Institute, reporting on 2004 results, shows that property/casualty sector premiums earned totaled $412.6 billion spread over some 3,330 companies. The industry, including brokers and agents, employed 2.3 million people. Even better, according to I.I.I., in 2004, the P-C industry enjoyed its best underwriting results in more than three decades, with a $5 billion net underwriting gain and a combined ratio of 98.1, even though premium growth slowed. Net after-tax income was $38.7 billion, boosting the industry’s surplus to $393.5 billion. That’s the good news, but it has a down side because some, not all, key members of Congress and the Treasury Department, now looking into the extension of the Terrorism Risk Insurance Act (TRIA), are arguing that an industry with nearly $400 billion in surplus is in good shape and doesn’t need federal backup on terrorism risks. It’s going to take a lot more determination than appears available at this time to convince the opponents of extension that a major terrorism disaster might cause an unbearable drain on surplus and could impair some companies. Coverage of war-like terrorism risks was never contemplated in the insurance scheme and the responsibility to guard against attack lies with the government. Bogardus expressed concern over the marketplace because of the attack on the American International Group by New York Attorney General Eliot Spitzer, which forced the departure of Maurice “Hank” Greenberg, its long-time CEO and steady helmsman. He told me that AIG was always in the forefront of innovation, much like Lloyd’s. He also praised AIG for its willingness to take on risks that other companies shunned. Without Greenberg’s leadership, Bogardus said, he was not sure that the company would be the same and he wondered who was going to take up the slack. That has not happened up to this point. But Greenberg has not gone away. He said at a recent annual meeting of directors of C.V. Starr & Co., an insurance brokerage firm that places its business largely through AIG, that a series of white papers is being prepared to present to regulators to refute the charges that he manipu-lated the financial status of AIG. The meeting and his comments were reported in a news story by Chris Sanders of Reuters. In the latter part of 2004 and the early part of this year, the New York Attorney General dominated a segment of the media when he was at the height of his challenge, not only to Greenberg and AIG, but to the mega brokerage firms that he charged with bid rigging and conflicts of interest in their receipt of contingent commissions. Subpoenas, charges, allegations and threats of criminal and civil suits were an almost daily fare in The New York Times, The Wall Street Journal and other financial papers. For some months, after the achievement of some prosecutorial victories, there has been silence. But there have been some rebuttals, or perhaps clarifications. As to the adverse effects, Spitzer’s attacks on the mega-brokers have caused grief, decreases in stock values, loss of some personnel, but little, if any, public outcry. Other attorneys general, the SEC and state insurance regulators have made some noises. There have been suggestions that the business of the mega-brokers had become vulnerable and that smaller brokerage firms were successfully raiding the client bases. But this has now been called massive over-hype. That characterization was reported in a news story from London by Reuters. It was made by Charlie Cantlay, deputy chairman of the reinsurance unit of Aon in the UK. Cantlay said at a press briefing that the Spitzer foray had little impact on Aon’s clients. He was quoted in the Reuter’s story as saying, “Clients do not (care) a thing about Spitzer.” Bogardus told me in the interview that business of clients with international operations cannot be handled by second-tier brokerage firms. He said it is not practical to take care of that business using foreign correspondents. Such risks, Bogardus said, require on-the-scene service by offices of the broker servicing the insured’s account. He said that such business is not up for grabs by second-tier or small brokers. He also said mega-firms are not actively seeking small premium business because it is unprofitable. Bogardus did not join the chorus condemning the principle of contingent commissions. Regardless of the legalities of what has been Spitzer’s crusade, he has unquestionably opened the curtains for the industry to do some reappraisal of past operating procedures. The business is reaching new plateaus and it is time for reassessment. That does not mean wholesale revamping because many of the established practices of the business have served it and the broad public well and honorably and deserve to be continued. But the world of business is evolving and status quo may not be the better part of wisdom. Yet, ripping it apart will serve no purpose. The major buyers of insurance have certainly not cried out over the contingent system, but it needs better definition, more customer knowledge of its existence, and elimination of any implication of conflict or threat. But extermination, as dictated by the attorney general and other regulators, does not seem justified. Just a note about the book by John Bogardus. It is a marvelous history that defines the significance of the business and creates a deep understanding of its human values. It’s an excellent tool for the orientation of new employees as well as a reorientation of those in the business who may need a reminder of the outstanding service they are providing. * The author |
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