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"I like building," says Joseph P. DeAlessandro, and in his long career in the insurance industry he has done his fair share of building new coverages for policyholders in the United States.
Most of the innovations he was involved in were developed in the 20 years he spent at American International Group Inc. In that time, he and his team at the AIG subsidiary National Union Fire Insurance Co. of Pittsburgh, Pa., where he became president, helped nurture directors and officers liability coverage from a fledgling product to indispensable insurance protection for corporations; created Employee Retirement Income Security Act fiduciary liability coverage; developed kidnap and ransom insurance for bankers; and developed private political risk insurance in the United States.
After he retired from AIG in the mid-1980s, Mr. DeAlessandro helped Sanford Weill build Commercial Credit into the Travelers Group through a series of audacious takeovers.
After retiring again he then took on his present job in the early 1990s as a partner in American European Group, which specializes in taking over and turning around insurance companies, including Kentucky National Insurance Co. and Rutgers Casualty Insurance Co. Mr. DeAlessandro, 67, is president and CEO of both companies.
Mr. DeAlessandro recently spoke with New York Bureau Chief Gavin Souter.
What would you say was the most significant thing you were involved with in your time in the insurance industry?
I think the most significant was the formation and development of directors and officers liability insurance when I was with Hank Greenberg. Hank is phenomenal at being able to assess the ability of a person and let them run with it -- and as long as they do well he never interferes. So I had the opportunity to go in there and develop a product which I thought was a good one.
At the time that I started getting involved in D&O there was a major question as to whether or not it was a legal coverage, whether or not a corporation could pay the premium on behalf of its directors and officers.
We formed a group to influence the legislators to suggest to them that they make it possible for corporations to buy it, because in essence D&O protects the shareholders' interests. And we were very influential in getting the Delaware statute to be approved in 1967, allowing corporations to buy D&O insurance and also to put provisions in their by-laws to enable the company to indemnify the directors and officers for certain acts that would not be considered criminal or self-dealing.
So we made a very strong mark on the market. Then it was a question of selling the insurance to people we felt needed it but didn't know they needed it. I decided that we had to get a major national account to really show that somebody was standing up and listening and I honed in on Coca Cola.
It was the kind of account we wanted. It was squeaky clean, well-managed and extraordinarily accepted by the people. So I made a couple of visits down to Atlanta and after a long discussion about why they needed it vs. why they didn't they bought the policy and that was really the beginning.
What was the reason behind the product?
First of all, the people who serve as directors of a company are putting their fortunes on the line without D&O insurance. If there is any litigation against the company, it's against the directors and officers.
But it was unclear as to whether a corporation was able to help them. So with the blessing of the state of Delaware we were able to determine that there was an indemnity that could be available to the directors via corporate reimbursements, so now the corporation had a liability. So you have now created a liability and you have a policy to protect that liability.
From the directors' point of view, they were fine with being indemnified by the corporation and the corporation being reimbursed by an insurance company. But there were certain instances where the corporation was unable to protect them by statute because of either some criminal wrongdoing or something they had done individually where the corporation could not pay for hurting itself.
So you have a policy that does two things. One was corporate reimbursement, which protected the corporation for indemnities it could make on behalf of the directors, and the second piece, for directors and officers directly, where they couldn't be reimbursed by the corporation. So we gave them a rounded package.
At first people were dubious about it but it is now a household item.
How important was D&O in the overall development of the commercial insurance market?
It became a very important production tool. By the 1970s, if you wrote the D&O you could demand the balance of the account. It was a hook and worked very successfully.
You could count the number of companies that wrote D&O on the fingers of one hand and have two fingers left over. So we could say we would be happy to write your D&O and we would like to have the opportunity to write the balance of your business, and we did.
How else did the coverage expand in the first few years?
Well, a few years later, in 1969 or 1970, I started a new program for bank directors and officers. No one wanted to insure banks. The theory went that the bank directors are only rubber stamps, they don't know what they are doing, they have no knowledge and some nefarious guy comes in and runs the bank.
I said "Bullfeathers, that isn't true anymore." So I launched a program for small banks which became very successful.
Then we wrote for larger banks, less successfully than for the smaller banks.
Around the same time that we did the banking program, I came out with my BEPI program -- Bankers Executive Protection Insurance. In the 1970s we had a rash of kidnappings in the country and they were focussing on banks.
The modus operandi was they would call the president of the bank and say we have your wife and we want $25,000 in a brown paper bag and we'll collect it at McDonalds in an hour. Now, the kidnappers knew at that time a bank executive was able, under his own recognizance, to take $25,000 out of the bank. This went on and on and on.
We wrote the coverage for the kidnappings and it became very successful.
It was interesting, because when the banker took the funds from the bank and conveyed them to a third party he was actually in default, because he took funds that were not intended for the purpose of paying off the kidnappers. Therefore there was a serious question about the ability to cover the presidents of the banks.
So I said, look, when you buy my coverage under the BEPI program you will assume that we have on deposit in your bank the limit of the liability of the coverage you purchased so that if the situation should develop where the president needs to take the money to pay off the kidnapper, he will not be defaulting, he will be using monies that are there for that purpose. It was a big change.
How did you become involved in the ERISA coverage?
I had researched with my people the effect of the ERISA law that was coming through Congress in 1974 and the need for it. The intent of ERISA was basically to provide fiduciary liability for those who have an involvement with employees or employee trusts.
We researched it and determined a format for the coverage. President Ford signed the bill on Sept. 26th, I had a policy on the street on the 27th, and we became the lead market in ERISA.
As a marketing tool we also decided to put both D&O and ERISA coverage under the one policy, because eventually there were insurers that wrote ERISA but not the D&O and there were D&O carriers who didn't write ERISA and since we wrote both we developed the package policy.
Why did you want to get into political risk coverage?
The concept of AIG was we wanted to be as much of an insurance supermarket as we could be. We didn't want somebody to walk into our office with a program and then have to walk into another company to finish it off.
At AIG we had an awful lot of international opportunities and facilities and clients so we thought we had the expertise to analyze the difference between countries. We just wrote nationalization and confiscation and expropriation to start with and then we added to that inconvertibility of currency and then we added to that contract repudiation and then we finally added export and credit, so we gave the entire package.
When you look at the coverages you were involved in today, have they developed in the way that you would have predicted and desired?
I can say very positively yes. As the years have gone by the inclusion of additional coverages making the cover broader and more responsive to the needs of the insureds has certainly taken place. That was something that we foresaw but we didn't have the wherewithal in reinsurance to go broader than we did.
As the policies progressed over time, and they have been expanded to cover other insurable people, such as employees, that broadens the scope of the policy. And they have added add-on coverages, but the original concept of D&O has never varied.
Kidnap and ransom has blossomed all over the place. But the amount of kidnapping that we had has gone down and it's more of a perfunctory coverage now.
ERISA hasn't changed really. It's grown in that everybody has to have it now.
Political risk has grown but the economic strife of the world has relegated certain countries almost non-insurable, so it's still a very tight coverage and very carefully underwritten.
Do you think that some of the specialty risks that are emerging today, like coverage for sexual harassment, are answering clients' needs? Are they insurer driven or insured driven?
I think the fact is that there are coverages that are put to the market in the hopes that it will be seen as a needed coverage, not so much that it is.
In the case of ERISA and D&O there was a very keen need for it, but in sexual harassment you have a coverage that's being offered to a company but the question is do they really need it?
Are they worried about sexual harassment? Yes, they are worried about it but whether it is something they want to put a lot of money into the coffers to buy, that is another question.
The coverage does have many limitations that may make it less attractive to the buyer. So the writers of the coverage are now packaging it with other coverages and that I think is going to get sold.
But I agree with you that there are ventures into insurance and new products that have to be sold rather than bought.
What direction do you see the market going in the future?
I think the era of innovation is at its peak and there are new opportunities every day. There are constant changes in regulations and they are all opportunities for insurance. The most important thing is that there is somebody there to understand the opportunity for insurance.
How do you recruit those types of people and where do you look for them?
When we started writing D&O obviously I couldn't go and hire a property person because they didn't have the background necessary to do the financial analysis. So I said to Hank we have to make our own underwriting team. So, I drew from accountants, lawyers and financial analysts. It worked.
Once you have a nucleus, then they can train others that don't have to have the same background. The senior person that we had at one time was an ex-schoolteacher, another one had a business administration degree.
So you have to let the punishment fit the crime. You should not be bound by the fact that they are "underwriters." The question you have to ask yourself is are they adequate for the job that you want them to do and then you augment the people that you need.