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Opportunities abound within China's market
Published March 26, 2007
Martin J. Sullivan this month marked his second year as president and chief executive officer of American International Group Inc., a company that has a unique history: it began as an insurance agency in Shanghai, China, in 1919, before relocating to New York. AIG today is the world's largest insurer and one of the major foreign businesses operating in China. Mr. Sullivan spoke recently with BI Editor Regis Coccia about the outlook for insurance and risk management in China. A podcast with Mr. Sullivan on AIG's origins in China can be heard at www.BusinessInsurance.com.
Q: What was Cornelius Vander Starr doing in Shanghai when he decided to start the agency that later became this global company known as AIG?
A: It's a great story, isn't it? A Californian ice cream salesman lands in Shanghai, legend has it, with 300 Japanese yen in his pocket and forms the basis of what has become the largest insurance and financial services company in the world.
I think what Mr. Starr saw--I'm doing this from the history books; as you'll appreciate, I wasn't around at the time--was he recognized immediately that there was an opportunity to provide life insurance products to Chinese individuals. Previously, a lot of focus concentrated on selling these products to the expatriate community in Shanghai.
But Mr. Starr had the vision, and the ability to execute that vision, of selling life insurance products to the Chinese. Really, from that, the organization grew.
Q: How has AIG's history in China since 1919 helped AIG expand its business there?
A: Being born in China clearly doesn't hurt in any way, shape or fashion. But I think also it was a long-term commitment to China which involved many visits over the past 25 or 30 years by a number of AIG executives, obviously including (former Chairman and CEO Maurice) Mr. Greenberg and led many times by Mr. Greenberg, that resulted in us getting a license back in the early 1990s. I think from our standpoint, we were born an international company before we became an American company by definition. That experience in China and expanding throughout Southeast Asia certainly put us in good stead. But I think the position we're in today in China reflects not only the beginning of AIG in 1919 but a lot of effort in the preceding years.
Q: What specific lessons has AIG learned in China that have helped it grow and expand elsewhere?
A: Clearly, one of the attributes AIG has that differentiates it from the rest to a degree is our ability to enter new markets. We're able to, in many respects, be the first company going into an emerging market or a market that opens. A lot of that, I believe, emanates from the entrepreneurial culture that we have in AIG, and that ultimately was born in China in 1919. That entrepreneurial culture clearly is a key differentiator for AIG. From that base in China, Mr. Starr grew the operations first throughout Southeast Asia and then much more broadly.
Q: What are the major risks that foreign businesses face when they set up operations in China, and how is AIG helping them?
A: I wouldn't necessarily call them risks but more opportunities. From our perspective, we have a number of operations in the country both on the life and nonlife side. Up until January 2004, nonlife business was only allowed to distribute and sell products to foreign enterprises. That's been expanded since. But what we can bring is new product innovation to the marketplace, expanded distribution opportunities and really respond to the needs of the Chinese consumer and commercial enterprise as the economy develops and grows. And, as more people have net disposable income, they're clearly looking to protect their assets and purchase savings and life products.
It's like any startup operation. You want to have new-product development and a broad-based distribution platform.
Q: Western companies operating in China are already using insurance, but how do domestic Chinese businesses view commercial insurance? Is AIG finding them receptive or skeptical to the need for protecting their people and assets?
A: The trend that we see is the initial focus is on asset protection, either bricks and mortar and business interruption type exposures, but clearly when they're an exporting company and they see the risks that are being taken on outside of China, in particular, we're seeing more demand for products liability coverage. And as companies go for IPOs and have external shareholders, there's a growing demand for D&O insurance. Aviation, accident and health, there's clearly a strong demand. Other lines of business will clearly emerge over time in China, there's no doubt about that. At the present moment, the key focus is on asset protection, products liability and marine.
Q: What are the biggest challenges foreign insurance industry companies face in China?
A: I don't necessarily look at them as challenges but more as opportunities. Candidly, we would like a broader distribution footprint. Obviously, China by definition is a very large country with a very large population. We were clearly delighted to get the provincial license expansion approved last year in Guangdong and Jiangsu. That brings 170 million potential new customers into our catchment zone. That could keep us busy for a week or two. Clearly, distribution is key for any organization and you build that over time, and you want it to be multifaceted.
Q: Nonlife business in China is much smaller than life business at the moment. How does AIG foresee commercial nonlife business developing there?
A: A key component of that was our ability to write Chinese companies post-January 2004. That allows us to pursue a broader customer base. We're developing that by bringing new products to that customer base. Obviously, a lot of focus is on insuring the assets in China and providing property insurance. But also, with the amount of exports leaving China, there's a continuing growing demand for products liability coverage. As you're seeing some of the IPOs emerge, there's a growing demand for D&O insurance. There's clearly a demand for marine insurance. Over time, other coverages will be introduced. From our standpoint, it's (about) getting distribution, getting to the customer and providing them with the products and services that they want. That's the challenge, not only in China but elsewhere.
Q: How many employees does AIG have on the ground in China right now? How does AIG handle claims there?
A: We have around 3,500, and it's worth pointing out that we have about 25,000 life insurance agents as of the end of last year. That gives you some idea of the employee and agency workforce there. Claims are not handled in any way significantly different in China than they are elsewhere in the AIG family. There are authorized loss adjusters and loss personnel in both the life and nonlife company, and they handle the claims as they occur within their respective authority levels. But there's no significant difference to handling claims in China than anywhere else in the AIG family.
Q: To keep relations strong, how often does the head of a global company such as AIG need to meet with senior Chinese government officials?
A: It's important to have very open and transparent relationships with all of your regulators around the world. You can rest assured, every time I'm in Beijing or in Shanghai, I reach out to our regulators while I'm there. If diaries permit, I welcome the opportunity of meeting with our regulators at CIRC and elsewhere. It's always beneficial to the organization to keep a very open and positive dialogue with our regulators.
Q: How many times a year do you personally visit China?
A: Since I've taken office, I've been there five or six times. So I average three a year....When I'm there, not only do I want to meet with our regulators, I want to meet with our customers, with our employees, review our strategies. Every time I go to China, you can't help but be amazed at how much progress the country continues to make. Whether it's Beijing or Shanghai, every time I'm there I continue to see different things being constructed, improvements appearing, and the country continues to develop.