For AIG, the Appetite for Risk Stops at Lean Cuisine(R).

An Interview with Robert E. Lewis

Banks and insurance companies face increasingly similar risks, especially as the line between the two sectors of the industry grows ever fainter, courtesy of the Gramm-Leach-Bliley Act. And as far as appetites for risk go, American International Group, Inc. (AIG), the leading U.S.-based international insurance organization, is into Lean Cuisine(R).

Robert Lewis is VP and CCO of AIG, which has growing financial services and asset management businesses. He sets worldwide policy for AIG with respect to the extension of credit by all subsidiaries and divisions, establishes credit and risk management guidelines, identifies potential exposures, and establishes systems to manage and monitor such exposures on a global basis. He chairs the AIG Credit Risk Committee, established to oversee and approve all financial transactions, investments, and credit exposures outside certain established parameters and limits.

As a member of RMA, Lewis has worked to help insurance companies learn and adapt banking risk management techniques to their sector of the industry. Before AIG, he was at ING Bank, the banking division of Internationale Nederlanden Gro[accute{e}]p, the largest insurance group in the Netherlands, in New York, where he served as assistant general manager for North America, CCO, and senior executive responsible for risk and exposure management. Before ING, he spent 12 years in various management positions at Chase Manhattan, including VP, Portfolio Risk and Policy Review.

Who better than Robert Lewis to tell us more about the role of credit risk management in the insurance industry? Elliot Asarnow (above, right), managing director of ING Capital Advisors and member of the editorial advisory board of The Journal of Lending & Credit Risk Management, interviewed Lewis in May.

EA: Would you please describe the role of CCO at AIG?

RL: The CCO's ultimate responsibility is to see that credit risks are managed appropriately throughout the worldwide organization. Those credit risks emanate from many different sources because of our varied businesses. Our mission is to ensure that no credit event causes a material impact on the firm by either increasing the volatility in our earnings or weakening the financial strength of the firm.

AIG's largest business is insurance underwriting--property and casualty (P&C) and life. Premiums received from writing our insurance policies are invested until such time as claims are paid, and credit risks arise when we invest any of these premiums in assets more risky than the U.S. government.

Within the P&C business and, to a certain extent, in life insurance, there also are material credit risks because AIG purchases reinsurance to manage insurance risk. In fact, AIG is one of the largest purchasers of reinsurance coverage in the world; the credit risk of reinsurance comes from taking the risk that the reinsurers are both able and willing to pay when we file claims.

AIG also is increasingly involved in managing insurable risk for our major corporate clients--a combination not only of writing risk transfer insurance (taking over the insurable risk from the client and managing it at AIG) but also fronting the insurance for our clients (in essence, helping them to design a self-insurance program). A major corporation might, for example, have AIG write its workers' compensation insurance; however, they would be willing to incur the first $X in losses and only buy risk transfer insurance over and above that. AIG, being responsible for writing the entire policy, would seek reimbursement from the corporation for claims that would be paid within that first level, thus incurring a credit risk on the major corporation. For the amount of claims exceeding the $X amount, we would only have credit risk to the extent we had purchased reinsurance to manage, or hedge, our downside.

Those are the primary credit risk areas for insurance activity. We are, of course, involved in insurance lines that are more directly associated with credit risk by their very nature. In the surety business, we issue surety bonds to back up completion risk, performance risk, et cetera. Surety bonds are a credit and performance business that was basically granted to the insurance industry through regulation. Banks, of course, have a similar role through their letter-of-credit activities.

In our financial services businesses, we have counterparry credit risks emanating from our trading activity. We incur lessee credit risk through our aircraft operating lease activity at ILFC. And, in our consumer finance business, credit risk exists in consumer and small business loans. We also are a credit card issuer in a number of countries.

EA: Prior to joining AIG in 1993, you were at ING for six years and before that Chase Manhattan Bank for 12 years--six in Europe and six in the U.S. Can you describe your experience of moving from banking to insurance?

RL: My career with Chase began after credit training in institutional banking, moved to corporate banking, and then to portfolio risk management. At ING, I was initially responsible for corporate finance and then…