Brainstorming for business: AIG's search for new risks worldwide often makes it the first to market a new insurance product.

The SAFETY Act, a provision in the Homeland Security Act of 2002, encourages companies to create new anti-terrorism technologies such as bomb sniffers for airports. The regulations for that Act, issued in October 2003, require the purchase of Safety Act liability insurance, which did not exist as of that date.

But when American International Group became aware of this little-known provision in early January 2004, it took just 10 weeks for the insurer to conduct discussions with Homeland Security officials, analyze the problem, create the insurance policy with subsidiary Lexington Insurance, rate the policy, put together the form, assemble the marketing materials and send out a press release. Within four weeks, Homeland Security announced the first SAFETY Act certifications, and the first purchaser of this insurance bought AIG's coverage, The SAFETY Act Homeland Security Protector, said Ty R. Sagalow, president of AIG Product Development.

"For us, this is a core part of our culture over the last 80 years--to search for new risks as they may appear anywhere around the world and be one of the first, and frequently the first, to market a new insurance product," Sagalow said.

AIG is well known in the insurance industry as a product innovator. For decades, the company has been a leader in creating a number of products, including directors and officers liability in the United States in the late 1970s, employment practices liability in the United States in the 1990s, and cyber risk insurance in the dot-corn era of 1999-2000. AIG was the first to develop the ERISA policy (Employee Retirement Income Security Act) within just a few months of passage of the new law in 1974. Also, after Sept. 11, the carrier was one of the first companies to introduce a stand-alone commercial property facility to write cover for terrorism, and it worked to create a War on Terrorism Risk Pool for commercial airlines.

Just recently, AIG announced it would provide coverage for loss on commercial property arising out of terrorist acts involving biological or chemical agents. While Lloyd's may be offering something similar, this is the first time a carrier has provided a product of that nature in the U.S. market on a widespread basis, said Richard Thomas, senior vice president and chief underwriting officer for AIG.

AIG is poised to get the jump on competitors with its centralized, dedicated AIG Product Development team, led by Sagalow. The dozen members of the New York-based team include an actuary, an attorney, marketing and sales experts, and seasoned veterans in specialty lines, personal lines, general liability, property, casualty, small business, accident & health and financial lines. "Their only job is to search out new risks anywhere in the world," Sagalow said.

They accomplish this in a number of ways. Team members do basic research, reading publications and revisions in laws. They also communicate with people in different sectors of the global insurance industry. "We have someone whose entire job is to reach out to the broker community, which can come up with great ideas," Sagalow said. "And we reach out to the risk management community--the direct client community."

AIG's team also works closely with attorneys. "One of the main changes in society that leads to new product need is a change in the law," Sagalow said. AIG has a panel counsel program of lawyers throughout the world who tell the team of any such changes. Team members also consult with some 40 AIG lawyers outside the country and a lesser number within the United States. AIG also recently created a Claims Executives Panel, "an excellent source for new products because they see problems every day with the existing insurance offered by the industry," Sagalow said.

A Plan for New Products

Once an idea surfaces, here's the drill: the AIG Product Development team vets the proposal by examining the exposure, potential demand, underwriting issues, reinsurance and the distribution channels that might exist to sell it. The research is reviewed and product specifications are written. Then, rates are determined, forms and applications are written, a market strategy is developed, promotional materials and a press release are drafted, and a launch event is planned. If necessary, reinsurance is purchased at this stage. Six months to a year later, the business unit handling the product and the team conduct a performance assessment and decide whether or not rates or other elements need to be adjusted.

Generating new products doesn't fall solely on the team's shoulders, however. The group also acts as the incubator for proposals from coworkers, Thomas said. "The culture of the corporation is one where we expect all of our people--at least at one moment every day--to think about the types of new products that we might want to consider," he said. "In a number of companies, if you have a really great product idea, you've got to take time out of everything else you do to develop it. Here, if the product idea comes in through one of our business units, our claims people or underwriting people, or anyone else in the organization, it can be referred to Ty's unit for review and development."

If an employee's idea results in a successful product, he or she can be eligible for rewards up to $10,000. "We have an ad hoc bonus program that, if one of the originators of one of these ideas hits a home run, it can be recognized by their profit center group in the next quarter," Thomas said.

How Fast MG can move on a product idea depends upon the particular product and the need for it in the marketplace, Sagalow said. While the company moved very quickly on the SAFETY Act Homeland Security Protector, for example, some products might take a considerable amount of time to bring to market because it may take the carrier longer to determine if the exposure can be successfully underwritten, he said.

"One of the things that distinguishes AIG from many other insurance companies is that we believe we are in the business to take risk," Thomas said. "We're willing to take risk, but we believe that we have to do that intelligently. We've constructed these various mechanisms so that we can quickly assess and analyze and make a determination of whether or not we can underwrite that risk. But we don't shy away from it. Rather, we embrace it and then try to address it in a very intelligent way."

Harry Ennevor, executive vice president of broker E.G. Bowman Co., said AIG often is the first company to come out with new ideas that other companies eventually begin to write.

"They're sort of an American Lloyd's of London, but an admitted company--at least for the most part," Ennevor said." AIG was one of the first to write pollution coverage, product warranty coverage and a few others. In the travel accident arena, my specialty, AIG has been able to underwrite the types of situations no one else but maybe Lloyd's might touch." For example, a few years ago a woman scientist at the South Pole needed medical emergency rescue. AIG was willing to write coverage for that effort, he said.

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American International Group Inc.

A.M. Best Company # 05953

Headquarters: New York 

Lines of Business: General insurance, life insurance, financial services, retirement services and asset management

2003 Net Income: $9.3 billion

Distribution: Independent agents, brokers, direct to consumers (limited to personal lines products)

For ratings and other financial strength information about this company, visit www.ambest.com.

Some Recently Launched Products

* The SAFETY Act Homeland Security Protector[SM]

* AIG Health Companion

* AIG HELP-Health Emergency Liability Protection

* Cyber Insurance for Community Banks

* Marine Operations Business Interruption

* Personal Identity Internet Cover

* Residential Contracting Special Excess Liability Policy