Businesses are built on simple calculations

November 14, 2009 03:35 pm | Updated 03:35 pm IST - Chennai

Ron Shelp wanted to write a novel, an adventure story, about ‘a company founded in China, the first reverse multinational, operations in 130 countries, and zany adventures such as employees imprisoned in Iran and Nigeria.’ But the final output was about the original, ‘the amazing story of Hank Greenberg and the history of AIG,’ captured in ‘Fallen Giant’ (www.wiley.com).

The collapse of AIG was much more complex than due to Greenberg’s hubris, notes the prologue to the second edition. Because, “in the complicated international world in which we live, a world where AIG grew and prospered dramatically, every shade is grey.”

For starters, there is education about AIG in a Wikipedia page devoted to ‘American International Group’ – with history dating back to 1919, when Cornelius Vander Starr established an insurance agency in Shanghai, China. “Starr was the first Westerner in Shanghai to sell insurance to the Chinese, which he continued to do until AIG left China in early 1949.” And, more recently, the company, rescued by the US Government post financial meltdown, has reported its second quarterly profit.

A major reason for AIG’s growth has been its willingness to insure what others would not, writes Shelp. “The premiums are higher and the competition is less, or nonexistent.” An example he cites is about how, back in the 1970s, Greenberg had the idea that AIG would write political risk insurance – insurance against expropriation, currency inconvertibility, and the like.

The author finds the origins of such risk-taking practice to China, where Starr was ready to insure a wide assortment of risks – from a baseball team wanting protection against rainstorms to the cargo of a Czech ship carrying refugees from Vladivostok to Europe.

One of the anecdotes in the chapter titled ‘Secrets to building the Chinese empire’ quotes a long-time friend of Starr, Henry Luce, the China-born founder of Time, Inc., thus: “Neil Starr started out in Shanghai with a very simple calculation. He figured that with the coming of modern hygiene to Asia, the life expectancy of the Chinese must invariably go up, so he went into the life insurance business when rates, based on a life expectancy of less than 30 years, were immensely high. What could be simpler or more obvious than such a calculation? Well, most businesses are built on simple calculations.”

In ‘Life with Hank Greenberg,’ Shelp observes that a powerful contributor to AIG’s success has been its uncommon ability to get what it wants from governments across the world. “AIG executives learn early on to approach government and regulatory problems in the same aggressive way they attack business issues in general. The company routinely tries to persuade, cajole, or, if necessary, intimidate officials at all levels anywhere in the world.” A telling example, described in the book, is the AIG campaign to achieve majority ownership of its Mexican affiliate, by nearly arm-twisting US lawmaking.

Another example of working with the government, recounted in vivid detail, is the Iran operation of AIG, for which K. C. Shabani, a staff from the California office chosen for the task, “divorced his wife and married the Shah’s social secretary, whose brother was the lover of the Shah’s older sister, who had real influence on the Shah. So suddenly he was in, with regular Saturday tennis games at the palace and the social whirl of Tehran. Finally, in 1975 the Iranian government passed a law permitting AIG to become the country’s first foreign insurer. Shabani was made the manager, and the company did well…”

Gripping read.

>BookPeek.blogspot.com

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