AIG Insurance subsidiaries not as solid as originally claimed?

In today's New York Times an article by Mary Williams Walsh raises some new concerns that are surfacing among some in the insurance community about the potential conflicts between the need for AIG to pay back the US Taxpayer and the need to honor the rights of policy holders. Apparently there is concern among some industry observers and others that the amount of internal business that AIG units do between each other could potentially weaken the stability of these firms to pay claims and remain profitable in the future.

You can read the NY Times Article by clicking here.

After I read this over, I'm not quite sure what the point of the article is, other then to name a few independent actuaries and consultants, former regulators and  others and to speculate on the future impact of reinsurance contracts between many of the AIG subsidiaries. While raising the issue does shine some light on the large and tangled relationship that  exists between AIG subsidiaries, it fails to mention that these different subsidiaries are some of the worlds largest excess and reinsurance firms in the world and that they utterly dominate their markets. Reinsurance contracts by their nature involve a lot of shifting of risk, assumption of large risks and transferring portions of that risk to other markets as well. It's how the business is done, has been done, and shouldn't be a cause for concern if properly regulated and audited by State insurance departments.

However, what I did find interesting in the article was the contention that AIG life markets had pledged $8 billion of funds to the US Treasury or the Fed to pay back some of the $187 billion in loans and equity the taxpayors have provided to keep AIG afloat.

The article correctly points out that this is going  to raise some serious issues and conflicts between the rights of life insurance policy holders who rightfully believe those assets belong inside the life company for the protection and benefit of the policy holders. There appears to be litigation in process to address and resolve that issue so that's going to be one worth watching.

At the end of the day the long slow and painful process of watching the AIG companies struggle to maintain the old business model of synergy and sharing of business between it's numerous subsidiaries under the market conditions and public concerns they face now, is going to continue for months if not years. This article does raise some excellent points which is what might happen if an AIG subsidiary doesn't make it and State Insurance officials need to take it over to protect policy holders. Who will get first shot at the funds, the policy holders or the Fed? I'm betting on the policy holders, but who knows anymore and how such a scenario would play out.

Bottom line, as agents and brokers we still need to proceed with extreme caution and diligence if we are contemplating writing business with an AIG subsidiary but as before it would be the height of professional irresponsibility  to encourage or suggest to policyholders or annuitants to move their funds out of these markets and suffer excessive financial loss by doing so. The occasional headlines don't make our job easier but I still advise sitting tight and letting the process and markets work this through to the end.


Posted on July 31, 2009 .