Insurance Information

AIG's alarming recent claims that if it were to collapse this could threaten banking institutions as well as decimating the wider U.S. life insurance industry, are largely unproven.

The statement was made in late February as part of a presentation to U.S. regulators at the time of the third stage of the U.S. government's rescue of American International Group Inc. -- the global insurer whose possible collapse has already cost the U.S. taxpayers close to $180 billion.

While it is possible that this same report strengthened AIG's cry for the government to place yet another $30 billion at the insurer's disposal, this may more reflect alarmist guessing than a realistic idea of what is possible in the future.

The Citigroup analyst, Colin Devine, suggests that it is irresponsible and inaccurate to suggest that AIG will bring down the industry. She says that this is not at all true. She adds that it is true that the life insurance industry is going through some difficult times but this has nothing to do with what is happening to AIG.

Until recently, AIG was ranked as the world's largest insurer. Last September it was given an infusion of cash by the U.S. government as it experienced losses on toxic mortgages acquired by its financial products unit, being nearly driven by the holding company into bankruptcy.
It was the decision at the time, of the U.S. Treasury and Federal Reserve that such a move was necessary of AIG were to be saved and that it was necessary to save it in order to protect millions of banks and other individuals and institutions that had purchased guarantees on debt from AIG Financial Products. The government feared possible losses that could send shockwaves through the already sick financial markets.
With turmoil created by the Lehman Brothers' collapse in mind, that occurred just two days before the initial AIG rescue, the U.S. government has continued to fund the insurer.

In its presentation to regulators, AIG warned that an AIG collapse could have a growing affect on the number of U.S. life insurers already weakened by credit losses.

As if to only worsen the situation, AIG officials as a part of their run for greater federal funding, suggested that state insurance guarantee associations, that were set up approximately 40 years ago to ensure policyholder obligations are met, would be quickly dissipated, and that this would lead to even greater runs on the insurance industry.

But the troubles affecting AIG are not linked to their insurance units, which may be found in about 140 countries throughout the world, and there is no clear evidence that even a bankruptcy would necessarily lead to the closures of any subsidiaries.

Professor emeritus of Indiana University Joe Belth, editor of the Insurance Forum newsletter, described it as being misleading for AIG to make any parallel comparisons between troubles at its parent company with the insurance businesses in general.