AIG Insurance Units' Risk Misunderstood By Treasury: NAIC 

NU Online News Service, Feb. 3, 10:15 a.m. EST

WASHINGTON—State regulators have told Congress the Treasury’s assessment of how American International Group holding company problems could have impacted AIG’s ability to pay insurance claims is wrong.

In a letter to lawmakers the National Association of Insurance Commissioners said that American International Group’s difficulties at holding company levels would not have prevented AIG insurance subsidiaries from making good on claims.

Moreover, the letter said, AIG’s problems are no reason to “justify a new federal bureaucracy” through creation of an optional federal insurance charter.

“We respectfully disagree with the assertion that insurance regulators could not have separated the insurance units from those companies that had taken terrible risks,” the NAIC letter said.

At the hearing before the House Oversight and Government Reform Committee, Timothy Geithner, former president of the Federal Reserve Board of New York and now Treasury secretary, and Henry Paulson, then Treasury secretary, said they needed to provide AIG with federal bailout cash to prevent problems at its insurance subsidiaries.

Mr. Paulson and Mr. Geithner said they felt they had to pay off AIG financial holding company liabilities in full because a request to AIG bank trading partners to take less than a full payout would have led rating agencies to downgrade the conglomerate, creating problems for its insurance companies.

Mr. Geithner testified that “the people who were responsible for looking at those insurance companies frankly had no idea of the risks to the insurance firms, and you could not separate those companies from the companies that had taken terrible risks.”

Mr. Geithner also testified that the insurance businesses were “tightly connected” to the parent company.

Mr. Paulson added that the healthy parts of AIG had been “infected” by the “toxic assets,” and noted that “one part of the company would have contaminated the other.”

The NAIC letter was signed by Jane Cline, West Virginia insurance regulator and NAIC president, and Therese Vaughn, NAIC CEO.

It noted that Secretary Geithner’s written statement acknowledged that a bankruptcy filing by the AIG holding company “would have caused insurance regulators in the United States and around the world to take over AIG’s insurance subsidiaries.”

Ms. Cline and Ms. Vaughn added, “Without a doubt, insurance regulators had the ability and the legal authority to seize AIG’s insurers from the holding company if needed to protect AIG policyholders through our state receivership and guaranty fund systems.”

Moreover, they said, “It is unfortunate that proponents of an optional federal insurance regulator continue to politicize the extraordinary efforts to stabilize the non-insurance units of AIG and the broader financial system in a misguided effort to justify a new federal insurance bureaucracy.”

“The financial crisis in general and the AIG situation in particular illustrate the problems with regulatory arbitrage created by such a system,” Ms. Cline and Ms. Vaughn said.

At the same time, the letter acknowledged that state regulators “were not aware of the risks posed to the AIG insurance companies by AIG’s federally regulated or unregulated non-insurance units,” as noted by Treasury officials in their testimony.

“We agree,” Ms. Cline and Ms. Vaughn said, but they added that the answer to such problems is “greater information sharing among regulatory bodies to better understand and anticipate how operations outside our respective authorities could affect the group as a whole.”

The letter added, “We also agree that complex groups like AIG call for a systemic approach to supervision.”

“This is why we have called for strong, effective, consolidated supervision of holding companies that leverages the expertise of each functional regulator; in fact, such supervision could have helped avoid the turmoil at AIG,” the letter said.

NAIC’s message was sent in response to a “Dear Colleague” letter sent by Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., to fellow lawmakers.

The “Dear Colleague” letter said that comments at a recent hearing on why the Federal Reserve Board and the Treasury Department decided to pay off AIG’s partners to credit default swaps showed the need for a federal insurance charter.

In their letter, Reps. Bean and Royce said that an optional federal charter is needed because the “uneven state-based system of insurance regulation with state insurance commissioners with different legal authorities, different funding levels, and varied levels of expertise and priorities, has not provided a comprehensive look at the insurance market.”

Meanwhile, in an opinion piece published today in The Wall Street Journal, former New York Insurance Superintendent Eric Dinallo noted that Mr. Geithner had not said  that state insurance regulation caused AIG to fail.  Any financial regulation reform he wrote, "should learn from state insurance regulation" and "insurers are required to keep enough reserves to meet their promises. If that principle applied to all financial services, a replay of the crisis of 2008 would be much less likely. "

• • 2/3/2010 10:49:47 AM
  • Gary
  • AIG
  • The NAIC is correct. As taxpayers we've been bilked by the Government to pay banks through AIG. Now the Gov't is proposing tax changes as respects ceding reinsurance premiums. They haven't a clue as to what they are doing. They're trying to grab dollars from anywhere and they won't stop until they ruin us more or we vote then out after one term.
• • 2/3/2010 10:58:33 AM
  • JAMES LETTE
  • AIG INSURANCE AND TREASURY
  • THE 1999 SEC NEW REGULATIONS CREATED THE EXEMPT NON- REGULATED INSURANCE PRODUCT IN THE AIG INVESTMENT BANK COMPANY OR STOCKBROKER TO HAVE UNFUNDED EXEMPT INSURANCE PRODUCTS CALL CREDIT DEFAULT SWAPTS. READ THE 1999 SEC ACT SIGNED BY MR CLINTON AND PASSED BY THE DEMOCRAT CONGRESS IN 1999 WHEN IN 1999 THEY ALSO REPEALED THE GLASS-SEGAL ACT REGUESTED BY CITI-CORP BANK.
• • 2/3/2010 11:15:03 AM
  • Paul Butler
  • AIG- Should they survuve?
  • The perception of strength is what makes insurance work. The sudden demise of and insurance giant would have cause significant damage to that perception. Investment banks were using AIG as a mirror to deflect the weakness of the security bond like instruments they were selling. The house of cards existed and AIG was one of the bottom cards. This sudden shift of loss to the states would have added to their budget woes. Lack of claims payments to the banking system would have further opened that hole in the dam. Looking back the only thing that is irritating is that there were not more strings attached to the money. Those should have prevented the damaged firms from paying giant bonuses to their executives. Rules separating banking and investment should have been put in place. That probably would have prevented taxpayer backlash and actually made our financial system stronger. Today we are told that the investment and banking industries are not able to value investments to market. Sadly the rule of cost or market has been repealed. It has been replaced by cost or make believe which ever is higher. My fear is that given the same circumstances the Fed will be put upon by the same people that say they do not want any rules. Will they have enough clout to get the Fed to write a check to right the ship they have put holes in with a tax on our grandchildren? Paul Butler
• • 2/4/2010 1:10:45 PM
  • Bill
  • Are you kidding me??
  • The conclusion that AIG corporate could have collapsed with its decapitated insurance subsidiaries continuing on full speed ahead is preposterous. My organization had many tens of millions of dollars of coverage and reserved claims at risk with AIG at the time, and believe you me we looked at this carefully. The loss of corporate administrative support (payroll, benefits, taxes, etc.) by itself would have been destabilizing. Furthermore, given the scenario of an AIG corporate collapse, no matter how flush the AIG P-C insurance units’ statutory capitalization, written premiums would have dived off the chart as insureds frantically cancelled and rewrote and non-renewed AIG policies. Key executives and underwriting teams with skills critical to survival would have fled to competitors and newly created underwriting entities. (Of course, both of these happened anyway at a survivable level even after AIG staggered on with $140 billion of Federal subsidies.) I’m suspicious that the illogical NAIC analysis was skewed to produce the conclusion that it did for self-serving purposes. Had a robust Federal insurance regulatory regime been in place instead of the disconnected 50 state insurance commissioner offices, there would have been a better opportunity to have nipped the looming AIG catastrophe in the bud.
• • 2/8/2010 3:34:48 PM
  • Tom
  • James Lette is WRONG
  • Dear ditto-head, you've probably never bothered to read a book or legislation since you're too busy listening to Rush "Drug Dealer" Limbaugh spout some hatred, but the Glass–Steagall Act was repealed in November, 1999 by the Gramm–Leach–Bliley Act, which was passed by the 106th congress which had a republic majority in both the house and senate. Clinton had to sign it since it was pushed as "modernizing" the financial services industry. You ALSO HAVE YOUR CAPS ON GRANDPA! SNAP!

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