Collapse of Insurance, AIG Could Lead to Tax Hikes

Washington, D.C., March 25, 2009—The collapse of state-regulated insurance
subsidiaries could result in a significant tax hike for nearly all Americans,
warns an insurance policy expert with the Competitive Enterprise
Eli Lehrer, who first
warned about potential problems with AIG’s US-based insurance subsidiaries in
September of 2008, warns that a second scandal appears to be brewing with regard
to the insurance giant.
“AIG subsidiaries are likely in worse shape than appeared at first blush,”
Lehrer explained.  So far, AIG has sold only one of its 72 subsidiaries that
sell insurance in the U.S.
Past collapses have not been a big deal because they have been small; but
an AIG collapse would not be small. “In the past, when insurers have collapsed,
it has meant that people in a few states have seen surcharges of a few dollars
on their insurance policies—annoying, but not a big deal,” said Lehrer. “A
bailout of AIG’s insurance businesses could mean enormous new taxes for just
about everyone. Some people might see a very unwelcome surprise in their
insurance bill.”
Lehrer compared the situation to another famous corporate collapse. “On the
surface, this looks a lot like Enron,” said Lehrer. “A lot of the underlying
business may have had serious problems.”
The consequences for the collapse of any one of AIG’s sizeable insurance
subsidiaries would result in significant taxes—called “assessments” —on
homeowners, automobile, life insurance, and other policies.  These assessments
would be decided at the state level.
In almost all cases, legislatures do not need to approve assessments before
they are levied to bail out insurance companies. All insurers participate in
“guarantee associations,” and in most states, these associations are nominally
private, but state law mandates that all insurers writing ordinary insurance
policies participate in them. With the exception of New York state, the
associations have few hard assets and instead depend on nearly unlimited taxing
“Congress needs to be ready to deal with this problem,” Lehrer
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