Time to put an end to AIG’s misery
Sometimes, it seems like AIG’s crisis couldn’t get any worse.
After all, what was once the world’s
largest insurance company has already consumed over $120 billion in
taxpayer funding, paid big bonuses to some of the very executives that
helped run it into the ground, and attracted so much anger that its
employees have been warned not to wear company apparel in public.
largest insurance company has already consumed over $120 billion in
taxpayer funding, paid big bonuses to some of the very executives that
helped run it into the ground, and attracted so much anger that its
employees have been warned not to wear company apparel in public.
In fact, however, two factors—AIG’s
own activities in the insurance market and the stability of its
state-regulated insurance business–suggest that the AIG crisis will
probably get worse before it gets better.
own activities in the insurance market and the stability of its
state-regulated insurance business–suggest that the AIG crisis will
probably get worse before it gets better.
Ever since the government first
infused capital into AIG, the company has cut rates on a variety of
products. Many other insurers have cried foul but none has proven that
AIG has violated any laws requiring “rate adequacy.” (Because insurance
is worthless if insurers can’t pay claims, it’s illegal to charge too
little for an insurance policy.)
infused capital into AIG, the company has cut rates on a variety of
products. Many other insurers have cried foul but none has proven that
AIG has violated any laws requiring “rate adequacy.” (Because insurance
is worthless if insurers can’t pay claims, it’s illegal to charge too
little for an insurance policy.)
But accusing AIG of violating
existing laws probably misses the point. Due to the massive cash
infusions it has received from taxpayers, AIG probably can keep
its promises. And that present an even bigger problem: AIG’s continued
presence in the market destabilizes its competitors.
existing laws probably misses the point. Due to the massive cash
infusions it has received from taxpayers, AIG probably can keep
its promises. And that present an even bigger problem: AIG’s continued
presence in the market destabilizes its competitors.
Major U.S. insurers like Allstate
and the Hartford have reported massive losses in the wake of AIG’s
collapse and the overall insurance industry has begun to shrink for the
first time since record-keeping started.
and the Hartford have reported massive losses in the wake of AIG’s
collapse and the overall insurance industry has begun to shrink for the
first time since record-keeping started.
A partial or complete shutdown of
AIG could actually revive the fortunes of some of its troubled
competitors but, so long as AIG exists as a government owned entity,
prospects for an industry-wide revival seem grim.
AIG could actually revive the fortunes of some of its troubled
competitors but, so long as AIG exists as a government owned entity,
prospects for an industry-wide revival seem grim.
And it gets worse. Officially, AIG’s
problems exist as a result of massive bad bets in its London-based
investment division and, on paper, AIG’s subsidiaries that
sell automobile, life, homeowners, and commercial insurance appear
healthy.
problems exist as a result of massive bad bets in its London-based
investment division and, on paper, AIG’s subsidiaries that
sell automobile, life, homeowners, and commercial insurance appear
healthy.
But they may have more problems
than the company has indicated. These subsidiaries, 71 in all, receive
regulation at the state level and nobody except the company’s
executives has a full picture of their financial health.
than the company has indicated. These subsidiaries, 71 in all, receive
regulation at the state level and nobody except the company’s
executives has a full picture of their financial health.
Even with capital markets in
trouble, AIG should have found buyers for many of them and used the
funds raised to pay back taxpayers. So far, however, it has sold only
one U.S.-based insurance business. And this may mean that the
subsidiaries have yet-undisclosed problems.
trouble, AIG should have found buyers for many of them and used the
funds raised to pay back taxpayers. So far, however, it has sold only
one U.S.-based insurance business. And this may mean that the
subsidiaries have yet-undisclosed problems.
Why else would investors remain on
the sidelines for so long? AIG’s mind-bogglingly-complex structure,
indeed, should worry everyone. State Farm, which has more U.S.
customers than AIG, makes do with only eight subsidiaries.
the sidelines for so long? AIG’s mind-bogglingly-complex structure,
indeed, should worry everyone. State Farm, which has more U.S.
customers than AIG, makes do with only eight subsidiaries.
The complexities of AIG’s
subsidiaries and the interrelationship may ultimately mean that the
supposedly localized problems afflict the entire company. On the
surface, AIG’s structure has a lot in common with another high-flying
company that had a big fall—Enron.
subsidiaries and the interrelationship may ultimately mean that the
supposedly localized problems afflict the entire company. On the
surface, AIG’s structure has a lot in common with another high-flying
company that had a big fall—Enron.
A collapse of state-regulated AIG
subsidiaries could be a major problem for virtually all Americans. When
a state-regulated insurer collapses, all states have mechanisms called
“guarantee funds” that allow them to impose special taxes called
“assessments” on almost every type of insurance policy to cover the
cost of an insurers’ collapse. If a wholesale collapse of AIG’s
state-regulated businesses took place, these assessments alone could
cost a typical household over $1,000 a year.
subsidiaries could be a major problem for virtually all Americans. When
a state-regulated insurer collapses, all states have mechanisms called
“guarantee funds” that allow them to impose special taxes called
“assessments” on almost every type of insurance policy to cover the
cost of an insurers’ collapse. If a wholesale collapse of AIG’s
state-regulated businesses took place, these assessments alone could
cost a typical household over $1,000 a year.
AIG’s looming problems have no easy
solution. Bankruptcy under current laws may not make sense for AIG
since simply forcing the company into immediate liquidation would
almost certainly precipitate the collapse of its state-regulated
businesses.
solution. Bankruptcy under current laws may not make sense for AIG
since simply forcing the company into immediate liquidation would
almost certainly precipitate the collapse of its state-regulated
businesses.
But AIG needs to undergo
reorganization process. At minimum, AIG company should lose its
taxpayer lifeline and sell its state-regulated insurance subsidiaries
at auction in order to repay whatever it can to taxpayers.
reorganization process. At minimum, AIG company should lose its
taxpayer lifeline and sell its state-regulated insurance subsidiaries
at auction in order to repay whatever it can to taxpayers.
So long as it exists in its current
form, it should not be able to continue efforts that undercut its
competitors and, if the subsidiaries turn out to have problems of their
own, the federal government should look for ways to minimize or
eliminate the burden on state taxpayers. (It could probably do this at
no cost to the taxpayers by giving state guarantee funds a claim on
AIG’s best assets.)
form, it should not be able to continue efforts that undercut its
competitors and, if the subsidiaries turn out to have problems of their
own, the federal government should look for ways to minimize or
eliminate the burden on state taxpayers. (It could probably do this at
no cost to the taxpayers by giving state guarantee funds a claim on
AIG’s best assets.)
AIG, quite simply, deserves to be
put out of its misery. The federal government made a mistake in
“helping” the company to survive and further efforts to avoid the
company’s demise will probably make things worse.
put out of its misery. The federal government made a mistake in
“helping” the company to survive and further efforts to avoid the
company’s demise will probably make things worse.
Eli Lehrer is a senior fellow at the Competitive Enterprise Institute.