AIG recently approached the Federal government for its third billion-dollar bailout since its $85 billion bailout last September. This time, AIG will receive a $30 billion infusion, raising the stakes to almost $150 billion. What’s a few billion between friends, right?
AIG may well ask itself, given its fourth quarter losses of almost $62 billion, the largest loss in any
An October 2008 survey by Advisen asked top insurance professionals how concerned they were about AIG’s financial stability in light of the first bailout. At that time, 75 percent of the respondents felt either “very confident” or “somewhat confident.” In that survey, not one broker admitted advising its clients to replace AIG coverage.
Best and S&P ratings in March 2009 for most of AIG’s subsidiaries hovered in the “A” range. However, relying solely on ratings can be troubling. “Rating agencies depend greatly on information gathered by the rating agency through regular Q&A with the company. In other words, garbage in, garbage out,” cautions Greg Sosbee, CPCU, CEO of Dynasty International Group.
“AIG’s Best rating at this point is almost meaningless,” Sosbee continued. “The company’s ability to keep any rating with the issues of the parent company is short of a miracle and shows a weakness of any type of third-party ratings [system].”
An AIG missive dated March 2, 2009, described future plans to spin the commercial insurance holds into a new entity, AIU Holdings, Inc. This has some brokers pleased. According to Sosbee, “Creating AIU Holdings is an attempt to further insulate the insurance companies from the parent. But even that will only hold up under so much pressure. In the end, if AIG declares bankruptcy, the state regulators will be all over the AIG companies. No Federal judge will let the subsidiaries operate without supervision. Believe me, you do not want to work a claim with a company being managed by a state or Federal regulator,” Sosbee cautions.
What are brokers advising given this latest record loss? Do they still recommend their commercial clients stay the course with AIG? From the chatter I see, most brokers are still recommending renewals with AIG because they feel the property and casualty companies are solvent. However, many public agencies renew in July, so we may see some changes.
Richard Betterley, CMC, a risk management consultant, offers these thoughts. “Yes, AIG has severe problems at the parent level, but the operating insurance companies are well-shielded from these problems. Although I have always been critical of state insurance regulation, in the case of AIG and the core property and casualty companies, it has worked to protect the insured.”
If your commercial insurance program holds AIG paper, what should you do? According to Betterley, “In many lines of coverage such as hospital professional liability, directors & officers, various professional liability lines [of coverage] and high excess liability, it is very difficult to assemble sufficient capacity without AIG. Also, long relationships with AIG on difficult risks can be very hard to replace.”
For those with large and unique exposures, AIG may remain the best alternative. As one industry wonk told me, “You don’t go to AIG for the way they handle claims; you go to AIG because they can get the deal done.”
Can your broker give you an unbiased opinion? According to one insurance industry insider, I’m not sure. A letter to insurance producers from the New York Department of Insurance specifically regarding AIG reads in part, “Misrepresentations or misleading statements regarding AIG insurance company subsidiaries in New York—or other insurers—aimed at causing fear or undue concern amongst insurance consumers will compel the Department to take appropriate disciplinary or other regulatory action against any person violating the Insurance Law and regulations hereunder.” This type of announcement may inhibit agents and brokers from offering too much advice.
Working with a consultant may be your best bet. “My suggestion is that insureds, in conjunction with their brokers and consultants, look at the specifics of their situation, the lines of coverage and the risk of changing claims-made coverages before jumping on the ‘dump AIG’ bandwagon,” according to Betterley.
A risk management consultant can help you sort through the issues involved in this complicated imbroglio. “Free of compensation conflicts or the need to worry about their relationships with insurers, an independent consultant can help a client arrive at a decision on this challenging topic,” Betterley said.
One tongue-in-cheek comment regarding AIG on a risk board last week summed it up perfectly. “I am so confident in Congress; with them in the mix, I know I can sleep well at night.”