Thursday, September 18, 2008

Some Thoughts on AIG

Inasmuch as this is a blog about insurance, it seemed obvious that we'd want to comment on the recent events surrounding our acquisition of the largest American insurance company. The issues are, of course, complex and somewhat disturbing. I've asked Bob to put together a more comprehensive piece, so I don't want to step on any toes (no pressure there, Bob). But I have some preliminary observations that I'd like to share.
Oh, you're wondering about that first sentence: our acquisition of AIG.
Like it or not, you and I just bought an insurance company. As we've repeatedly pointed out here at IB, the gummint has no money. It has the power to take money from thee and me, which is how it pays its bills (or not). So while it's convenient to say that the Fed has "bailed out" a massive financial institution, it's more accurate to say that you and I just bought it.
Did we get a good deal?
At this point, it's impossible to say. For one thing, it seems to me that although this looks like Fannie and Freddie, it's really not. Those were quasi-government entities to begin with, while AIG is - or was - a publicly traded company wholly in the private sector. It seems to me that there are a number of issues; I'll touch on just a few:
First, insurance is a highly competitive business. Carriers often operate on razor-thin margins, and try very hard to build market share with the resources available to them. But that's all they have: the resources on hand. AIG, however, now has the ultimate reinsurer: the US Government. Or, to be more precise, the US Taxpayer.
Second, what kind of signal does this send to the rest of the market? It's no great stretch to say that carriers can now comfortably take even more substantial risks, secure in the belief that, should they not pan out, you and I will step up to the plate for them, as well. That doesn't bode well, particularly when one stops to think about the nature of risk itself. The message here, whether intentional or not (and I'm reasonably certain that it wasn't), is that carriers are now free to assess risk with a much more liberal attitude.
Finally, it bothers me that an industry that has long fought to keep regulation at the state level isn't screaming out loud at federal intervention. Yes, a carrier failure of this magnitude would send major shockwaves through all kinds of financial sectors, but ultimately, state guaranty funds are there for a reason. As are state regulators. I think the industry is making a very big mistake by accepting this situation with nary a whimper.
Okay, that's where I am right now, and I suspect that my co-bloggers will be sharing their thoughts, as well. Obviously, there's nothing we can do about this except to deal with the new paradigm.
I just think that this particular change was ill-advised.
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