DOES THE GOVERNMENT'S TAKEOVER OF AIG MEAN THAT I SHOULD BE CONCERNED ABOUT THE STRENGH OF MY INSURER?

It’s certainly been an interesting last two weeks reading the increasingly gloomy news about the credit crises and the government bailout of some of our most venerable financial institutions. Certainly one of the big surprises was the federal government's action to take an 80% stake in AIG, one of the world’s largest insurance companies. As a business owner you may have been wondering about the solvency and strength of your own insurance company(s). Insurance risk transfer is a major component of your risk management program, and solvency of your insurer is sometimes taken for granted. So let’s look at the AIG situation and see what it means to the broader insurance marketplace.

First of all, AIG is a major player in more than just insurance. They are a leader in the marketplace for derivative financial products such as credit default swaps and other complex financial instruments not regulated by the Feds or state insurance departments. Their traditional insurance products are still a profitable venture for them. Most traditional property and casualty insurance companies are not involved in these highly speculative risky instruments of credit. Regulation is the key issue. An insurance company’s solvency is monitored by several sources. State insurance departments regulate insurers and classify them as either Admitted or Non- Admitted insurers. Admitted insurers are licensed by the states, pay state premium taxes, and are backed up by state guarantee funds which agree to pay claims according to state law to the customers of insolvent insurers. A Non-admitted company is not licensed, and its customers are not protected by the state guarantee fund. It is very important that you and your agent/broker are aware and have discussed what if any part of your insurance program is provided by Non-admitted insurers.

Second, there are rating agencies such as BESTS who regularly monitor and report financial strength ratings for each insurer. These ratings are available to your agent/broker, to the public on the internet, and on the reports to stockholders. Again, you and your agent/broker should make this a part of your regular review of your insurance risk transfer program. Your agent/broker should help you monitor the financial status of your insurance company.

Finally, there is the question of what affect the fall of stock and bond prices in the market will have on insurers’ solvency. Even though most traditional insurers, life, health, and property casualty, don’t deal with high risk derivative financial products, their asset base of investments has a lot to do with the profitability and ability to provide insurance protection. Just like banks, the more assets they have the more insurance they can underwrite. It remains to be seen whether there will be a tightening in the supply of insurance in the coming year which could drive up insurance pricing. We will monitor that and keep you apprised of developments.