Bailouts

Learning the lessons of AIG’s fall

Posted on Wednesday, October 27, 2010

By Paul J Davies, Insurance Correspondent
Published: October 26 2010 22:27 | Last updated: October 26 2010 22:27
Financial Times
AIG was the world’s biggest insurer before the financial crisis but became the world’s biggest bail-out, casting a long shadow over the sector.
The bitter irony for the rest of the insurance industry is that the US company’s traditional insurance businesses had nothing to do with its failure. It was an unregulated London-based credit derivatives business that brought down the edifice.
AIG’s collapse has nonetheless created serious hurdles for insurance regulators and executives as they seek to persuade politicians and the public that large insurers should not be penalised by the creation of a system-wide financial stability regime.
The International Association of Insurance Supervisors says its members urgently need to present a more sophisticated view of sector risks, so they can make a stronger case to lawmakers.
Many are hoping to make significant headway towards agreement on these issues at the annual global supervisors’ gathering in Dubai this week.
Howard Mills, a partner at Deloitte in the US and a former New York Insurance Supervisor, argues the main problem is that the public does not understand how insurance works. “People have the view that big insurers are definitely systemically risky and politicians are definitely reacting to that,” he says.
John Huff, director of Missouri’s insurance department, acknowledges this difficulty.
“People who would like to put some blame on insurance point to AIG but it was not the insurance subsidiaries that bought the company down,” says Mr Huff, who will represent state insurance regulators on the new financial stability oversight committee created by the Dodd-Frank act.
“We have to make sure that any financial services regulatory reform does not undermine other parts of the system [that work].”
The matter has become pressing for the insurance industry now that many of the most urgent regulatory issues for the banking sector have been settled with the Basel III capital rules.


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