AIG collapse would have cost N.C. $1B - Charlotte Business Journal:
If the federal government had allowed insurance colossus American International Group Inc. and its subsidiaries to fail, N.C. regulators — and ultimately state taxpayers — would have been left with a mess that would have cost, according to a conservative estimate, more than $1 billion to clean up.
That’s the back-of-the-envelope number that officials at the Raleigh-based N.C. Insurance Guaranty Association came up with as they monitored this week’s developments on Wall Street, including the $85 billion federal loan guarantee that’s supposed to save AIG.
“We wanted to see what our exposure would be,” says Mike Newton, the association’s guaranty director. “And the more we looked at it, the wider our eyes got.”
The federal government now controls almost 80 percent of AIG.
Insurance companies, large and small, don’t file for bankruptcy in the way most businesses do. When they topple, they go into a liquidation process in which regulators try to make sure policyholders are protected ahead of other creditors.
On the state level, industry groups such as NCIGA enter the picture to ensure all outstanding policy claims are paid — on auto crashes, for example — and to refund customers any premium dollars paid for coverage that won’t be coming.
The industry groups get the funds to do that by passing the hat among the other insurance companies doing business in the state. In North Carolina, contributions come from 700 firms that, in 2007, had $6.5 billion in premiums in force. Any cleanup money those firms pay can then be deducted from their N.C. tax bills, which means the taxpayer ultimately picks up the tab.
As news of AIG’s chances of survival went from bad to worse, Newton searched the records of the 13 AIG property and casualty companies writing business in North Carolina. Those firms include American Home Assurance, National Union Fire and Granite State Insurance.
Outstanding claims and refundable premiums — the tab NCIGA would be held liable for refunding in case of a collapse — totaled $785 million. Of that total, $359 million was in the workers’ compensation arena, $43.6 million in auto insurance and $383.4 million in “all other categories, including fire, marine and similar types of policies.”
“These numbers we were looking at were just huge,” says Newton.
And that was just in North Carolina.
“Obviously, these numbers are the reason why the feds had to move,” says state Rep. John Blust of Greensboro, a member of the House Insurance Committee.
An AIG failure would have dwarfed the cost of any previous insurance collapse in the state. The most costly to date came after the demise of workers’ comp writer Reliance Insurance. That tab was $80 million.
In an AIG meltdown, the cost of a North Carolina cleanup would have gone even higher than Newton’s initial estimate, to perhaps $1 billion or more.
That’s because seven AIG subsidiaries also write life and health policies and various annuity plans in North Carolina. On the annuity front alone, AIG’s Sun America, at the beginning of 2007, was the state’s third-largest annuity writer at $331 million, giving it a market share of nearly 6 percent. Another subsidiary, AIG Annuity Insurance, had $46 million on its books, for a market share of nearly 1 percent.
The total North Carolina market is about $6 billion. The figures were complied by the state Department of Insurance.
If AIG’s subsidiaries firms had been caught up in the failure of their holding company, a second state group, the North Carolina Life & Health Insurance Guaranty Association, would have activated a procedure to pay consumer refunds of up to $300,000 per policyholder for claims and premium refunds.
That agency’s head, Lowell Miller, declines to put a figure on the possible cleanup costs. “But it would have been pretty significant,” he says. “The life and health numbers are big, and they generally are long-term contracts.”
Kristin Milam, a spokeswoman for the N.C. Department of Insurance, says the department routinely monitors the economic health of all the firms doing business in the state, including those under the AIG umbrella.
She notes it was the AIG holding company, not the insurance subsidiaries, that was in crisis. And Newton says all the AIG firms doing business in the state are well-capitalized and “doing fine.”
But because of the turmoil on Wall Street, he says it’s impossible to say for certain if the damage would have been limited to the holding company if AIG had gone under.
Annuity
