The American Insurance Association (AIA) says the financial assistance lavished upon American International Group is having a deleterious impact on insurers who compete against it.

In a letter to U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Benjamin Bernanke, AIA president and CEO Leigh Ann Pusey said AIG’s access to subsidized capital threatens to distort the market.

“In recent months, we have heard reports from companies that compete in the market with AIG that those distortions are occurring,” Pusey wrote. “Whether it is the implicit government backstop or failure by the government and state regulators to ensure that taxpayer money is used for its intended purposes and that it does not impair private market competition, it appears that such significant government financial support of AIG has facilitated market behavior that is detrimental to other property-casualty insurers and to the taxpayers.”

Pusey stressed that while the AIA does not oppose federal efforts to stabilize institutions that pose a systemic risk to the broader financial markets, there must be safeguards ensuring competing firms are not put at a competitive disadvantage. “The federal government has an obligation to those companies and to their customers to provide assurances that AIG does not use federal dollars to weaken market competition or for other improper purposes.”

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