Members of the insurance industry are taking exception to comments made by Treasury Secretary Timothy Geithner last week before the House Committee on Oversight and Government Reforms.
Pressed on why Federal Reserve officials did not push harder for trading counterparties to bailed out American International Group to take “haircuts” on credit default swaps, Geithner responded that AIG’s businesses were so intertwined that weakening the parent company would imperil AIG’s insurance companies, and that regulators “could not separate those [insurance] companies from the companies that had taken terrible risks.”
In a statement, Blain Rethmeier, spokesman for the American Insurance Association, countered Geithner’s assertion that the failure of AIG’s insurance business would have posed systemic risk.
“There has been some suggestion in recent Congressional testimony by Secretary Geithner that if AIG had been allowed to fail, the crisis would have spread to insurance companies around the world, thus implying that the property/casualty industry might have been in crisis or potentially posed a systemic risk to the broader financial system,” he said. “It is well understood that AIG’s financial problems did not originate or stem from their property/casualty insurance business. In the event that AIG’s property/casualty business had failed and needed to be dissolved, it’s our view that the existing state guaranty fund system, which relies on post-event assessments on insurers, would have been able to protect AIG’s policyholders. Property/casualty insurers are subject to stringent capital standards that focus on maintaining their financial health and strength. The guaranty fund system exists to ensure that policyholders are protected in the rare circumstance when an insurer no longer meet those standards and fails."
Separately, in a letter to legislators, National Association of Insurance Commissioners President Jane Cline and CEO Therese Vaughan wrote that they “respectfully disagreed” with Geithner on whether regulators could have separated AIG’s trading operations from their insurance businesses. Cline and Vaughan also advised legislators against using the financial crisis as an excuse to establish an optional federal charter for insurers.
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