In the past several days we’ve all heard about the crisis going on with AIG and their recent attempts to raise capital to forestall a decrease in their credit ratings. We have heard that bankruptcy is one option that AIG’s management might have no recourse but to use. That raises the question of: What happens to a policyholder when their insurance company goes bankrupt?
The answer is probably not as bad as it seems. Insurance is regulated on the State level usually by an organization called a State Insurance Department. One of the requirements that States have is that licensed insurance companies maintain in reserves enough capital to be able to pay policyholder claims. As of yesterday, the New York Insurance Department, issued the following statement saying that AIG “continues to meet New York’s solvency standards and is able to honor its obligations to policyholders.”
But what if the worst case scenario happens and there are not enough reserves to pay losses? The answer is a little known feature of insurance regulations called the State Guarantee Funds. These funds have been established by the States to guarantee claims from insurance companies that are insolvent and who are unable to meet their policyholder liabilities. These funds and the procedures to file a claim vary by State but they have been designed by to provide policyholders with a safety net.
Do we believe that AIG will go the way of Continental Life Insurance Company that was put out of business by the great Chicago Fire? AIG is the world’s largest insurance company with assets of over 1trillion dollars. While we can’t predict the future we are confident that they will still be around tomorrow and next year.