Aon Outlines Insurance Program for Troubled Financial Assets

In testimony in mid-November before the House Committee on Financial Services in Washington, D. Cameron Findlay, executive vice president and general counsel of Aon Corp., urged the U.S. Department of Treasury to address what he said is a primary cause of the current U.S. liquidity problem — the hundreds of billions of dollars of illiquid assets that reside on the ledgers of America’s financial institutions.

Testifying on behalf of the Council of Insurance Agents and Brokers, Findlay said any effort to combat the turbulence in today’s financial markets “should consider the potential for an insurance component.”

Findlay testified that no matter the volume of capital infusions, financial institutions including insurance companies will have a “difficult time playing their critical role in the functioning of our economy.”

He said CIAB and its members believe that the Department of Treasury should establish a program to insure the value of troubled and illiquid financial instruments.

In response to an October 2008 request for comments from the Treasury Department, Aon recommended a plan to insure troubled assets. Aon’s plan, drawing on the precedents including the Price-Anderson Nuclear Industry Indemnity Act, calls for insurance program that uses a combination of risk retention, risk pooling and government backstop liquidity that Aon says would benefit taxpayers, financial institutions saddled with illiquid assets, and homeowners.

“Such a plan, largely self-funding and drawing inspiration from the Price-Anderson Act, involves the sharing of risk by participants in an entity that we refer to as the asset stabilization pool,” Findlay said. “Participants in the asset stabilization pool would have a portion of the principal and interest from specific, illiquid assets guaranteed.”

Findlay said the Aon program would insulate an asset holder from the decline in value resulting from the non-payment, or expected non-payment, of principal and interest. Asset holders would be required to retain a small percentage of the shortfall of principal and interest, subject to a maximum annual payout per asset. Asset holders would be reimbursed from the pool for a shortfall in principal or interest once such amounts exceed their retention in a single year.

Participating institutions would have to pay premiums into the pool. Each year, actuaries would calculate the level of premium needed to fund guarantee payments for the following year. Premium payments to the pool would be capped by the government.

In the event that payments from the pool exceeded premium collections, the government would lend the pool the funds needed to make good on the guarantees. The government would be reimbursed by premium collections in following years. The Treasury could calibrate liquidity by speeding up or slowing down the collection of premiums.

Topics Aon