Regulators: AIG Not Using Bailout Funds to Under-Price Insurance

Despite some complaints by competitors, American International Group (AIG) does not appear to be using federal bailout funds to lower its insurance prices to keep and attract business, state and federal officials told a House subcommittee recently.

Representatives for the Government Accountability Office (GAO), which was asked by Congress to investigate the allegations of unfair pricing, and the National Association of Insurance Commissioners (NAIC), told lawmakers that they have not found enough evidence to conclude that the bailout funds triggered by troubles with AIG’s financial products unit have been of any direct benefit to the insurance operations.

However, Orice M. Williams, director of Financial Markets and Community Investment for GAO, and Pennsylvania Insurance Commissioner Joel Ario, representing the NAIC, indicated that their monitoring is ongoing and their results are preliminary.

Williams did suggest the property/casualty and life insurance operations of AIG may have received some indirect benefit “to the extent that the property/casualty insurers would have been adversely affected by a credit downgrade or failure of the AIG parent.”

She said that some of AIG’s competitors claim that AIG’s commercial insurance pricing is out of line with its risks but other insurance industry participants and observers disagree. This, she said, her agency has not drawn any final conclusion.

Ario suggested that the allegations of unfair advantage stem from the fact that AIG insurance operations continue to perform well, despite the troubles of the parent company and the financial products unit.

“The allegations are most prominent in the highly competitive commercial property and casualty markets, where some of the nation’s largest insurers routinely bid against each other on multi-million dollar accounts for the privilege of insuring the nation’s largest businesses,” Ario said.

Ario said that the latest allegations maintain that specific accounts have been deliberately under-priced in a manner that would present a solvency risk if done systematically. Regulators, he said, must monitor such situations because “there is a point at which low prices for policyholders can threaten long term stability.”

Ario said his department could not conclude that there is widespread under-pricing by AIG going on. “With the caveat that these issues are very complex, we have not seen any clear evidence of under-pricing to date, though we continue to look both at individual cases and at aggregate numbers on both renewals and new business at AIG,” Ario concluded.

Williams reported on federal officials’ interviews with insurer, brokers and buyers in investigating pricing and the allegations against AIG. From competing insurers they heard that while current market conditions would dictate price increases, this was not happening with AIG. They cited examples where AIG Commercial Insurance’s prices had decreased significantly from the prior year’s price, when circumstances appeared to indicate that higher prices were warranted.

According to Williams, the insurers added that when such pricing activity is combined with AIG Commercial Insurance’s market power, AIG Commercial Insurance “can prevent prices from increasing and thus hurt other insurers’ ability to price insurance at a cost adequate to cover the risk involved.”

The insurers also suggested that buyers are choosing to stay with AIG because they believe the company is backed by the government.

AIG executives told GAO that they are charging prices adequate for the risk and that their commercial insurance rates have been mirroring the overall trends in the current soft market. That is, AIG’s rates have been declining at an increasingly slower pace since the fourth quarter of 2008, and in some cases have increased.

AIG executives also noted that AIG has actually been losing market share “because the financial situation of the parent company had impacted the reputation of the AIG commercial insurance companies.”

In addition, AIG told federal officials its competitors are using the AIG parent company’s financial problems as a way to discourage customers from buying from AIG. AIG provided GAO with recent contracts lost to competitor bids that were below their own.

GAO also spoke with insurance brokers, who stressed that commercial markets are very competitive, especially where large coverage amounts are involved, but that AIG Commercial Insurance did not appear to be low-balling to any surprising degree. Some brokers told GAO that AIG Commercial Insurance has “historically priced aggressively in some lines, and that while in some instances in the past several months AIG Commercial Insurance may have priced more aggressively in order to retain certain customers, it did not appear to be a widespread practice and was viewed as an expected response given the reputational hit the company has taken.”

Some brokers interviewed by GAO cited instances where AIG Commercial Insurance has lost business because other insurers’ prices were lower than theirs. The brokers also said that they would recognize, and be concerned about, an insurer charging suspiciously low rates for the coverage because it would create a risk that the insurer would be unable to pay the policyholder’s claim.

Topics Carriers Agencies Property Casualty AIG