Bailout Money Is Being Used to Undercut Competitors, They Charge

Published December 9, 2009

More than a year after American International Group Inc.—AIG—received its first federal bailout money, federal and state investigations continue into whether that money is allowing AIG to underprice its competitors in the commercial property and casualty insurance markets.

None of the $182.5 billion in federal bailout money went directly to AIG’s commercial property and casualty insurance arms. However, some AIG competitors allege both AIG and its customers have felt secure the company would not be allowed to fail, enabling AIG to price insurance at rates too low for the risks covered.

This has enabled AIG to sell insurance at rates lower than its competitors who have not received federal backing, they say.

“AIG continues to be overly aggressive on pricing and terms,” Liberty Mutual Group Inc. Chief Executive Officer Edmund “Ted” Kelly told investors in March 2009, according to The Wall Street Journal. “But, of course, if you’ve got an implicit federal backstop, you can do that stuff.”

Reserves Running Out
On November 30 insurance industry analyst Todd Bault reported he had discovered AIG has an undisclosed $11 billion shortfall in reserves for paying property-casualty claims. He wrote AIG had become too “aggressive” in pricing workers compensation and professional liability policies.

“AIG shareholders and the federal government face considerably more uncertainty than they may have anticipated,” Bault wrote.

No Conclusion from GAO
The Government Accountability Office has yet to draw any conclusions about the allegations.

The GAO’s last released report on this issue was in March 2009, “Federal Financial Assistance: Preliminary Observations on Assistance Provided to AIG.” The GAO concluded, “[s]ome of AIG’s competitors claim that AIG’s commercial insurance pricing is out of line with its risks but other insurance industry participants disagree. At this time, we have not drawn any final conclusions about how the assistance has impacted the overall competitiveness of the commercial property/casualty market.”

The same remained true in December 2009. Orice M. Williams, the Government Accountability Office’s Director of Financial Markets and Community Investment, said the GAO is “continuing to monitor this issue.”

The Pennsylvania Insurance Department is leading state investigations into allegations of AIG underpricing. Pennsylvania Insurance Commissioner Melissa Fox said state investigations are ongoing.
Insurance Prices Falling
Meanwhile, commercial insurance prices continue to fall, and AIG’s competitors are still arguing AIG is using its federal backing to undercut their prices.

AIG did not respond to requests for comment. The firm has told reporters the company has not changed its underwriting, and it says the criticism is driven by competitors.

Arin Greenwood ([email protected]) is a writer and lawyer in Alexandria, Virginia.