Insurers Shouldn't Play Blame Game With Taxpayers and AIG

In the wake of the American International Group (AIG) disaster, insurers are not winning any congeniality contests. And it doesn’t help when they start whining and blaming, of all people, the American taxpayers for their problems.

But that’s exactly what’s happening in Washington. According to the Wall Street Journal, companies that compete with AIG have complained to Federal Reserve Chairman Ben Bernanke that AIG’s $170 billion taxpayer bailout has given the big, but crippled insurance company an unfair advantage. These unnamed insurers say that AIG has been able to use its public subsidy to reduce prices on its policies and undercut the market.

That point was made again at today’s House Financial Services Committee hearing when California Republican Congressman Ed Royce asked Bernanke, “How confident are you that (taxpayer) subsidies aren’t being used (by AIG) to undercut competitors?”

“State regulators have looked into this and have not seen evidence of underpricing,” Bernanke responded. He went on to say that if anyone was suffering it was AIG, which was losing business because of the “competitive taint” associated with the recent scandal over its bonuses.

In truth, all the evidence seems to point in the opposite direction. Actually prices are firming up in the markets where AIG competes most aggressively, such as commercial insurance. A survey by Tillinghast, which monitors the market, showed that while commercial insurance prices had declined at the end of 2008, the price reduction was the smallest in the last two years. Business lines that had experienced the greatest reductions during that time, such as workers compensation and property, “showed initial signs of stabilizing.”

In other words, prices are still falling, but at a lower rate. This can’t be blamed on AIG because the decline started more than two years ago, when credit default swaps weren’t even a blip on the radar and AIG traded at more than $60 a share. And now, despite the bailout and all those complaints by insurers, prices seem to be firming up.

“Some large insurers are drawing a line in the sand and demanding rate stabilization,” said Richard Kerr, the chief executive of MarketScout, an electronic insurance exchange.

The unnamed insurers who are complaining would be wise not to bring too much attention to themselves. Only two months ago life insurers were rattling their tin cup for insurance regulators at the National Association of Insurance Commissioners (NAIC), whining that they had lost so much money in their investment portfolios that the NAIC needed to change the rules on their capital requirements. The NAIC turned them down. Flat.