Bailout Effect: AIG Underpricing Commercial Coverage

“[Bailout money] allows unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term.”

-David Sampson, head of the Property Casualty Insurers Association of America


File this one under what moral hazard and unintended consequences produce: The legitimate, non-structured finance/hedge fund run Life Insurance competitors have a legitimate complaint. Why is AIG underpricing Commercial Coverage? They argue, persuasively, I might add, that its due to the government subsidy AIG has received.

Yet another example of how bailouts cause all manner of consequences in the marketplace. Legitimate and well run companies find themselves at a serious competitive disadvantage when firms like AIG are showered with billions of dollars in reward for their horrii management and bad behavior.

Bloomberg reported that

“American International Group Inc., the insurer that got four bailouts from the federal government, has been the subject of complaints from rivals who say the firm is underpricing commercial coverage, a regulator said. Competitors have said AIG was able to charge lower rates after getting government help, said New York Insurance Superintendent Eric Dinallo in an interview with Bloomberg Television today.

“We worry just as much about low pricing as high pricing,” because the industry needs to have enough capital to pay claims that may emerge years after policies are sold, Dinallo said. AIG, based in New York, sells coverage protecting companies against lawsuits, property damage and worker injuries.

Insurers including Hartford Financial Services Group Inc. have also applied for capital from the federal government, seeking to join more than 500 financial institutions that have received about $300 billion in government funds. Other insurers have complained that government aid gives a competitive advantage to the weakest firms at the expense of those that don’t need extra capital.”

Moral hazard not only encourages more bad behavior from poorly run firms, it punishes the good behavior of well run firms.


Property Casualty Insurers Association of America

AIG Competitors Complained About Rates, Dinallo Says
Erik Holm and Margaret Popper
Bloomberg, March 5 2009

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