AIG - Systemic Risk

  • 2009 0226 - AIG - AIG: Is the Risk Systemic? - 21p
  • 2012 - JIR / NAIC - An Analysis of the AIG Case : Understanding Systemic Risk and its Relation to Insurance, Etti G. Baranoff - 30p
  • (p84) - Mr. CAMPBELL (R-CA). Talk about the life insurance subsidiary for a second.
    • I know that in your—I believe it was the company’s evaluation of systemic risk, that is where you believe there is a great deal of systemic risk, but there is a lot of counterparty liabilities to other life insurance companies. Is that true?
  • Mr. LIDDY. It is in both.
    • You know, we insure, on the property casualty side, we insure 94 percent of the Fortune 500 companies.
    • So the systemic risk idea is very real in both the property casualty and the life side.

[PDF-380p

Systemic risk afflicts all life insurance and investment firms around the world.

Thus, what happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means. (p2)

  • The failure of AIG would cause turmoil in the U.S. economy and global markets, and have multiple and potentially catastrophic unforeseen consequences.  (p3)
  • The systemic risk is principally centered in the “life insurance” business because it is this subsector that has the greatest variety of investments and obligations that are subject to loss of value of the underlying investments. (p4)
  • A significant rise in surrender rates – inspired by consumers’ needs for cash or because of rumored or real failure of insurance companies – could be disastrous.
    • Because of widespread loss of liquidity, the industry would struggle to raise adequate cash to meet surrender requests.
    • A “run on the bank” in the life and retirement business would have sweeping impacts across the economy in the U.S. In countries around the world with higher savings rates than the U.S., the failure of insurance companies like AIG would be a catastrophe. (p4)
  • AIG has written more than 81 million life insurance policies to individuals worldwide – Face value: $1.9 trillion (p9)
  • Surrender of insurance policies at above-normal actuarial rates could impair current policyholders as capital, along with state guarantee funds, might be insufficient to pay all policyholder claims. (p9)
  • Since life insurance has changed greatly in character over the last two decades – from just a basic provision of death and disability benefits to a vehicle for retirement
    savings and wealth accumulation – the effects of disrupting the industry are wide ranging and significant. (p21)

2009 0226 - AIG - AIG: Is the Risk Systemic? - 21p