Insurance Quotes & Advice

Federal Reserve Chairman Ben Bernanke was critical of AIG while speaking before Congress this week.  Coming on the heels of a new revised bailout plan for what was once the world’s largest insurer, it’s not surprising

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.

After the company reported the largest quarterly loss in history at over $61 billion, it became imperative for AIG to receive additional capital or face ensuing credit downgrades.  This will likely cause a regulatory shake up in the insurance industry since much of AIG’s massive losses had very little to do with insurance.

The Treasury will create a new facility to make available an additional $30 billion in credit available to the struggling insurer.  The questions is though, what are AIG’s losses likely to be in the upcoming quarters and how much more will it need to stay afloat.

AIG jumped into the unregulated derivatives market with abandon and for awhile that led to spectacular profit margins earlier in the decade but as we’ve seen when things go bad, all that leverage can be a double edged sword and can lead to equally spectacular losses.  The housing crash and credit freeze that followed brought a spotlight to AIG’s massive exposure to insured credit and the resulting wave of defaults opened AIG up to liabilities that were largely unfunded.

The Federal Reserve, unfortunately now has to open itself to this exposure as well by having to reduce it’s $60 billion credit facility with the company in exchange for a preferred equity stake.  It is estimated that the Fed’s exposure to AIG is now over $93 billion so it’s not surprising why Bernanke isn’t too happy with that.

Florida regulators had a well publicized battle with Allstate Insurance last year and for a time ordered the company to stop writing policies in the state until it released subpoenaed documents relating to it’s underwriting practices.  Florida has one of the highest homeowner’s insurance in the nation and it’s regulators have taken a hard line against the insurance industry ever since Governor Charlie Crist took office.

Last year had a busy Atlantic Hurricane season which had two of the top ten costliest storms on record.  The insurance industry has also had to cope with the fallout from the financial crisis which has crippled their normally robust investment income.

State Farm had submitted a 47% rate increase to the Florida Insurance Office which regulators denied.  Two weeks after their request was turned down State Farm announced that it would stop writing homeowner’s insurance in the state.

The move will affect approximately 1.2 million residents, State Farm has submitted a two year withdrawal plan that must be approved by regulators.  The move comes at a bad time for the state as Florida has one of the highest foreclosure rates in the country. 

Two days after State Farm’s decision, Florida regulators ordered a subpoena for detailed information regarding all of the company’s policy holders.  State Farm will continue to write health, auto and life insurance in the state, so it may seek to find some sort of compromise with regulators like Allstate did last year.

The Federal Trade Commission(FTC) has ordered nine major insurance companies to provide information on their use of credit based scoring in determining home insurance premiums.  The use of credit based scoring has been controversial, many consumer advocacy groups feel that it unfairly profiles certain racial groups.

The orders require information from the nine largest private providers of homeowners insurance, which have roughly 60 percent of the homeowners insurance market in the U.S.: State Farm Mutual Automobile Insurance Company, The Allstate Corporation, Fire Insurance Exchange, Nationwide Mutual Insurance Company, The Travelers Companies, Inc., United Services Automobile Association, Liberty Mutual Holding Company, Inc., The Chubb Corporation, and American Family Mutual Insurance Company.

Credit based scoring has been mainly used by the auto and property insurance sectors.  A number of states have attempted to ban it’s use over the years but insurers have vehemently opposed them.

Florida’s state regulator was one of the leading figures against credit scoring when Congressional hearings were held on the matter back in May.  The last study by the FTC was convened in 2003 and was completed last year,  it found that credit based scoring was an accurate measure to determine risk.

Needless to say that finding was slammed by a number of groups.  There is a lot of evidence that credit scoring may be an accurate measure of risk but there is also a lot of evidence that certain groups are disproportionately affected.