On Tuesday morning, Congressman Henry Waxman's committee staff (House Oversight and Government Reform Committee) released information that executives at AIG's life insurance subsidiary, AIG General, went on a week-long retreat in California at the luxurious St. Regis Monarch Bay Resort -- just down the road from Disneyland in Orange County. Part of the continuing saga of AIG has been two important facts: first, that credit default swaps marketed by the parent or holding company of AIG have escaped state insurance regulatory oversight because of the Commodity Futures Modernization Act of 2000, and second, policyholders are safe because the AIG insurance subsidiaries are financially sound.
Those grounds are shifting and now it's time for state insurance regulators to step up to the plate with more comprehensive and vigorous oversight. Here is why:
· AIG, the parent, should be examined by state regulators. Too often insurers create labyrinthine corporate structures to avoid oversight -- when the "non-insurance" holding company is the puppet-master for the entire corporate entity. A new trend in regulation is the risk assessment and risk focus methodology. In lay language -- look at the entire corporate entity.
· The trip to "Disneyland" was taken by AIG executives of a Texas-based life insurance subsidiary clearly under the purview of state regulators.
· Experts are saying that credit default swaps are insurance after all -- and the New York Insurance Department has announced that it has the authority to oversee them (why now and not a year ago?).
· The AIG insurance subsidiaries are presumably in a healthy and stable position. However, state regulators have expressed concern that some of the losses from the credit default swaps have bled down into the insurance subsidiary in Texas. These concerns were first raised by the Texas Insurance Commissioner last June, as reported in Barron's (September 22, 2008):
"AIG was also taking cash generated by its life-insurance subsidiaries in return for lending out their investment securities and putting it into long-term subprime mortgage paper rather than shorter-term liquid investments."
I sure hope it is the last hurrah for the Houston AIG executives that traveled to the St. Regis resort.
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