Thursday, April 30, 2009
AIG FP - Why?
Why Didn't the U.S. Government Simply Guarantee AIG FP's Products? It would have saved taxpayers a lot of money.
Thursday, March 26, 2009
AIG: The World will soon be able to blame the U.S. Congress
Be careful what you wish for. The big PR fuss over the AIG FP bonuses may cause unintended consequences.
If the talent at AIG’s FP unit begin to leave, who is going to be able to unwind everything? It seems that just a few people were involved with the credit default swaps that caused the problem in the first place. Most of the AIG FP people were involved in other products.
With all the noise Congress made over a relatively small amount of money (compared to the amounts being thrown at the problem by Congress), it appears that some key AIG FP employees are headed for the doors (i.e., AIG FP Paris).
If there is no one left to unwind things, the result may costs more than anyone ever thought possible.
Congress is going to be left holding the bag. I wonder how they will deflect this monument to poor judgment.
If the talent at AIG’s FP unit begin to leave, who is going to be able to unwind everything? It seems that just a few people were involved with the credit default swaps that caused the problem in the first place. Most of the AIG FP people were involved in other products.
With all the noise Congress made over a relatively small amount of money (compared to the amounts being thrown at the problem by Congress), it appears that some key AIG FP employees are headed for the doors (i.e., AIG FP Paris).
If there is no one left to unwind things, the result may costs more than anyone ever thought possible.
Congress is going to be left holding the bag. I wonder how they will deflect this monument to poor judgment.
Wednesday, March 18, 2009
Monday, March 16, 2009
AIG: Ratings were the Real Problem
Putting aside the issue of whether or not AIG should have been offering 'insurance' to firms insuring against losses on securities (notably those related to U.S. mortgages), the principle reason this whole ting started was because AIG’s ratings were downgraded.
Pure and simple: Had AIG’s ratings not been downgraded, perhaps, just perhaps, the global downward economic spiral might not have happened.
Which brings up the point that AIG recognized the potential for disaster several years ago when it stopped writing this type of business.
Pure and simple: Had AIG’s ratings not been downgraded, perhaps, just perhaps, the global downward economic spiral might not have happened.
Which brings up the point that AIG recognized the potential for disaster several years ago when it stopped writing this type of business.
AIG’s Counterparty List: To Disclose or Not to Disclose? That is the question.
With everything that has been said concerning which companies benefited from the U.S. Government bailout, no one has mentioned that there may have been terms and conditions in these policy contracts that more or less forbids disclosure.
I used to write a policy which clearly stated:
“The Assured and Insured Person(s) must at all times use best efforts to ensure that knowledge of the existence of this insurance is restricted as far as possible.”
The principle reason for this important condition was to avoid the ‘moral hazard’ problem.
Moral hazard?
What does Moral Hazard mean?
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
Moral hazard explained:
Moral hazard can be somewhat reduced by the placing of responsibilities on both parties of a contract.
The inclusion of such condition in one of these policies would explain why Ben S. Bernanke, the chairman of the Federal Reserve, has said “it is proprietary information.”
I used to write a policy which clearly stated:
“The Assured and Insured Person(s) must at all times use best efforts to ensure that knowledge of the existence of this insurance is restricted as far as possible.”
The principle reason for this important condition was to avoid the ‘moral hazard’ problem.
Moral hazard?
What does Moral Hazard mean?
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
Moral hazard explained:
Moral hazard can be somewhat reduced by the placing of responsibilities on both parties of a contract.
The inclusion of such condition in one of these policies would explain why Ben S. Bernanke, the chairman of the Federal Reserve, has said “it is proprietary information.”
Sunday, March 1, 2009
AIG Slashes Minimums
It has been reported that AIG units are slashing prices across all lines in order to win business. As an example, they have reduced their minimum premium on mid-market packages to $1,500, from a previous $2,500, the industry standard.
You get purchase D&O, EPLI, Crime, K&R, and Fidelity for $1500!
This is outrageous. As taxpayers, we are subsidizing this irresponsible underwriting.
You get purchase D&O, EPLI, Crime, K&R, and Fidelity for $1500!
This is outrageous. As taxpayers, we are subsidizing this irresponsible underwriting.
Tuesday, February 10, 2009
Why Insurers are Faring Better than Banks
I was impressed by Bob Hartwig’s (President Insurance Information Institute) presentation to the Association of General Contractors Surety Bonding & Construction Risk Management Conference in Naples, FL today, so here’s my take-away:
There are important differences between insurers and banks. During this global economic crisis insurers around the world are operating normally, unlike banks.
Why? For two reasons: 1) Insurers have a superior risk management model; and, 2) insures have low leverage (i.e., they don’t rely on borrowed money to underwrite or play claims).
The reason insurers are faring better than their financial brethren on the bank side according to Dr. Hartwig is that insurers have a superior risk management model:
•Emphasis on Underwriting
Matching of risk to price (via experience and modeling)
Limiting of potential loss exposure
Some banks sought to maximize volume and fees and disregarded risk
•Strong Relationship Between Underwriting and Risk Bearing
Insurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all times
Banks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
•Low Leverage
Insurers do not rely on borrowed money to underwrite insurance or pay claims. There is no credit or liquidity crisis in the insurance industry
•Conservative Investment Philosophy
High quality portfolio that is relatively less volatile and more liquid
•Comprehensive Regulation of Insurance Operations
The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
•Greater Transparency
Insurance companies are an open book to regulators and the public
Click here to read more about this.
There are important differences between insurers and banks. During this global economic crisis insurers around the world are operating normally, unlike banks.
Why? For two reasons: 1) Insurers have a superior risk management model; and, 2) insures have low leverage (i.e., they don’t rely on borrowed money to underwrite or play claims).
The reason insurers are faring better than their financial brethren on the bank side according to Dr. Hartwig is that insurers have a superior risk management model:
•Emphasis on Underwriting
Matching of risk to price (via experience and modeling)
Limiting of potential loss exposure
Some banks sought to maximize volume and fees and disregarded risk
•Strong Relationship Between Underwriting and Risk Bearing
Insurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all times
Banks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
•Low Leverage
Insurers do not rely on borrowed money to underwrite insurance or pay claims. There is no credit or liquidity crisis in the insurance industry
•Conservative Investment Philosophy
High quality portfolio that is relatively less volatile and more liquid
•Comprehensive Regulation of Insurance Operations
The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
•Greater Transparency
Insurance companies are an open book to regulators and the public
Click here to read more about this.
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