AIG - NOT AN INSURANCE COMPANY?

Rough Notes, May 2009 by Hennosy, Kevin P

Tell us another story, Commissioner Ario

The National Association of Insurance Commissioners (NAIC) is doing something it has not done in a long time, talking about regulating insurance; however, the regulators' association is talking out of both sides of its mouth-and telling some whoppers to Congress in the process.

The most interesting bit of fast talking coming from the NAIC appeared in the form of a news release on March 19, 2009, in which the NAIC claimed that American International Group (AIG) is not an insurance company. In a self-described attempt to "correct misinformation," the commissioners' association asserted:

"First and foremost, AIG is typically described as the world's largest insurance company. In fact, it is a global financial services conglomerate that does business in 130 countries. AIG owns 176 other companies, in addition to 71 U.S. state-regulated insurance subsidiaries."

I suppose it was this "non-insurance company" standing that qualified AIG to pay the NAIC for the opportunity to file its financial statements (as required of insurance companies) with the association since the early 1970s. (Will the NAIC return the fees AIG paid to the regulators' association as an insurance company to the cashstrapped conglomerate anytime soon?)

And when the NAIC wrote financial accounting rules, model investment laws and other financial guidelines that allowed AIG to grow to a size too large to regulate and too big to fail, the NAIC was only accepting AIG's financial data as a favor to "global financial services conglomerates."

If the NAIC continues this rhetorical trend, we can expect to hear that AIG is actually an alien life form from another galaxy, brought by an interstellar Tooth Fairy, which the NAIC only first heard about in the 4th quarter of 2008.

On March 18, 2009, Pennsylvania Insurance Commissioner Joel Ario testified before a subcommittee of the House Financial Services Committee, where he delivered the claim that AIG is not an insurance company.

Commissioner Ario is a difficult character to figure out. He began his journeyman career around insurance regulation as a consumer advocate with a Ralph Nader-aligned public interest group. He went to work as an insurance regulator in Oregon, where he rose through the ranks to become the state's chief regulator. At the NAIC he fell into the cult of personality of former Executive Vice President Catherine J. Weatherford, who moved him into the NAIC leadership. Somewhere about this time, he must have met a shadowy figure at a rural crossroads at midnight under a new moon. He left Oregon and moved to Pennsylvania, where oddly enough he was appointed insurance commissioner.

Commissioner Ario likes to talk tough on consumer protection, but he has a history of "go along to get along" attitude toward NAIC senior staff, which keeps him in good standing with the NAIC leadership.

Hayseeds?

The Pennsylvania commissioner began his testimony by pointing out that much of AIG's operations fall outside the homey and provincial jurisdiction of state insurance regulation. "State insurance regulatory authority is limited to the 71 U.S.-based insurance companies. Under the nationally coordinated system of state-based insurance regulation, state insurance departments have primary authority for those insurance companies domiciled in their state. In Pennsylvania's case, we are the domestic regulator for 11 of AIG's 71 U.S. insurance companies."

This testimony runs counter to 15 years of NAIC statements, which presented the association and its membership as international troubleshooters for insurance regulation. The NAIC enters into Memoranda of Understanding with numerous foreign governments and regimes around the world. As recently as March 5, 2009, the NAIC issued a statement touting a paper delivered by Executive Vice President Therese M. (Terri) Vaughan, Ph.D, which features a discussion of how the NAIC and state regulators worked with foreign jurisdictions to shape global financial regulation.

If one would review the stamps on Vaughan's U.S. Passport, they would include a stamp from China, where she traveled on the NAIC's behalf when she was Iowa Insurance Commissioner. She played a role in negotiating a trade-oriented Memorandum of Understanding that the NAIC signed with Chinese officials, at a time when AIG was the only American insurance interest operating in China.

Yet, according to Commissioner Ario, if Congress wants to learn about AIG's failure, the hayseeds at the NAIC and state insurance departments just are not the people to talk to. I guess all that international travel that various commissioners took on the NAIC's dime in the past decade was just for giggles.

In addition, Commissioner Ario alleged in his testimony that the financial collapse of AIG was far beyond the knowledge base of the lowly state insurance regulator because the trouble started in a holding company.

"Now pay no attention to the man behind the curtain" who has a copy of the NAIC's Model Holding Company Act, which was last materially updated after the failure of the Baldwin United Life Insurance Company in 1983. After the Baldwin United failure, which resulted from holding company-based financial shenanigans, the NAIC assured policymakers and the public that insurance regulators now had the tools to supervise and control holding company operations.