The financial problems that threatened to sink the American International Group conglomerate, forcing the federal government to bail out the company with a bridge loan, were not the fault of insurance commissioners, as locally-regulated subsidiaries remain solvent and sound, state officials reiterated last week.

Their comments to that effect were delivered throughout the quarterly meeting here of the National Association of Insurance Commissioners, a week after the federal government stepped in with $85 billion of liquidity to keep the AIG holding company in business.

New York Insurance Superintendent Eric Dinallo–one of the regulators involved in negotiations that led to the Treasury Department loan deal with AIG–emphasized that the problem was with credit default swaps and the way federal regulators oversaw the holding company, not with how insurance regulators oversaw insurers.

Mr. Dinallo emphasized that the insurance units are solvent.

Pennsylvania Insurance Commissioner Joel Ario, vice chair of a new NAIC group charged with handling the AIG issue, expressed disappointment that proponents of an optional federal charter for insurers chose AIG to make a case for an OFC.

The insurance units of AIG are its “crown jewels,” and the reason that federal regulators had the confidence to bail the company out, according to Mr. Ario.

State legislators and regulators here rejected comments made by U.S. Treasury Secretary Henry Paulson attacking state insurance regulation in the wake of the AIG crisis. Speaking on NBC's “Meet the Press” on Sept. 21, Mr. Paulson called AIG “very much a hedge fund on top of insurance companies,” charging that AIG's near meltdown is a “classic example” of the need for “new regulations, new policies.”

“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn't match the financial world we are dealing with today,” he said.

Mr. Paulson earlier this year called for a radical revamping of insurance regulation, starting with the establishment of a federal Office of Insurance Information, and ending up with an optional federal charter. He said the current crisis reinforces his earlier view about inadequacies in regulatory oversight.

“What has gone on here is terrible. And it is inexcusable and we need to deal with it,” he said.

“Something like this [bailout] in my judgment should never have happened,” Mr. Paulson said. “But we did this to protect the taxpayer. And this was something we are going to deal with in the future in terms of our regulatory system.”

However, AIG's problems were on its investment side and not with the insurance subsidiaries, said North Dakota State Rep. George Keiser, R-Bismarck, the secretary of the National Conference of Insurance Legislators.

“The U.S. is the best insurance market worldwide and offers the best protection for consumers worldwide,” he said, adding that “the problems surfacing have been at the federal level of regulation.”

He noted that within 24 hours of the start of the AIG crisis, locally-based state regulators were explaining to consumers what the crisis meant to them, and that the insurance subsidiaries are sound. “We didn't have to wait for a federal bureaucracy,” he said.

Mr. Dinallo, in a letter to the editor of the Financial Times, pointed out that the AIG holding company was regulated by the federal Office of Thrift Supervision.

Maine Director of Insurance Mila Kofman said the problems were focused on the AIG holding company, and “the whole mess was created under federal watch. Because of effective state-based insurance regulation, the insurance subsidiaries of AIG are financially solvent and not in trouble.”

“The approach from Secretary Paulson to deregulate insurance through an optional federal charter and an Office of Insurance Information is exactly what we do not want and will not protect consumers,” according to Ms. Kofman, who said these two approaches do not have enforcement standards that could ensure effective regulation.

Meanwhile, Mr. Ario said that with some of AIG's insurance units up for sale, he hoped “a leaner AIG built around core insurance competencies would remain.” Most likely, the insurance units would be purchased by other “top-tier insurance companies,” he said.

Mr. Dinallo added that if the insurance assets are sold for a profit, then the profits may be used to pay off the loan. However, he emphasized, the core assets of the company would not be used. Core insurance assets cannot be invaded by the holding company, he explained.

Connecticut Insurance Commissioner Tom Sullivan said he does not see any extraordinary dividends being paid out.

New York's Mr. Dinallo said in the neighborhood of 10 percent of AIG's credit default swaps are insurance products. The state announced this week that on Jan. 1, 2009, new tight regulation of those transactions would go into effect.

Mr. Dinallo also said that state insurance regulators do not have data yet on whether the number of contract cancellations of AIG insurance products increased following the announcement of federal intervention.

But insurance commissioners including NAIC President Sandy Praeger of Kansas, Mr. Dinallo and Mr. Ario warned that state regulators would not tolerate producers who deliberately provide misinformation about AIG insurance subsidiaries to move customers' business to another carrier.

They distinguished legitimate movement of business from disinformation about AIG's strength just to move business.

Toward that end, the NAIC's Life & Annuities “A” Committee adopted a template to warn consumers to be aware of surrender charges that might be incurred for leaving what they say are solvent insurance subsidiaries, and a warning to producers that use of disparaging information without a factual basis is a crime that will be pursued by state insurance departments.

To date, states including Kansas, New York, Pennsylvania and Wisconsin have sent out such notices.

AIG's troubles have raised the concerns of many insurance consumers. Mr. Dinallo said that in the first two days following the AIG crisis, his department received over 1,000 calls concerning AIG contracts.

His department has sent out 308 forms to insurance companies requesting information on their securities lending programs to see if any are exposed to the sort of financial problems that have dogged AIG.

Special Reports /

Blame Feds, Not States For AIG Mess, Regulators Contend

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