On July 9, it became official: The Federal Stability Oversight Council designated American International Group (AIG) as a systemically important financial institution (or SIFI), pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Two more firms—GE and Prudential Financial—were also named as SIFIs. GE will accept the designation, while Prudential has appealed and says it plans to fight the SIFI tag.

Any company designated as systemically important could be subject to higher capital levels and regular stress tests to ensure they can absorb losses, though the specific capital rules for insurers remain far from complete.

While the decision is historic—no insurer has been federally regulated for more than 150 years, according to recent testimony by an official of the Congressional Research Service—the news was a surprise to no one, least of all AIG CEO Robert H. Benmosche, who has been saying since January that he welcomed the designation and understood that government oversight would be a fait accompli for insurers going forward. In a July 2 statement, the insurer said it already had been working closely with the Federal Reserve Bank of New York “as our regulator.”

Another highly placed AIG executive (who has since departed) told me back in April 2012 at the annual RIMS conference that embracing the SIFI classification and working with the Fed was a foregone conclusion—and that such a designation spoke volumes of just how sizable the insurance industry's role has become in helping to sustain the greater economy.

Love or hate Benmosche (and I happen to be in the former camp), he's wholly right and responsible to embrace the idea of accepting AIG's position as an important financial institution. One of the core responsibilities of the insurance industry is to do right by those who place their faith in it. In a very real way, accepting that insurers now play a greater role than ever in maintaining our nation's economic health is not only a smart choice in terms of working with the government, but also improves insurers' public image. One only need look at the potentially devastating impact that AIG's implosion would have had on the economy at large—and the ensuing multibillion-dollar bailout that followed (which AIG paid back ahead of schedule with interest, thank you very much)—to realize just how important insurers are not just to their customers, but to the country in which they are based.

While the phrase “government oversight” strikes fear into the hearts of most of us (and perhaps it still should), in this case, for an insurer to be characterized as a financial institution vital to something much greater than itself is a new reality that cannot be avoided—nor should it be. As AIG returns to a position of power in the industry, it has indeed regained much of its former swagger. Only this time, it will do so as an even more “important” player than it was before.

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An &lsquo;Important&rsquo; Distinction

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An ‘Important’ Distinction