AIG Cleared Of Predatory Pricing

The market has been buzzing about AIG's commercial insurers allegedly underpricing their coverage beyond all sound judgment to overcome the reputational damage done by their corporate parent's federal bailout. But two government representatives gave the carrier aclean bill of health of sorts, chalking up any premium declines to old-fashioned competition. Did they miss the boat?

NU's Washington Editor, Dave Postal, reported in ourMarch 23 editionthat “there is no evidence American International Group is engaged in predatory pricing of its property-casualty business, the U.S. Government Accountability Office and Pennsylvanias insurance commissioner told Congress.”

State insurance regulators, insurance brokers and insurance buyers said that while AIG may be pricing somewhat more aggressively than in the past in order to retain business in light of damage to the parent companys reputation, they did not see indications that this pricing was inadequate or out of line with previous AIG pricing practices,Orice Williams, director of the GAOs financial markets and community investment unit, testified before Congress.

Pennsylvania Insurance Commissioner Joel Ario hesitated to make any definitive judgment,citing the caveat that these issues are very complex.” However, he noted, “we have not seen any clear evidence of underpricing to date, though we continue to look both at individual cases and at aggregate numbers on both renewals and new business at AIG.

Mr. Ario said that while the Pennsylvania department didnt take the allegations lightly,members of Congress should remember that both sides have good reason to gripe.

The Pennsylvania department has devoted special attention to the current allegations because both AIG and its competitors may have distorted incentives to put their competitive engines into overdriveto preserve business on one side and to deliver a knock-out blow on the other side, Mr. Ario testified.

Ms. Williams also hedged her bet, conceding thataccurately evaluating whether AIG is unfairly competing in the market presents a number of challenges, including:

The unique, negotiated nature of many commercial insurance policies.

The subjective assumptions involved in determining premiums.

The fact that for some lines of commercial insurance, it can take several years to determine if premiums charged were adequate for the related losses.

In other words, GAO cannot be sure, right here and now, whether AIG is or is not irresponsibly pricing its products.

Normally, in a free market, this is none of the government's business. But this is anything but a free market. Competitors are concerned that AIG, backed by the deepest pockets on Earth–the U.S. Treasury–is cutting prices to a level it could not sustain on its own without the implication of government support.

This takes on added importance because ofstate guaranty funds, which force surviving carriers to pay the claims of those insurers that recklessly underprice themselves into oblivion.

No one is saying that any AIG carrier is on the verge of insolvency. And AIG has adamantly rejected any suggestion that it is charging too little for its policies to keep skittish customers or draw new business.

Yet these rumors won't die. Is it just that in this deep recession–with clients scaling back their operations or going out of business altogether,and laying off workers by the millions, meaning insurable exposures are in decline–it's just not possible toraise insurance pricesright now? Or is AIG really giving coverage away toovercome the hesitation of buyers to do business with apariah firm?

I think it's probably a little bit of both. AIG knows it must priceaggressively tomaintain its market share while its competitors bash its reputation relentless. But at the same time, given the state of the economy,insurers cannot afford to hike prices at a time when a dwindling number of buyers are desperate tokeep their own costs in check.

What do you folks think?