Given the current economic climate, the financial markets may well be considering whether other insurers are at risk. While the only certainty in today’s market is uncertainty, research suggests that AIG was a one-of-a-kind event within the insurance sector.

Unlike other insurers operating within the life and non-life market, AIG was heavily involved with credit default swaps (CDS), which are unregulated quasi-insurance products that protect against bond defaults. For years, CDS were a profit center for AIG. The size of AIG’s CDS exposure reached $440 billion, which exceeded what the company could pay in claims. Realizing that AIG had excessive exposure to CDS, rating agencies reduced its rating, forcing the insurer to put up greater amounts of collateral. This event triggered the downward spiral that eventually forced the federal government to intervene.

On the positive side, the US government has turned proactive. After coming to the aid of AIG, the federal government drafted a plan to buy and gradually unwind the illiquid assets plaguing the balance sheets of financial service institutions. The estimated $700 billion plan, which was being debated at the time of publication, has two potential positive effects.

First, the plan, by steadying the banking industry, should boost lending, thus lowering the cost of capital and keeping the economy chugging along. Second, the plan will allow the government agency to purchase illiquid assets from a number of financial service companies, including insurers. By enabling an orderly sale of assets the plan should mitigate write-downs among insurers.

Although it is too soon to tell, the recent events could mark the beginning of the end of the soft market. For the last three years, premiums of nearly all commercial lines as well as some personal lines have been falling and this in combination with withering investment income has had a crushing effect on the industry’s bottom line. This could change, however. Many times after a market shock the industry gains greater pricing power. Furthermore, a weakened and distracted AIG could cause a supply shock that puts upward pressure on prices. A shaky economy, however, may temper demand, making it difficult to pass on higher premiums.

Furthermore, insurers have a chance to gain market share from AIG. While AIG’s insurance units are solvent, the market has another perception. According to a survey of 1,000 insurance agents and brokers conducted by Insurance Journal, 44% of AIG policyholders have requested to move their account. Some 62% of the producers said they expect to place less business with AIG. This shift in consumer and agent perception presents competing insurers with a great opportunity.

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