Will AIG Sell its Auto Insurance Business?

Consumers can look to states for protection before and after a sale.

In last Tuesday's address to Congress, President Barack Obama promised to reform the nation's regulatory system to "ensure that a crisis of this magnitude never happens again." That crisis has affected financial institutions worldwide, causing consumers to question the safety of their money and other assets.

When it comes to insurance companies, American International Group (AIG) has been a high profile target of criticism. While we can't attempt to evaluate its worldwide operations here, we do offer some thoughts on what we know—auto insurance. (Full disclosure: Insurance.com has partnered with aigdirect.com for many years. Their insurance product is now branded 21st Century and is marketed on our site and across the country.)

New financial assistance to AIG gives the company additional cash in exchange for a stake in two of its companies. The government announced today that it granted a new package of relief because the company has spent the cash granted previously but has not yet found buyers for pieces of the company it had hoped to sell in order to repay the government some $150 billion. Today's package gives AIG $30 billion on an "as needed" basis. And, instead of paying back $38 billion in cash with interest that it has used from a Federal Reserve credit line, the company has agreed to repay that debt by giving equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries.

If you have a policy with AIG today, you're protected. The individual AIG company that is licensed to sell auto insurance in your state is regulated by your state department of insurance. Each insurance company has strict legal restrictions on how they invest their money (your insurance premiums) and the amount of money (called a loss reserve) they must have on hand to pay future insurance claims. State regulators have one primary responsibility—and that is to make sure that the companies they regulate have enough cash to pay claims. Insurance commissioners from numerous states, including New York, have publicly asserted that the claims reserves for AIG's Auto Insurance companies are solid.

If AIG sells its Auto Insurance companies, you're still protected. Recently, it's been reported that Zurich Financial Services Group is considering purchasing the auto insurance companies owned by AIG. Zurich has a global network of companies, and sells auto insurance in the United States through the Farmer's Insurance Group, the 3rd largest property-casualty insurer in the U.S. So, a sale to Zurich means that your policy would eventually be owned and serviced by a company with a long and profitable record of insuring cars and homes. Farmer's earns a Financial Strength rating of "A" (Excellent) from A.M. Best Company, an independent firm that rates the financial strength and performance of insurance companies. If a sale occurs, you will be notified of how your policy might change—subject to state laws, of course.

Would federal regulation of the insurance industry give me more protection? There's plenty of debate on the issue. The current crisis within financial institutions does not revolve around the individual insurance companies themselves—but rather the holding companies which are engaged in other types of business.

Regulatory reform may be necessary, but state insurance regulators are nearly unanimous in stating that federal regulation could significantly complicate the current system. And Federal Reserve Board Chairman Ben Bernanke said Tuesday that federal regulation of financial institutions needs to be "…a much more elaborate version of the Federal Deposit Insurance Corporation… that would apply to large financial institutions of various types, that would give guidance to regulators under appropriate checks and balances about under what circumstances the regulators could come in and shut down a firm in a safe way that doesn't disrupt the financial markets." In other words, simply shifting regulation of insurers from states to the feds won't do it, because the holding companies are financial institutions and are not regulated as insurance companies.