Posted On: September 30, 2008, 2:22 pm CDT

Posted By: VC

The NAIC blasted Congress for suggesting federal regulation of the insurance industry , and mistakenly argued that state regulation actually did an exemplary job in protecting AIG insurance companies and policyholders. NAIC stated "the government didn't bailout an insurance company" they said the government bailed out AIG and its financial holdings. This is a distinction without a difference. The AIG mess as a prime example of why the state by state regulatory system is not suited for the 21st century. NAIC should not be using AIG as an argument for continuation of state by state regulation. If anything, the AIG situation is a poster child, Exhibit A, for the need to create federal regulation and oversight of the insurance industry. I suggest the NAIC read and comment on the article in Sunday's New York Times, September 28, 2008 . There was a page 1 article about AIG which, if I read it correctly, stated that one of the major reasons for the downfall of AIG, and the required federal government bailout to the tune of $85 billion, was because there was a failed AIG insurance program. Repeating: A failed insurance program. The program was based overseas in a subsidiary of AIG in London The AIG program insured mortgage loans and other debt instruments. AIG was making huge profits on this insurance. And its executives were making millions while the boom was on While everything was going up, this was easy insurance to sell, and it added a large percentage of net income for AIG. Then when the mortgage crisis and credit crunch hit, and the real estate foreclosures began, AIG realized it was about $75 billion short in the claims that it would have to pay for the risk they insured. That's when AIG turned to the federal government for the $85 billion. This was no holding company issue, as NAIC is attempting to portray it. NAIC appears to try to characterize AIG as a holding company, which would have avoided state insurance regulation. While top of AIG may be a holding company, the culprit according to the article, was a subsidiary of the AIG holding company in London, which was selling, it turned out, risky insurance . that should've been carefully watched. Is there any state regulator that could have watched these international undertakings? Impossible! Isn't this a clear enough example of where more regulation is required, and on the federal level. ? If these facts about AIG are true, the NAIC and individual state regulators should take a good look at this, and ask themselves if their current regulations could have detected and stopped this problem. The international scope of insurance clearly dictates the need for federal regulation. Congress should clearly be looking at federal regulation and our Congress can be criticized for many things, Congress should not be criticized by the NAIC for applying proper regulation to the insurance industry.. The AIG bailout story, with its international nexus, is a perfect example of why federal regulatory oversight and controls are needed in the insurance industry, and why states could not handle this.. Any comment?