American International Group Inc.’s near failure in 2008 shows that government watchdogs may struggle to curb risk beyond insurers’ traditional underwriting businesses, an executive at rival Berkshire Hathaway Inc. said.
“The idea that somehow insurance regulators are going to identify the next AIG Financial Products group, which is the operation in London that brought down the AIG holding company, is, in my view, not very realistic,” Forrest Krutter, Berkshire’s corporate secretary, said today at a U.S. Treasury Department panel discussion on insurer regulation in Washington.
AIG was bailed out by the U.S. in 2008, in a rescue that swelled to $182.3 billion, after the Financial Products division suffered losses on derivative bets tied to subprime mortgages. The federal Office of Thrift Supervision, which was since merged into another regulator, “fell short” in its oversight of the contracts at New York-based AIG, Scott Polakoff, then acting director of the OTS, told a Senate panel in 2009.
State insurance regulators in the U.S. met their responsibility, which was to make sure AIG units had sufficient funds to back their obligations to buyers of property-casualty coverage and life policies, Krutter said today.
“Insurance regulators should work at improving what they’re ultimately very good at,” said Krutter. “Assuring that when unregulated affiliates of insurance companies fail, as some ultimately will in a competitive, capitalist economy, that the insurance company affiliates are not placed in a financially hazardous condition and that policyholders can sleep soundly knowing that they have the insurance protection they paid for.”
Berkshire, led by billionaire Chairman and Chief Executive Officer Warren Buffett, didn’t require government capital during the financial crisis. The Omaha, Nebraska-based firm sells insurance through units including Geico and National Indemnity. AIG, which has wound down Financial Products unit, is majority owned by the U.S. Treasury Department.
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