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Fallout: The Financial Crisis

Ensuring your insurance’s safety

Amy Scott Oct 17, 2008
Fallout: The Financial Crisis

Ensuring your insurance’s safety

Amy Scott Oct 17, 2008


Tess Vigeland:Surely you’ve seen those ads for AIG? They were in rotation for a while.

[From Ad]:

Mom: Did you have a nightmare?

Kid: No, I’m worried about this family’s financial future. Does your retirement plan provide predictability of income and protection against market risk?

Fast forward to the punch line.

Narrator: The AIG companies. The strength to be there.

Yeah, not so much. AIG got an $85 billion loan from the federal government and went back to the trough a couple of weeks later.

Is your policy safe with your insurance company? Here’s Marketplace’s New York Bureau Chief Amy Scott.

Amy Scott: So after all that drama with AIG, can you trust your insurance company? The experts I talked to said: probably.

Eric Dinallo is New York state’s top insurance regulator. He says, for one thing, AIG is not your average insurer.

Eric Dinallo:I think AIG was unique in that it was not really an insurance company by the time events hit the wall; it was the largest financial services company in the world.

One of its subsidiaries in London invested in securities that blew up and destroyed AIG’s balance sheet.

Robert Hartwig is president of the Insurance Information Institute. It’s an industry trade group. He says he doesn’t know of any other company that made mistakes like AIG’s. Hartwig says insurers have an advantage over banks right now: they don’t borrow as much money to fund their businesses.

Robert Hartwig: Insurance companies are not suffering from a liquidity crisis or a credit crisis like the banks are. If you want a policy today, it will be written. If you have a claim that needs to be paid, even a very large claim, it will be paid today.

That doesn’t mean your insurance company hasn’t lost money on its own investments. Insurers take the money we pay in premiums and invest it in stocks, bonds and all kinds of other securities that you really don’t want me to talk about right now. As we all know, many of those assets are worth a lot less today than they were months ago.

Bob Hunter is director of insurance for the Consumer Federation of America. He says many life insurance companies are invested in, yes, mortgage-backed securities.

Bob Hunter: If some of those mortgages go under, in other words, if people beyond the subprimes start losing their homes because of drops in evaluations and so on, then it could affect some life insurance companies.

Hunter says such loses could drag some insurance lenders under. If that happens, your policy has a lifeline: each state has a guarantee fund that works a bit like FDIC insurance at a bank. The coverage varies from state to state, so it’s still possible you could lose money.

Glenn Daily is a consultant who helps individuals make insurance decisions. He says that whatever you do, don’t freak out. If you switch your insurance policy to another company, you may end up paying more in fees. If you pull your money out all together, you may have to pay taxes.

Glenn Daily: You really can lose money if you panic. It’s much less likely that you’re going to lose money if you don’t panic — if you stay put, if you chill out, take a deep breath.

Ready? (Breathes) Better?

In New York, I’m Amy Scott with Marketplace Money.

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