American International Group is, by far, the largest non-life insurance company in the whole, wide world. It operates in some 130 countries and territories. The head office in the Philippines is in PBCom Building on Ayala Avenue in Makati City. It probably has the widest range of non-life products in the country.
Last week, I was shocked to read on Yahoo that AIG was going to collapse within 72 hours.
What happened? I read the Internet posting three times. I must confess I could not understand the financial transactions AIG found itself embroiled in. Of course, we here in the Third World, have underdeveloped financial markets. We would be completely lost in the utterly sophisticated financial markets in New York.
I think, and I must stress this is just my educated guess, the story behind the story was that AIG was in deep trouble (and this was not the first time) with the New York Insurance Commissioner. Under the insurance code, AIG is required, as any insurance company in the Philippines, to keep its admitted assets (that is, assets admitted by the Insurance Commissioner, not by AIG’s accountants) at 110 percent of liabilities. This is called the margin of solvency.
When the admitted assets fall below this threshold, the company has to pump in more money or lose its license. In the case of AIG, its admitted assets must have been so eroded that it was on the verge of losing its license or certificate of authority, when no one was willing to invest in AIG. Then, the US federal government came to the rescue by granting a whopping $85-billion loan.
Philamlife, AIG’s wholly owned subsidiary, and the largest life company in the country, was quick to announce in the media and the Internet that it was not affected by the turmoil in New York. This was confirmed by Insurance Commissioner Malinis. I agree, but without that huge loan, Philamlife could have been in some trouble because, if a recall it right, all its reinsurances are placed with another AIG subsidiary in the Bahamas, which probably was not in the best of health either.
The president and investment manager of Sun Life Philippines were on a TV talk show to say that it was not affected at all by the exposure of Sun Life Canada at Lehman Brothers. I agree. Sun Life Philippines markets various financial products that are locally backed.
Our Insurance Code and the commission’s implementing rules spell out in great detail how the money held in trust by insurance companies should be invested. The rules sacrifice earnings on the altar of safety. Any company that wants to invest outside the rules has to secure the commissioner’s prior approval.
To keep the companies honest, the commission’s eagle-eyed auditors inspect the books of the insurers every year. On top of these, the commissioner has the awesome power to cancel or refuse to renew licenses.
The Social Security System has assured its members that its relatively minor investments abroad are in good shape.
The Government Service Insurance System (GSIS) is quite another story. It made a lot of noise last year that it was launching a whopping $1-billion investment program abroad. Well-known foreign investment firms were signed up.
But, in spite of the demand of Senator Loren Legarda, and other columnists, to open up to the public, the usually voluble Winston Garcia, president and general manager of the GSIS, has been unusually quiet. Will Mr. Garcia please come forward and tell us how much the poor members have lost? His silence is deafening — and ominous.
Related story:
BSP gives assurance as 2 banks take hit from Lehman
Previous columns:
Unclogging the courts – 9/17/08
Asbestos – 9/10/08
VAT and your insurance claim – 9/03/08
MOA – 8/28/08
The President’s secret agenda – 8/20/08
