A.I.G. brought to heel
Something else to be thankful for this holiday season:
The American Insurance Group copped a plea. The company will pay an $80 million fine and submit to an external monitor.
A.I.G. is accused of using insurance contracts to "smooth out" earnings. The NYT article explains why forrays into so-called "finite insurance" have gotten so many leading insurance companies in to serious regulatory trouble:
Finite risk or loss mitigation insurance was developed in the 1990's. The policies have become the subject of investigations because they sometimes do not operate like insurance - which protects against unexpected events - but may simply amount to loan agreements, possibly violating accounting standards. Payments of insurance claims should be recorded, for example, as income. But a loan must be recorded as a liability. A crucial test in insurance is whether there is a transfer of some risk from an insurance company's customer to the insurance company. If there is no transfer of risk, there is no insurance.
Update: Reuters reports that A.I.G. has agreed to pay $126 million to settle earnings inflation charges (as opposed to the $80 million figure cited above).