In a desperate effort to save the American International Group (AIG) from insolvency, on Sept. 16, 2008, the Federal Reserve Bank of New York announced a two-year, $85 billion secured revolving credit facility to the insurer. While this unprecedented bailout has allowed the company to see another day, its problems seem to be far from resolved.
Concerns about the company and its Canadian subsidiary, AIG Life of Canada, have rolled across the border into Canada as insurance agents and managing general agencies (MGAs) grapple with growing distress amongst policyholders. Some advisors interviewed by The Insurance Journal also explained that they are selling fewer AIG policies, or only selling small face amounts that would be covered by Assuris in the case of an insolvency (see inset text).
Lorne Marr, the president of LSM Insurance in Markham, Ontario, is one of those advisors fielding calls from worried clients wanting to know what happens if their insurance company goes bankrupt and asking whether they should cancel their existing AIG policies.
Mr. Marr has tried to be proactive in placating concerns. For his clients with AIG policies, he forwarded them a letter of reassurance dated Sept. 24 and signed by AIG Canada's president, Peter McCarthy.
Mr. Marr has also been advising them of the guarantees offered by Assuris in the case of insurer insolvency.
In terms of specific advice, Mr. Marr is telling his clients with current AIG policies, especially those with whole life or universal policies, not to switch. He says they would be paying unnecessary surrender penalties and would have to take out coverage at an older age with less favourable rates.
In his opinion, many people are getting unnecessarily worked up. He says there's a lot of misinformation in the press with too little being mentioned of the guaranteed offered by Assuris. "It should be noted that three Canadian life insurance companies went bankrupt in the 1990's," he said. "Les Coopérants in 1992, Sovereign Life in 1993, and Confederation Life in 1994. In each of these instances, Assuris (formerly known as CompCorp) protected Canadian life insurance policyholders."
That said, Mr. Marr did concede that he is writing less business with AIG Canada and accepts that in the case of larger policies over the Assuris cap, AIG Canada may not be the best option. "All things being equal, if it's over the $200,000 cap then you might want to go to a company that doesn't have any pressing problems," he said.
Bob Dickson, an advisor with his own firm Bob Dickson Insurance Services located in Carleton Place, Ontario, is another broker wrestling with the issue. He is worried that while AIG Canada is a separate legal entity to its parent company, "if the parent goes bad, then so does the child." He has a small block of AIG Canada Life business and has not had any major concerns.
He said he will continue to recommend AIG unless the policy was large, in which case he would "steer clear until things settle down".
Gary Goldshmidt, the managing director with Stone-Hedge Financial Group Inc., in Toronto said that the AIG situation is "definitely going to shake up the marketplace." His advice to other brokers worried about their existing AIG policies is to protect their clients by replacing them, particularly the policies above the Assuris cap. "If you had someone with a $1 million term policy, I would definitely look for another company which is competitive to perhaps eliminate some of the risk that is associated with that company."
Mr. Goldschmidt has a general rule not to deal with foreign insurers if he can help it. He does this because of liability reasons. "My clients want to know that if something goes wrong, who they have to sue and where the money is," he said. "When I'm dealing with foreign jurisdictions, that becomes very messy and in some cases that's not possible because typically they just have a strip down Canadian division."
One of the interesting consequences of the whole AIG fiasco, Mr. Marr has noticed, is the positive effect it is having on advisors. Consumers are now looking more for advice and guidance rather than just the cheapest price. The result of this is a greater reliance and respect for the service insurance advisors provide. Now people are looking at other variables like the strength of the company, the convertibility of the policy, if it's a renewable term and what the renewable premiums are, he said. "There's more than just the initial premium."
Robert Frances, president of Peak Financial Group, a Montreal-based MGA and investment products dealer, also see this same positive impact. "Advisors are actually getting more interest from clients. When times are good and there is little risk in financial decisions, investors tend to do well, sometimes even on their own. It's at times like this that people seek out and value independent advice. Those with unbiased access to many financial product manufacturers do better at times like this."
Another positive effect could be that advisors will see the value of diversifying their suppliers. "It will remind advisors of the importance of diversification, no matter how well a company is rated."
In this respect, Peak's advisors have been doing well, he adds. "Most advisors had done a good job diversifying their clients into many carriers and are not feeling the concern (about AIG)."
Michel Kirouac vice-president, general manager of MGA and mutual fund dealer, Le Groupe Cloutier, headquartered in Trois-Rivières, Quebec, says the situation with AIG may impact the distribution channel's perception of insurers' stability. "I think these issues with AIG mainly will have a big effect on our market. The fact that AIG is one of the biggest does not help, because if they are in trouble, what should we think about others?"
So far, he has not seen much in the way of requests for switches from AIG to other insurers on pending applications. "Pending applications seem to be staying there. We may have more requests for switches in the future, but this has not been the case."
Longer term, however, he anticipates an impact. "I don't think this will have an effect on existing business, but future bigger cases will be handled differently.
With respect to the effect that the general financial market turmoil has had on Le Groupe Cloutier's investment product sales, Mr. Kirouac says that clients have been quite stoic. "We have not seen a lot of fear, very few changes. Our seg funds are good because of the guarantees," he emphasized.
Mr. Kirouac adds that consumers' perception of the insurance industry could be adversely affected by AIG's troubles. "The bigger challenge in the future will be the trust that the clients have in companies. How can we explain now if a company is safe or not? Brokers understand the market, but for the client, it is very different."
That said, if AIG resolves its problems, he doesn't think that clients will be too concerned over "the fragility of our institutions. But if a second one is in trouble, watch out!!" he warned.
At the same time, Mr. Kirouac believes that Canadians can have confidence in their financial institutions.
John Hamilton, the president of managing general agency, Financial Horizons Group, headquartered in Kitchener, Ontario, also says he has great faith in the Canadian system. "We're very tightly regulated and the Canadian consumer is probably safer than any other consumer in any other country." He compared the current situation to the failings of Confederation Life and Sovereign Life, saying that AIG is nowhere near as dire as those situations were.
This was also the view expressed by various key players in the Canadian insurance industry, who are strictly espousing the virtues of the industry, but refusing to comment about concerns around AIG and AIG Canada.
Neither Wendy Hope, the vice-president, external relations at the Canadian Life and Health Insurance Association (CLHIA), nor Gordon Dunning, the president and CEO of Assuris, would comment specifically on the situation with AIG. Mr. Dunning cited confidentiality reasons and Ms. Hope said the association doesn't comment on individual company matters. She did, however, say that "to the extent that individual companies have been affected by the recent turmoil in the global financial markets, they are making the appropriate provisions to deal with the impact."
Ms. Hope also went on to say that the Canada's life and health insurance industry "remains sound, well capitalized, prudently managed and regulated." The CLHIA will continue to monitor developments in the United States.
Mr. Dunning had similar sentiments. "In general, the Canadian financial institutions are well-regulated and the Canadian life insurance industry is stable," he said. These comments, however, come only months after Mr. Dunning warned, in the organization's 2007 Annual Report, that the risks of a Canadian insurer becoming insolvent are higher than they have been since the early 1990s.
The Honourable Jim Flaherty, Minister of Finance, has also come out in support of the Canadian insurance industry by issuing a statement on topic on September 17. While accepting that Canada is not immune from the current volatility in the global financial markets, he wrote that the Canadian insurance industry is well capitalized and the financial system is sound. "The International Monetary Fund has determined that Canada's financial system is resilient and that the stability of our system is well supported by sound macroeconomic policies and strong prudential regulation and supervision."
The Insurance Journal also made efforts to find out whether the AIG situation is having an effect, either positive or negative, on any of the major Canadian life insurers. The insurers contacted, including Sunlife Financial, Great-West Life and Standard Life would not comment. Manulife Financial would also not comment on AIG specifically, but Tom Nunn, Manulife's assistant vice-president, media relations, did say that Manulife is following the developments very closely.