First mortgage lenders. Then Wall Street investment firms. Now insurance companies?
Several dozen jittery Marylanders called state regulators yesterday in reaction to big insurer American International Group's struggles to stay solvent - it eventually required an $85 billion government aid package last night - the latest ripple from the housing slump and credit crunch. They want to know: "What happens if things with AIG get worse?" said Karen Barrow, a spokeswoman for the Maryland Insurance Administration.
Plenty of people don't have mortgages or investments, but most everyone is covered by some sort of insurance - whether auto, home, health, life or workers' compensation. That makes the future of the nation's largest insurance company a topic of some importance for average folks.
But even as industry experts warned that other insurers could also find themselves in financial difficulties, many said yesterday that consumers shouldn't do anything rash. It's not the insurance side of the business but rather how insurers chose to invest money that's a problem now, the experts said. And state guaranty funds protect residents from the total loss of their policy benefits.
"Panicking doesn't pay," said John Boritas, executive director of the Maryland Life & Health Insurance Guaranty Corp. in Owings Mills.
Every state has guaranty funds for life and health as well as property and casualty insurance, and they step in if insurers are declared insolvent. Maryland, like most states, caps payments to consumers at $300,000 for most insurance policies - life, health, auto and home. Annuities are capped at $100,000 of present value.
"It's meant to be a limited safety net," said Barbara Cox, vice president of legal and regulatory affairs with the National Conference of Insurance Guaranty Funds.
That doesn't mean people with a $500,000 life insurance policy should despair, Boritas said. Insurance companies usually have a lot of assets even after they get into trouble, and policyholders are in line before banks and other creditors to get money from an asset sell-off. A consumer might end up with everything he or she expected - particularly because states will try to find other insurance companies to take over the policies.
"There have been one or two occasions where there have been what I'll call haircuts, but we strive mightily to avoid that," Boritas said.
And one local insurer that went into state receivership in 2004 - Mutual Fire Insurance Co. of Carroll County - managed to emerge "rehabilitated" the next year.
Tony Plath, an associate finance professor at the University of North Carolina at Charlotte, said he doesn't believe policyholders would be affected if AIG files for bankruptcy. The company's insurance arm is profitable and would be attractive to acquiring firms, he said. AIG's problem is that it put money into investments such as mortgage-backed securities that have since been battered by the housing slump. Major credit bureaus downgraded its ratings Monday.
"It's the investments portfolio that's broken, not their insurance business," Plath said.
Other insurers made similar investments. That's why both he and Etti Baranoff, a former Texas insurance regulator, expect more problems down the road.
"This is what we saw coming," said Baranoff, now an associate professor of finance and insurance at Virginia Commonwealth University. "The insurance companies are holding huge quantities of mortgage-backed securities."
Two other large insurers said yesterday that their policyholders shouldn't be concerned.
"We are very strong, and our investors take a long-term approach," said Angela Mitchell, a spokeswoman with State Farm Mutual Automobile Insurance Co.
Joe Case, a spokesman with Nationwide Mutual Insurance Co., said the firm is well capitalized. "We feel confident that we're able to meet our customers' needs," he said.
AIG wrote about $780 million in premiums last year in the state, 4 percent of everything in Maryland for life, property and casualty insurance in 2007, according to the Maryland Insurance Administration. The agency said yesterday that it is working with other states' insurance regulators to "maintain the strength of the insurance subsidiaries of AIG."
Consumers might want to review their policies and talk to their insurance agents, said Dave Evans, senior vice president with the Independent Insurance Agents & Brokers of America.