Worried about AIG’s tumble? Here are some steps you can take

After the Federal Treasury announced its $85 billion bail-out of American International Group last week, many consumers wondered if their insurance policies were safe.

AIG requested the massive loan because of a cashflow crunch, due to bad investments in mortgage derivative products, which could bankrupt its insurance assets. The U.S. Treasury granted the loan, because a collapse of the nation’s largest insurance company would affect too many American policyholders and threaten financial markets worldwide, said Treasury Secretary Henry Paulson.

But is your insurance policy safe?  The short answer is, experts said, yes.

“There’s no reason to panic or pull your policy out of AIG, because the (insurance) companies are secure,” said Melissa Gannon, vice president of insurance and bank ratings at thestreet.com, an investment information site.

Other insurance companies also seem to be safe. “You can’t leap to the conclusion that because AIG is having this problem, it will go into other insurance companies,” said Gannon. 

Here are seven ways you can check.

Find out who owns your insurance. Even if you think you do not have AIG policies, your insurance company may be an AIG subsidiary. For example, AIG owns SunAmerica (retirement annuities), 21^st Century (auto insurance), and American General Life and Accident. You can check your insurance company’s Web site, do an online search, or ask your agent.

Even if you own AIG insurance, experts said you do not need to panic.

“The issues that compromised the financial integrity of AIG were at the holding company level, not the underlying insurance subsidiaries, (which) were heavily capitalized,” said Tom Sullivan, Connecticut insurance commissioner and executive committee member of the National Association of Insurance Commissioners. Even if AIG were to file bankruptcy, said Sullivan, the underlying cash reserves would be enough to fulfill all insurance claims.

Strict state regulations requiring insurance companies to set aside reserve funds for insurance claims provide a strong cushion for policyholders, said Sullivan.

Check the financial health of your insurance company. You can check the balance sheet of insurance companies, to assess its financial strength. The NAIC Web site posts information — including assets and liabilities — of insurance companies.

You can also find out your insurance company’s ratings. Although there is no national rating system, various market research companies rate insurers, based on their financial health. For example, thestreet.com offers ratings, ranging from A to F.

You can also find out an insurance company’s balance sheet by looking at its quarterly reports, which are often posted on a company’s Web site, said Nell Newton, healthcare and insurance industry editor at market research firm Hoover’s. Annual and quarterly reports will show you a company’s investment activities.

Large insurance companies which have diversified into international markets and non-insurance products are most at risk, said Newton. Publicly-held companies under pressure to earn shareholder returns are also financially riskier, said Newton.

In contrast, regional and mutual insurance companies — owned by private investors and policy-holders, respectively — are more financially conservative, said Newton. “They didn’t go off trying to … turn themselves into something other than bread-and-butter insurance companies.”

Check the insurance guarantee limits of your state. In the unlikely event that an insurance company goes bust and cannot fulfill claims, each state has a Guaranty Fund to back policies. “It’s a social safety net, much like FDIC (Federal Deposit Insurance Corporation) insures deposits for banks,” said NAIC’s Sullivan.

Each state’s Guaranty Fund has a different limit, with a nationwide average of about $350,000 per claim. In Connecticut, for example, if a fire burned down your house and car, you could claim up to $500,000 for each — or $1 million total. NAIC.org provides a link to each state’s insurance department, where you can check the guarantee limit.

Policyholders may one day have more guarantees, as lawmakers consider regulation at the federal level, said NAIC’s Sullivan, who believes state regulators are already working effectively. 

Meanwhile, some academics are proposing industry-led regulatory agencies, which would have the financial motivation to back policyholders. “Having a guaranty fund owned by the industry, managed by the industry, financed by the industry, paying the company policyholders — we think is the right solution,” said Guillaume Plantin assistant professor of finance at London Business School, and co-author “When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation.”

“If they don’t take the right conservative action, the future losses of the company will be theirs,” said Plantin. “So they have the right monetary incentives to take care of the situation.”

Meanwhile, keep paying your insurance premiums, said experts. Even if your insurance company fails in a worst-case scenario, you need to be current on policies to claim against guaranty funds.

Find out the surrender value of your policies. If you decide to dump your insurance company, find out how much it will cost you. Many life and annuity insurance policies offer a reduced “cash” or “surrender value” for early termination.

You can read the fine print of your policies or call your insurance company to find out.  Alternatively, find out how much a new policy will cost. It may actually be more.

“It’s best for people take a measured approach, educate themselves, make sure they understand their position, and then make a decision based on that,” said thestreet.com’s Gannon.

Consider using different companies. Experts say it may be safer to have different companies covering different policies, depending on the insurance company’s specialty.

“If a consumer just wanted to be really careful, find a company that specializes (in a certain type of insurance), and just stick with that,” said Hoover’s Newton.

Talk to your insurance agent. Your agent or broker may not know all the financial positions of its insurance companies or even want to discuss it. Three large insurance groups and companies — the National Association of Life Brokerage Agents, Travellers Insurance and The Hartford — all declined comment for this story.

But your agent should be able to answer some of the above questions, and make recommendations.  If not, you might want to reconsider your agent.

Sit tight. If you have AIG insurance, the company may be sold soon, since that was one of the Treasury’s bailout conditions.  “The lazy person’s way is to just sit tight and see who buys (AIG) up,” said Hoover’s Newton.  

If you do not own AIG, you can also sit tight.  “It’s a big rocky road, but… things will calm down,” said Newton.

Then wait and watch AIG’s surgery. If all goes well, taxpayers may actually benefit from the AIG bailout when the loan is due in two years. In 1979, when the government guaranteed loans to Chrysler Motors of $1.2 billion, it earned taxpayers $300 million in profit when Chrysler repaid the loan four years later.

“AIG has a trillion dollars on their balance sheet,” said NAIC’s Sullivan. “The federal government will more than likely make money on this deal.”