Worse Than Investment Banks?

In the midst of the carnage of Lehman Brothers, and the semi carnage of Merrill Lynch, something scary seems to have gotten little press. What happens to annuity holders if a large insurer like AIG goes under? They aren't covered by the usual moral hazard suspects (FDIC, SIPC), and as insurers are generally regulated by state oversight, that leaves the state guarantee funds and the larger umbrella (more of a cozy club than a formal master fund, however) of the National Organization of Life and Health Insurance Guaranty Associations (NOLHIGA). (Forgive me, but all I can think of when I see that acronym is some strange combination of NAMBLA and my University's Lesbian and Gay Alumni group).

In a very weak attempt to prevent moral hazard, most states forbid insurers from advertising the protection of the state guaranty association when marketing annuities. (That sort of brilliance must have its origins somewhere in the Carter Administration, I think). Moreover, most states limit recovery for annuity holders to a present value of $100,000. It doesn't take much calculating to see that 20 years of payouts on $100,000 isn't a lot of money. Considering how aggressively annuities have been marketed from the private wealth management groups of large banks, I think some people are going to be very unhappy. In addition, most states limit total recoveries for all insurance products to $100,000 per person. Just hope you don't have lots of insurance and an annuity with the same carrier, I suppose. Or that your carrier supplements with private insurance. Or that... something.

Of course, each insurance insolvency is different, and states tend to handle them on a case-by-case basis. Often, troubled insurers will end up pawning off their book to a stronger group, but in the case of a large failure, or several medium sized failures, I suspect states will find themselves rather overwhelmed, and buyers of assets will be rather thin. Say what you like, but at least investment bank failures have looked mostly orderly so far.

UPDATE: A certain DealBreaker executive is quaking in their shoes as AIG insures their condo. Look for minute by minute AIG coverage as a result.

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