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Originally Posted by samcol
From this it sounds like they knew they were going to be bailed out years before they actually did. How else could they even operate for any significant amount of time like this? Something tells me this whole mess was a long time coming, and unlike you I think most people who dealt with this day to day knew.
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No, not at all.
Yes, AIG has written coverage for buildings that are on fire at the time. They did it for a friend of mine, and it wasn't the first time. It was very expensive, it was very specific and they ended up making money on the deal.
Another case in point - years ago, they wrote an excess liability policy for me over one specific claim that had already occurred. My insured owned a truck that had hit a worker in a construction zone. She was in a vegatative state and would need care for the rest of her life, between 10 and 30 years. There was a suit in court by her family, and my insured was in the process of selling their company to someone. The new owners were concerned about successor liability and wanted to see if they could cap the claim. AIG wrote $5M excess of the $5M that the insured had in place at the time of the claim after reviewing the facts and discussing it with their accuaries. That's fucking ballsy in my book.
Here's the thing about insurance, regardless of whether or not it's liability, property, auto or whatever. If all your policyholders have an insurable limits loss (the maximum payout of the policy) at the same time, the insurance company is going out of business. No exceptions. The AIGFP folks thought that there was no way that it could happen to them. Clearly they were wrong. Really what they were doing wasn't insurance at all, though. It was an altogether different type of risk transfer on something that really should have been a business risk.
Cyn, you're right about how insurance is supposed to work. It should be almost impossible for the gears to sieze like it did with AIGFP. In most insurance (maybe not so much with what I do), it is actually pretty much impossible on this scale. Even if Fargo, ND burns to the ground (for instance), there should be enough spread of risk that no one carrier takes it on the chin so badly. Even Katrina, the biggest property loss that's ever happened in the US, didn't put anyone out of business. Then again, Reliance Insurance, who had been in business since the 1860's, went down because of a reinsurance spiral on Workers Compensation back in the 90's (they bought insurance on books of business from themselves - just stupid really), so companies do dumb things all the time.