Rampant speculation - AIG Life Insurance Company of Canada

Update: AIG Canada has released a document to their partners and agents that discusses their stability. It boils down to stating that AIG is a seperate legal entity unaffected by the US credit crisis and that they have no investments in US subprime mortgages or in Canadian asset backed commercial paper.

Full document is here.

Update 2: The rating agency AM Best has downgraded AIG Life Insurance Company of Canada from A+ to A as of yesterday (September 15).

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The internet wires are humming with news that AIG (American International Group) in the US is struggling. See this article in the Wall Street Journal.

That begs the question - what about us Canadians who have policies with AIG Life Insurance Company of Canada? Should be be concerned? Are we protected? What do we do?

Well, the short answer is that we’re fairly well protected. In the words of The Hitchiker’s Guide to the Galaxy, Don’t Panic! Keep your head even when others are losing theirs. There’s very little if anything to worry about even in the most dire of circumstances. The worst case scenario isn’t that bad, and the probably outcome is that we won’t be financially affected at all.

In addition, as it stands right now it seems there isn’t any problem at all with AIG Canada. The pdf document from AIG posted above indicates pretty clearly that they’re not in any financial difficulties.

Guarantees:

Let’s start with the guarantees and assume worst case scenario that AIG Life Insurance Company of Canada gets taken down along with American International Group in the US. All the life insurance companies in Canada (including AIG) belong to an organization called Assuris. Assuris provides some pretty robust base guarantees for life insurance polices:

1. Death benefits are guaranteed to the higher of up to $200,000 or 85% of promised coverage.
2. Cash values and investment values are guaranteed up to the higher of $60,000 or 85% of current value.
3. Policies will be transferred to a solvent insurer.

Worst Case Scenario - life insurance coverage:

Since we’re assuming worst case scenario here, let’s assume that AIG in Canada goes belly up and these base Assuris guarantees kick in. If your life insurance amount is less than $200,000 you are fully guaranteed. If you’re investments or cash values are less than $60,000 again you’re fully covered. So, the guarantees look after you completely.

Now lets say your insurance amount is over $200,000 and Assuris only provides the minimum guarantee of 85%. Well, you’ve just become exposed to the risk of 15% of your life insurance coverage if you die. I’m going to venture to say that the 15% isn’t a complete catastrophe for you. Now, if you’re healthy all you need to do is purchase new coverage for that 15%. There’s no need to dump the current 85% because that’s going to be transferred to a solvent insurer right? So you’re going to possibly pay a bit higher premium for a small fraction of your coverage.

If you’re not healthy so you can’t purchase additional insurance, you can always purchase no medical exam life insurance. Again this would be at a higher premium. It’s going to cost you a bit, but is this devastating? Not at all.

Worst Case Scenario - Cash Value and Investments in Life Insurance Policies:

Now let’s look at your cash value and investments in your life insurance and again assume absolute worst case scenario. If you’re investments or cash value are less than $60,000 you’re fully covered, nothing lost. If it’s higher than $60,000 you could potentially have just lost 15%.

Now that’s certainly not good news. But is it catastrophic? I’d say it’s not - it’s really not even as bad as many people suffer with their investments through things like tech bubbles and poor investment choices.

So yes, you could lose 15% of your cash or investments inside a life insurance policy. But that’s it - the other 85% is guaranteed by Assuris and backed by all the other life insurance companies in Canada.

Summary - worst case scenario:

In summary, the worst case scenario is that most folks will be entirely covered, the remaining few will on be mildly affected and can likely manage themselves back to full protection at minimal relative cost.

Probable scenarios - looking forward using the rearview mirror:

In the best practices of fund managers, I’m going to suggest we use past experiences to guide us in what is likely to happen in the future. There have been three life companies go bust in Canada.

Les Cooperants went bust. Policyowners were eventually 100% covered.

Confederation Life went bust. Policyowners were eventually 100% covered. And Confederation Life was one of the top 5 biggest companies in Canada at the time - and still, 100% coverage.

Sovereign Life went bust. 96% of policyowners were 100% covered. The remaining 4% of policyowners recieved a minimum of 90% of their benefits. So almost everyone received full benefits, a small fraction received the vast majority of their benefits.

So given past experience, it’s a reasonable assumption that AIG policyowners are likely to escape with 100% of their benefits. The only change is no change.

Full stop! We’re still speculating here folks!

It’s worth noting that not only is AIG in the US not bankrupt, but we have as of now no word that this even effects AIG in Canada - and if it does, how it affects AIG. In other words, any concerns surrounding AIG in Canada are at the current time unsubstantiated.

One of the things that may come out of this is how tightly AIG in Canada is tied to AIG in the US. DIfferent companies have different ties to their parent companies. It’s possible if AIG in the US falls (and again - that’s speculation at this point) that it may take AIG in Canada down with it. Or, AIG in Canada may be discrete enough of an entity that it remains fully viable - little effect on it. Even if AIG in the US falls (and again - that’s still an IF at this point), AIG in Canada may be just fine.

In fact, in the release from AIG posted at the top of this post it seems AIG Canada is saying that they’re a seperate legal entity. I think we’re supposed to take from that that they stand on their own, mostly seperate from the US company. And that makes this entire discussion a bit of a moot point - AIG US can do what it wants and AIG Canada will still roll merrily along.

Next step - Men in Black Suits step in:

If AIG in Canada is substantially affected by some potential future demise of it’s US parent, the first thing that’s likely to happen is the government and Assuris are going to step in and take things over. This is a good thing. Both the Canadian regulatory authorities and Assuris will have nothing other than the financial concerns of Canadians at the forefront of whatever they do. I appreciate we wouldn’t normally associate ‘best interests of consumers’ with service from a government authority but this is one case where I wouldn’t want to be standing between them and the best interests of getting consumers their money fully protected. I expect these folks will use the full authority of the government and the industry to move whatever they have to protect policyowners.

It’s also worth noting that I don’t see AIG Canada just going bankrupt one day. The government keeps a tight eye on our insurance companies and keeps a tight eye on what’s going on. They’re going to step in long before the company is reduced to ashes. I expect they’ll step in at the first signs of trouble and manage it back to viability again.

Big companies looking for deals:

The larger insurers are still cash flush and looking for buys. The Canadian market is pretty much tapped out in terms of companies they can buy so they’ve focused their efforts into the US. There’s been recent news reports that some of the larger Canadian insurers are excitedly circling some of the remains of US companies who are in trouble - it’s an opportunity for our insurers to expand.

If AIG flounders and there’s an opportunity for insurers to pick up the business I expect Canadian insurers are going to be rushing in to get the business. It’s possible we see a competition or bidding atmosphere. And that can only be good for policyowners.

So what’s probably going to happen:

Assuming AIG in the US goes bust. And assuming that affects AIG in Canada to the extent that they become insolvent
and the government steps in. What do I expect to happen? What’ll happen is that two or three large insurers are going to bid on the business, and AIG policyowners are going to end up with 100% coverage and unaffected.

So Don’t Panic. We’re going to be fine :).