Will AIG's aggressive pricing end up costing taxpayers even more?

Before you go, we thought you'd like these...
Before you go close icon
Rivals of AIG (AIG) complained to Federal Reserve Chairman Ben Bernanke at a March 4 meeting that AIG is undercutting them by pricing its insurance products aggressively. Competitors said that by lowering prices AIG is using its bailout package to win an advantage over other insurers. They added that this strategy could result in new market share for the company that is at least 80 percent owned by the U.S. taxpayer.

In February, Rep. Paul Kanjorski, the House Subcommittee Chairman on Capital Markets and Insurance, and Rep. Spencer Bachus, the top Republican on the U.S. House Financial Services Committee, asked the Government Accountability Office (GAO) to find out whether or not these complaints have any merits. So far, the GAO hasn't found a problem, but there is a general consensus that the insurer may be pricing products more aggressively than it used to previously.

If AIG builds market share, is that a good thing for the U.S. taxpayer? Won't AIG then be worth more if it grows its business? Wouldn't its stock price increase consequently and perhaps be high enough so the U.S. can sell its shares and get some of the bailout money back? One might think that would be the case, but personal finance expert Don McNay definitely does not see things that way. He thinks the underpricing could ultimately cost the U.S. taxpayer even more money.

He writes in a column for The Huffington Post:
I've been involved in the insurance business for all of my adult life. Pricing is done by actuaries who generally have the same assumptions.

Actuaries make investment projections and look at the losses. They look at the expenses or how much it will cost them to service the business. Then they come up a price.

Most companies have similar loss and expense assumptions. Unless a company has outstanding investment returns, their prices are not going to dramatically better.
He believes that a company doing what AIG is doing takes on much greater risk and usually ends up out of business. The big problem, though, is that the U.S. taxpayer will be left holding the bag.

McNay predicts that in a few years, "we could have a bigger AIG mess on our hands" if it is pricing its products too aggressively. He adds that, "Undercutting the market is a bigger issue than the $165 million in bonuses."

The problem shows why the government should not be taking over financial companies. Government employees don't have the depth of knowledge that industry professionals have. It's much easier for those left in charge at AIG to do whatever they want to make money while the U.S. taxpayer pays the bill and takes on the risks. Clearly, the leadership of AIG has to change now to protect the U.S. taxpayer from even more losses.

Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies."
Read Full Story

Markets

S&P 500 2,191.95 0.87 0.04%
DJIA 19,170.42 -21.51 -0.11%
NASDAQ 5,255.65 4.55 0.09%
DAX 10,513.35 -20.70 -0.20%
HANG SENG 22,564.82 -313.41 -1.37%
NIKKEI 225 18,426.08 -87.04 -0.47%
USD (per EUR) 1.07 0.00 0.06%
USD (per CHF) 1.01 0.00 -0.01%
JPY (per USD) 113.48 -0.41 -0.36%
GBP (per USD) 1.27 0.01 1.16%

From Our Partners