THE BLOG
04/22/2009 05:12 am ET Updated May 25, 2011

AIG Underbidding Insurance Rivals and Why We Should Be Really Angry

A Wall Street Journal said that AIG is dramatically underbidding its rivals for new insurance business.

As angry as people are about the bonuses, they need to be far angrier about this.

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.

We all know that AIG did not have great investment returns.

If you shop around for something like insurance, it is rare to see a price difference of more than a few percentage points.

When you do, a company is often "buying the business."

They are severely undercutting their rivals and hoping that somehow, someway, it will all work out.

It rarely does.

I've watched several insurers or self insurance pools "buy the business." A few years later, they usually went to another phase.

"Out of the business."

Their actuaries weren't that much smarter than the other actuaries. They were just more willing to gamble.

In the AIG case, it is appalling.

The taxpayers of the United States of America own 79% of AIG. If this "overly aggressive pricing," by AIG (as Ted Kelly, the CEO of Liberty Mutual Group, defines it) goes bad, the taxpayers ultimately pay for it.

In a few years, we could have a bigger AIG mess on our hands because of this "aggressive pricing."

AIG undercutting the market gives it an unfair advantage over its insurance industry rivals.

AIG's major rivals are not companies that the federal taxpayers had to bail out. These are not companies paying themselves $165 million in bonuses.

These are companies that employ thousands of hard working Americans and played the game correctly.

We are rewarding bad behavior and punishing good behavior.

Undercutting the market is a bigger issue than the $165 million in bonuses. If AIG loses millions, or billions, in the future due to its "overly aggressive pricing" we are going to be picking up the tab.

Some of the other insurance companies have complained directly to Federal Reserve Chair Ben Bernanke. Bernanke said on 60 Minutes last week that the AIG situation made him angry.

This is the chance to see if he was really angry, or just wanted a good sound bite.

We shall see.

Don McNay, CLU, ChFC, MSFS, CSSC is the founder of McNay Settlement Group in Richmond, Kentucky. He is the author of Son of a Son of a Gambler: Winners, Losers and What to Do When You When The Lottery. You can write to Don at don@donmcnay.com or read his award winning, syndicated column at www.donmcnay.com.