Tuesday, September 16, 2008

The panic for AIA policyholders

I received at least 5-6 calls from Friends and Policyholders today with regards to their AIA policies and if AIG collapse will affect their policies. One of them sounded very panicky and asked me if he should surrender his policy now as its maturing in 6 months time.

I bet AIA Financial Consultants must be very busy just to answer all their policyholders queries today.

For those who missed the news, you may watch this You-Tube posting below:

The media, the Company and some online forum postings had given so much assurance such as
1) separate insurance fund from AIG,
2) having more than sufficient capital and reserves above the regulatory minimum requirements, to meet obligations to policyholders,
3) sub-prime losses that may be borne by AIG at the group level have no impact on policyholders here,
4) Presence of the Policyholder's Guarantee Fund managed by MAS,
5) MAS assurances, etc
There are just too much rumours spreading that AIG may ask money from AIA, AIA books may not be properly audited, AIA participating fund consists of a lots of AIG shares, etc


In my opinion, its natural for them to panic because its their hard-earned money and many of us are probably not old enough to see such financial crisis before. Anything that concerns money will always be an issue.

Though I believe in the assurances given by AIA and there are curently no cause for alarm, I feel its still good to diversify your insurance policies with at least a few insurers. The one who has only AIA policies in their whole portfolio must be very nervous today.


Anonymous said...

You've managed to summarise the recent turmoil very well and allay the AIG fear in me. For the benefits of others and me, maybe you can unravel subprime crisis using layman terms. This crisis started 13mths back and although I've read a lot about it but somehow I still cannot grasp the actual events as I've no finance background

Anonymous said...

During the housing boom every tom dick and harry could get a housing loan. The housing loan was brokered by brokers who are like the insurance agents anyhow sell.Even people without holding a job could get a loan.Everybody was encouraged to buy house to speculate and even for those without means they too hoped to make some money from price appreciation. Never mind the interest rate charged , after all it was sure make money, cannot lose. Those with low credit rating was offered loan with very high interest. These people are called borrowers below prime rate or subprime borrowers.
It was money make money. There was so much loan given out, the good and the bad ones and so the financial experts went to work to produce another product out of these loans. As a package of bad and good loans they employed a rating agency to rate it as AAA . It was something like money laundering turning bad loans into AAA and marketed it to the financial institutions as a product for diversification with their portfolio of investment to increase the return. As a result you got products like MBS,CDO and laon related etc and then more repackaging. Layers and layers of cost were added and sold at higher price. It was good and lucrative business .
Then a new product came on the scene like CDS or credit default swap which AIG is one of the largest sellers.CDS is an insurance to insure the buyers of these derivatives against credit risk.
When the housing boom turned doom all hell broke loose.. There were massive loan defaults, foreclosures and then followed by the credit crunch or liquidity squeeze and this made the situation worse. A chain of reaction started with ripple effect and engulfed the whole world. Practically every financial institution in the world had exposure. OUr local 3 banks have exposure. Insurance companies like NTUC has and of course other insurers too.
AIG's problem is caused by the CDS. The policyholders who insured their derivatives, bonds or debt instruments want to be paid.It has to the tune of $500billions in CDS and AIG insured them against credit risk and not including interest and the amount was close $100billion of payouts. When it was known that AIG had this problem of liquidity the rating agencies reduced the rating and caused the share price to plunge making it difficult to raise capital.. The $20billns it got disappeared without sound.I t approached FED for help. FED was and is a Santa clause and when it mulled over and considering the wide ranging implication internationally and a possible global financial crisis FED loaned AIG and taking an equity stake of 80%,ie. FED owns 80% of AIG. AIG meantime will have to sell off non core business or non traditional to pay off the loan.
I believe it will because outside US and in Asia AIG is doing very well. Thsoe with AIA policies should have no fear of the insolvency, ie. it can make meet any laibility obligation.
The rule will change from now and which Paulson is strong proponent of this change, to regulate stringently the financial markets.
Hope Singapore MAS will too and control the market especially the insurance markets where the sellers or insurance agents are not allowed freely to sell products without considering the needs of consumers.