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Hospitals, Doctors and Insurance Companies Affected

Staff Reporters

The federal government recently announced a $100 billion rescue of American International Group [AIG], the largest insurer in the nation. Those involved in the business of insurance should know that it was the financial services operations and other non-insurance operations of AIG, and not its insurance companies, that forced the federal government to bail them out. Medical professionals should be aware, as well.

How it Happened

According to experts, the reason for AIG’s problems is two-fold. It is partly based in its dealings with credit default swaps, complicated financial instruments that investors use to protect themselves from bond defaults—which also caused the collapse of Lehman Brothers.

Insurers try to keep premiums low and profits high by investing. And while all insurers invest premiums in different forms of assets, AIG invested much of its enormous income in securities that were backed by sub-prime mortgages. As the mortgage-crisis came to a head, the value of those securities fell, creating financial problems for AIG. Insurers, like AIG, who attempted to profit from high risk investments found those investments to be so risky that they failed completely. When the investments failed, the insurer’s operating assets were reduced and it needed a major infusion of working capital. The federal loans, although enormous, are fully backed by saleable assets.

I Have AIG Insurance – Should I be Worried?

Generally no; because of the corporate structure of AIG. The holding company can be experiencing financial problems while the individual insurance company subsidiaries that agreed to insure you remain secure. They have more than adequate reserves to pay the claims anticipated. Each AIG branded insurer is a separate corporate entity that, by law, must maintain funds in secure reserves to pay claims presented.

And yet; First Professionals Insurance Company [FPIC] of Florida, recently told the SEC that it held securities with an amortized cost of $4.1 million in Lehman Brothers, $2.1M in American International Group, $2.5M in Morgan Stanley, $2.1M in Washington Mutual and $300,000 in Fannie Mae. 

Will AIG Claims be Paid?

Probably, yes. If the insurer has maintained adequate reserves, as required by state laws, there will be sufficient funds to pay all claims reasonably presented. If the individual insurer should fail, it will be taken over by the state where it is domiciled. If the insurer is faced with a catastrophe that it cannot cover and if your insurance is with an AIG company that is admitted to do business in your state, the state’s Insurance Guarantee Fund will pay your claim up to a limit that is usually no more than $500,000.  Of course, there is no absolute certainty in any situation relating to insurance, but the AIG companies are well-funded and very capable of handling all predictable claims.

On the one hand, if the insurer is put into receivership, the state regulator will use the insurer’s own assets to make payments before seeking funds from the insurance guarantee fund which is financed by assessments on all insurance companies that do business in the state. If, on the other hand, the AIG insurer is not admitted to do business in the state but does business through the surplus lines market, you are not protected by a guarantee fund and must be certain the insurer has the assets sufficient to cover any potential losses.

How Do I Determine That My Insurer Has Adequate Assets?

Contact your state department of insurance to determine if the insurer is admitted to do business and is protected by the Guarantee Fund. Also, check your policy; the insurer must tell you in writing if it is not admitted. Contact your state department of insurance to obtain financial documents filed by the insurer.

Assessment

The credit-crunch is on everywhere, and hospitals filing bankruptcy this quarter include: a two-hospital system in Honolulu; one in Pontiac, MI; Trinity Hospital in Erin, Tennessee; Century City Doctors Hospital in Beverly Hills, Lincoln Park Hospital in Chicago, and four hospital system Hospital Partners of America, in Charlotte [See www.HealthcareFinancials.com; November 2008 issue].

Assessment

Finally, conventional wisdom suggests a ratings reveiw of any policy provided the insurer by Bests. It should be at least “A” rated. Review financial ratings of the insurer issued by Standard & Poors. Of course, these have become suspect of late, too! So, search the Internet with a query including the name of the insurer and the words “financial problem.” Be sure to ask your insurance agent or broker.

Conclusion

Your thoughts and comments re appreciated.

Disclosure: Dr. David Edward Marcinko is the editor of Healthcare Organizations: [Financial Management Strategies] www.HealthcareFinancials.com

Speaker:If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Filed under: Breaking News, Financial Planning, Health Insurance, Health Law & Policy, Insurance Matters, Investing, Op-Editorials, Risk Management | Tagged: AIG, bankruptcy | 6 Comments »