How Insurers Contributed to Economic Crisis

Tom Wilson, the CEO of the All State Insurance company in the United States pitches in here with his assessments of the contribution of insurance companies to the financial crisis. Understandably, he is frustrated by the Mea Culpas that are being advanced by mangers of insurance corporations such as AIG. In the article, he makes two significant arguments.

The first is the declaration that the attempt to excuse insurance companies is completely unjustified largely because of the fact that insurers undertake to indemnify against a loss. therefore the Credit Default Swaps that the AIG made were a form of insurance that are an extension of the business. Taking forward his point then, I confirm to myself that AIG saw the CDS's instruments as a different name for insurance policies against default in securities. I accept this argument but I do not see that an insurance corporation such as AIG is justified to add to the risks it already through conventional cover by making further undertakings in a business that it hardly understood. It is just not possible then that the risks were appropriately priced.

Secondly, Wilson points out that the fragmented nature of insurance industry regulation in the United States led to a lack of expertise in their prudent regulation. Unlike the first point, I am only in partial agreement with this point in the sense that the complexity of these instruments and their ubiquity makes nonsense of state-level regulation. However, I am skeptical that federal regulation would do better as a matter of course. My reluctance is due to the fact that the problem is not entirely about regulatory ability as the inherent risk in instruments that are not properly designed and understood, even by those who sold them.

In sum, Wilson's admission of the fault and the incisive definition of the problem of regulatory fragmentation shows that he is a prudent manager but he errs by creating the impression that regulation can take away the risk of inherently unstable financial instruments. I do not think that this should be the primary purpose of the regulation that he persuasively argues for.