AIG Crisis: Impact on Insurance Business with Special Reference to China, Japan and India

Abstract

The American International Group Inc. (AIG) founded during 1919 in China entered US in 1926 as American International Underwriters (AIU) and remarkably transformed into the largest insurance company in the world. It experienced many turbulences and challenges during transformation. AIG business portfolio has a mix of financial services, asset management services along with life and general insurance businesses. It has many financial instruments and insurance products. Credit Default Swaps (CDS), one of the financial derivatives which generated huge revenues to AIG in the early days, later affected it adversely leading to liquidity crunch. The risk posed by the CDS accounted for $441 bn, pushing the AIG to the verge of bankruptcy. Crisis in Lehman Bros, American Express Bank, CITI Group, Merrill Lynch Crisis have further burdened the AIG. The initial bailout package of Federal Reserve Bank of New York, to the tune of $85 bn helped AIG from fall. Some of the vital factors which contributed to severe tribulations in AIG include: over ambitious business strategy for profit earnings and manipulations exposing gaps in ethical and corporate governance arenas; failure of management decision making and control systems; failure of auditors and regulatory monitoring; failure in forecasting and underestimating the risks that are associated with the CDS, etc. It is not the core insurance business that caused the crisis, but the fondness towards complex financial instruments and intention to protect the personal interests. The bailout package has given breathing space and time to AIG to revisit the stumbling blocks in its activities and frame strategies for recouping and regaining the old status.