Emerging from the Insurance Haze
When Australian insurer HIH collapsed a couple of years ago, one prescient commentator suggested that it was just the beginning of the collapse of the insurance industry world-wide.

Locally the problem was the combination of an under-resourced regulator APRA under enormous pressure from the wide boys in the industry who were touting complex and innovative schemes in a newly competitive environment. The fact that these schemes were deeply imprudent was constantly either concealed from the regulator or dressed up as the new economy model that the APRA folks were kept constantly on the back foot trying to unravel.

But those schemes were not the unique invention of HIH, they were percolating throughout the Insurance business as surely as dodgy accounting practices were being spread through that industry. Now we are seeing the results. AMP (one of the oldest companies around here) finds itself in major financial trouble, the British industry has just been thrown a lifeline by their regulator because the value of their share holdings is no longer sufficient to meet their liabilities across the board and they were on the verge of dumping shares into the market to recharge their cash reserves and in the process destroying the UK share market. This wont help in the long run as the cash will be needed, an actuarial certainty, for the various liabilities that the companies hold.

Now it looks like the process has crossed the Atlantic as American International Group Inc. (AIG.N), the world's largest insurer, warned that it had drastically underestimated liability claims. The largest insurer in the world had WHAT? What's the betting that AIG had been doing exactly the same thing as HIH? Cutting premiums to compete and "grow" while making insufficient provision for the inevitable claims that would arise? Insurance companies don't suddenly forget the actuarial tables, the tables don't change that much from decade to decade; but greed and stupidity are also constant, and when they get the upper hand we get Enron, WorldCom, AOL/ Time Warner and an Insurance meltdown.

I can hardly wait till the world's derivatives contracts start unwinding.