The U.S. Federal Reserve’s emergency $85 billion rescue of the U.S. insurer American International Group eased concerns Wednesday that its Japanese unit will survive, at least for the time being.
“It means that the U.S. government and financial authorities are tackling the problem to avoid a negative chain reaction triggered by the collapse of Lehman Brothers,” Chief Cabinet Secretary Nobutaka Machimura said at a news conference.
If AIG were to collapse, the Financial Services Agency would have to quickly issue an order to keep all assets of AIG Japan in the country to protect the contracts of policyholders, a top agency official said on condition of anonymity.
AIG’s Japanese unit has received a deluge of calls from policyholders worried that their insurance policies may be nullified.
But the unit claims there will be no problems in paying benefits because the insurance subsidiaries that comprise AIG Japan have sufficient capital.
“The problem comes from investment and the financial services business of (parent) AIG Inc.,” an AIG spokesman said. “Life insurance and nonlife insurance businesses are separate entities and there is no problem in their capability to pay benefits. This is also the case with AIG Japan.”
Even if a life or nonlife insurer were to go bankrupt, Japan has an emergency system to protect the insurance policies of clients, even though in some cases the benefits that policyholders receive would be lower than what they are actually worth.
When a life insurance company collapses, there are two scenarios.
The first involves finding a new sponsor to take over all the business and contracts of the collapsed insurer. The case of Chiyoda Mutual Life Insurance Co., which went bankrupt in 2000 and was purchased by AIG, falls under this category.
Under the second scenario, the Life Insurance Policyholders Protection Corp. of Japan, or LIPPC, an industry body funded by member insurers, is allowed to protect policyholders by either creating a subsidiary to take over the business under LIPPC or by directly taking on all of the policies.
The LIPPC has ¥46 billion in reserves set aside to fund policyholders in case of emergencies.
In the second scenario, the LIPPC will pay up to 90 percent of policy reserves of the insurer. The actual amount of benefits policyholders will receive depends on the policies.
All life insurers operating in Japan are members of the LIPPC, including foreign insurers. Nonlife insurers have a similar system.
Many in the insurance industry breathed a sigh of relief at Wednesday’s bailout of AIG, but the anxiety caused by rumors of the insurer’s possible bankruptcy only proved how big its presence is around the globe, including in Japan.
In Japan, AIG has three life insurance companies under its wing — American Life Insurance Co. in Japan, AIG Edison Life Insurance Co. and AIG Star Life Insurance Co. — and three nonlife insurance companies — AIU, American Home and JI Accident & Fire Insurance Co.
The combined premium revenue of the AIG group’s life insurance companies in Japan in fiscal 2007 totaled ¥2.1 trillion, which ranked the group fifth in Japan in premium revenue.
AIG first entered the Japanese market in 1963 in the nonlife insurance business for foreign military officers stationed in Japan.
In 1973, the AIG group launched its life insurance business in Japan. But it was not until after the turn of the millennium that the insurance giant quickly expanded business here.
When Chiyoda Mutual Life Insurance collapsed in 2000, AIG acquired the failed insurer and rebuilt it as what is now AIG Star.
It also purchased GE Edison Life Insurance Co., a Japanese life insurance unit of the General Electric group, in 2003 and renamed it AIG Edison.
The two life insurers, AIG Edison and AIG Star, are scheduled to merge in January and will be named AIG Life Insurance Co.
‘No problem’: FSA
The bailout of American International Group Inc. has prevented adverse effects on AIG insurance policy contracts in Japan, the Financial Services Agency said Wednesday.
“Since the bankruptcy of AIG has been avoided, insurance contracts in Japan will pose no problem,” an FSA official said.
The U.S. Federal Reserve said Tuesday it will lend up to $85 billion to AIG to skirt bankruptcy, effectively putting one of the world’s largest insurers under government control.
It was feared that a collapse of AIG could hinder payments of insurance benefits, affecting a large number of individual and corporate policyholders.
Another FSA official told lawmakers from the Democratic Party of Japan that seven AIG group firms in Japan do not rely on their parent company for their management and fundraising activities and will not likely be affected.
The official said the Fed’s bailout plan dispelled concerns about possible damage of the Japanese units from rumors about an AIG failure.
The AIG crisis, which stemmed from investment in risky securitized products, is expected to narrow down investment options for Japanese insurers already having difficulties finding decent investment targets, industry sources said.
Many analysts likewise believe the bailout does not mean an end to the turbulence from the U.S. subprime crisis.