AIG has a strong
presence in the
Hong Kong OFW
market through
its subsidiaries
AIA and
Philamlife.
presence in the
Hong Kong OFW
market through
its subsidiaries
AIA and
Philamlife.
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Philamlife was not exposed to parent's risky strategy
BAYANI CRUZ HONG KONG
Juan, a 60-year-old OFW, has an insurance policy with an AIG company
outside the Philippines. He has diligently put money into the policy for past 20
years, even through hard times. It was his savings for his retirement. According
to the insurance policy he should get the equivalent of about P2 million when
he retires at age 65, in five years time. Now he’s not so sure that will happen.
BAYANI CRUZ HONG KONG
Juan, a 60-year-old OFW, has an insurance policy with an AIG company
outside the Philippines. He has diligently put money into the policy for past 20
years, even through hard times. It was his savings for his retirement. According
to the insurance policy he should get the equivalent of about P2 million when
he retires at age 65, in five years time. Now he’s not so sure that will happen.
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In a sense,
Philamlife’s
policyholders
are in a better
situation than
most under
these
circumstances
Philamlife’s
policyholders
are in a better
situation than
most under
these
circumstances
Fortunately for Juan, the US government has
stepped in to bail out AIG with the staggering
loan of US$85 billion (more than twice the
Philippine forex reserves of US$37 billion as
of end-September). Following this, Juan has
received a letter telling him not to worry and
saying his policy will be honored when it
becomes due.
According to this letter, Juan may still be able
to collect his P2 million in five years. But this is
assuming nothing else bad happens to AIG in
the meantime.
stepped in to bail out AIG with the staggering
loan of US$85 billion (more than twice the
Philippine forex reserves of US$37 billion as
of end-September). Following this, Juan has
received a letter telling him not to worry and
saying his policy will be honored when it
becomes due.
According to this letter, Juan may still be able
to collect his P2 million in five years. But this is
assuming nothing else bad happens to AIG in
the meantime.
His other choice is to pre-terminate his policy and collect his savings now.
But this means he will get much less than P2 million, not enough for his
retirement.
For many OFWs like Juan, the financial turmoil at AIG has been their “worst
nightmare.”
Juan’s question is simple: How can such a big, profitable and stable
American company, with millions of policy holders around the world suddenly
get into so much trouble?
The answer is not so simple but at the risk of oversimplifying it, the answer
can be captured in one word: greed.
Like other big, profitable, stable companies AIG invested a lot of money in
structured notes, a complex derivative financial instrument which offered high
profits.
At that time it seemed like a good idea for the insurance companies and the
banks because the financial markets were booming. Profits were flooding if
for the insurance companies and banks as well as for their executives who
were collecting bonuses, and their shareholders.
What was not known at that time (although the insurance companies and
banks should have known it) was that these structured notes/derivatives were
based mostly on bad housing mortgages in the US that should have not been
used as the basis of any investments at all because they were just too risky.
In any event, during the last few years AIG was apparently investing millions of
dollars of its policyholders’ money (including Juan’s money) into these highly
risky, albeit profitable instruments. By investing in highly risky instruments,
AIG was actually breaking the trust which its policyholders like Juan gave to it
when they bought their insurance policies.
When Juan got his policy, AIG made a commitment to take care of his money,
not lose it in high-risk investments.
Why was AIG allowed to do this? Isn’t the government supposed to watch
over insurance companies like AIG to protect the policyholders’ interest?
The answer to these questions is yes and no, or variations of yes or no,
depending on where the insurance company is located.
For example, in the US, where AIG is based, the answer is: yes and no.
Yes, the US government is supposed to protect the policyholders but no it has
not been doing that effectively since the deregulation US financial system
during the last few years.
In the Philippines, where insurance laws and regulations are stricter than in
the US, policyholders get better protection.
For example, Philippine insurance companies are not allowed to invest in
structured notes/derivatives (the kind that brought AIG down). Because of
these restrictions, Philamlife, the local unit of AIG does not have any
investments in structured notes/derivatives.
This is why Philamlife, the local unit of AIG, has been largely spared the
problems of its parent AIG. In a sense, Philamlife’s policyholders are in a
better situation than Juan (who’s policy is not covered by Philippine laws).
But since Philamlife is still a part of AIG, it remains to be seen whether it can
completely escape any fallout from its its parent.
But this means he will get much less than P2 million, not enough for his
retirement.
For many OFWs like Juan, the financial turmoil at AIG has been their “worst
nightmare.”
Juan’s question is simple: How can such a big, profitable and stable
American company, with millions of policy holders around the world suddenly
get into so much trouble?
The answer is not so simple but at the risk of oversimplifying it, the answer
can be captured in one word: greed.
Like other big, profitable, stable companies AIG invested a lot of money in
structured notes, a complex derivative financial instrument which offered high
profits.
At that time it seemed like a good idea for the insurance companies and the
banks because the financial markets were booming. Profits were flooding if
for the insurance companies and banks as well as for their executives who
were collecting bonuses, and their shareholders.
What was not known at that time (although the insurance companies and
banks should have known it) was that these structured notes/derivatives were
based mostly on bad housing mortgages in the US that should have not been
used as the basis of any investments at all because they were just too risky.
In any event, during the last few years AIG was apparently investing millions of
dollars of its policyholders’ money (including Juan’s money) into these highly
risky, albeit profitable instruments. By investing in highly risky instruments,
AIG was actually breaking the trust which its policyholders like Juan gave to it
when they bought their insurance policies.
When Juan got his policy, AIG made a commitment to take care of his money,
not lose it in high-risk investments.
Why was AIG allowed to do this? Isn’t the government supposed to watch
over insurance companies like AIG to protect the policyholders’ interest?
The answer to these questions is yes and no, or variations of yes or no,
depending on where the insurance company is located.
For example, in the US, where AIG is based, the answer is: yes and no.
Yes, the US government is supposed to protect the policyholders but no it has
not been doing that effectively since the deregulation US financial system
during the last few years.
In the Philippines, where insurance laws and regulations are stricter than in
the US, policyholders get better protection.
For example, Philippine insurance companies are not allowed to invest in
structured notes/derivatives (the kind that brought AIG down). Because of
these restrictions, Philamlife, the local unit of AIG does not have any
investments in structured notes/derivatives.
This is why Philamlife, the local unit of AIG, has been largely spared the
problems of its parent AIG. In a sense, Philamlife’s policyholders are in a
better situation than Juan (who’s policy is not covered by Philippine laws).
But since Philamlife is still a part of AIG, it remains to be seen whether it can
completely escape any fallout from its its parent.
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