The insurance arms of American International Group did not lead it to seek billions in federal aid, but will likely be the mechanisms to repay American taxpayers, according to Pennsylvania Insurance Commissioner Joel Ario.

Joel Ario

Ario, speaking on behalf of the National Association of Insurance Commissioners, made that suggestion today (March 18) before a subcommittee of the U.S. House Financial Services Committee investigating AIG‘s impact on the global economy in the past and in the future.

The commissioner was part of an opening panel of experts reviewing how one of the nation’s largest insurers reached the point where it needed an estimated $182 billion in aid through the U.S. Treasury‘s Troubled Asset Relief Program, yet was also able to award $165 million in retention bonuses to its employees earlier this week.

Numerous politicians, including President Barack Obama, have called for governmental action to rescind the bonuses, despite AIG’s claims it was contractually obligated to award them despite the company’s current financial troubles.

Ario testified that AIG’s financial programs and its $440 billion in credit default swaps, not its insurance companies, led to the insurer’s financial problems. Only the insurance companies are under the jurisdiction of state regulators.

“We agree, this hasn’t been the fault of state regulators,” Ario said. “The success story is that the insurance [arms] are strong and are the most likely route that taxpayers get paid back.”

‘Poster child’ for systemic risk’

During his formal testimony before the subcommittee, Ario said AIG’s 71 U.S.-based insurance companies fall under state insurance regulations, but the company’s systemic risk, created by the AIG Financial Products division, do not.

“To put it bluntly, AIG’s Financial Products reach was so broad and so interconnected with the world’s largest financial institutions that it has become the poster child for systemic risk,” he said. “The fact is that the [insurance] companies continue to perform well and not in a ‘death spiral’.”

Rep. John Campbell (R-Calif.), alleged that AIG’s property-casualty division are in a “death spiral,” given the parent company’s troubles.

Ario said that while some have tried to use AIG’s situation to argue for an optional federal charter, it is not a valid argument, given the performance of state regulators in keeping the insurance divisions well monitored. Under the optional federal charter proposal before Congress, insurers could seek either a federal charter or state charters to operate in one or more states.

The commissioner called for a collaborative approach between state and federal regulators to identify and manage systemic risk and regulate credit default swaps. He said  numerous sets of eyes can be beneficial.

“Such a structure gives us, state regulators, the ability to do what we do best and that is to protect the insurance-buying public,” Ario said.

Policyholders safe

Rep. Paul E. Kanjorski (D-Pa.), who chaired the subcommittee hearing, questioned the status of AIG insurance policyholders and whether, in light of AIG’s troubles, they should fear being covered by the company.

“I can tell you today that the 11 companies covering Pennsylvania are strong and that overall, so far, none of the threats we envisioned have materialized,” Ario said.

“Policyholders are fully protected. The franchise value is there in property-casualty and life business, but we continue to watch things carefully.”

Rep. Brad Sherman (D-Calif.) said Ario’s testimony and that from others helped uncover another “fraud” by AIG. He said that if it failed, its entire company – including insurance – would fail as well and called for the company to go into receivership.

Rep. Michael Castle (R-Del) also inquired how AIG’s insurance divisions would fare if sold and if indeed they are sellable at this point.

“If the markets recover so there is an opportunity to sell …AIG’s companies will be as good as anybody’s,” Ario said.