American International Group

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American International Group, Inc.

Type

Public (NYSE: AIG

 

)

Founded 1919 in Shanghai, China

Founder Cornelius Vander Starr

HeadquartersAmerican International Building

New York City, New York

Area served Worldwide

Key people

Robert B. Willumstad

(Outgoing CEO)

Edward M. Liddy

(Incoming CEO)

Industry Insurance, financial services

Products Insurance annuities, mutual funds

Market capUS$6.26 billion (As of October 10, 2008,

close)

Revenue US$110.064 billion (2007)

Operating income US$8.943 billion (2007)

Net income US$5.36 billion (2nd Quarter 2008)

Total assets US$1.050 trillion ( 2nd Quarter 2008)

Total equity US$78.09 billion (2nd Quarter 2008)

Employees 116,000 (2008)

WebsiteAIG.com

 

American International Group, Inc. (AIG) (NYSE: AIG

 ) is a major American insurance corporation based at the American International Building in New York City. The British headquarters are located on Fenchurch Street in London, continental Europe operations are based in La Défense, Paris, and its Asian HQ is in Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest company in the world. It was on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. The London unit of the world's largest insurer by assets sold credit protection Credit default swap (CDS) on collateralized debt obligations (CDOs) that declined in value. [1] The United States Federal Reserve loaned money to AIG at AIG's request, to prevent the company's collapse, in order for AIG to meet its obligations to post additional collateral to trading partners. The Federal Reserve announced the creation of a credit facility of up to US$85 billion in exchange for warrants for a 79.9% equity stake and the right to suspend dividends to previously issued common and preferred stock.[2][3][4][5] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package.[6] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[7][8]

On October 9, 2008, the company borrowed an additional $37.8 billion from the Federal Reserve Bank of New York.

[edit] History

The American International Building in lower Manhattan

AIG's history dates back to 1919, when Cornelius Vander Starr established an insurance agency in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to the Chinese. After his business became successful in Asia, he expanded to other markets,

including Latin America, Europe, and the Middle East.[citation needed] In 1962, Starr gave management of the company's less than successful U.S. holdings to Maurice R. "Hank" Greenberg, who shifted the company's U.S. focus from personal insurance to high-margin corporate coverage. Greenberg focused on selling insurance through independent brokers rather than agents to avoid selling insurance at prices which occasionally became too low (to cover the future payouts) given marketplace competition. A company with agents must pay their salaries even while selling little to no insurance. Instead, with brokers, AIG could price insurance properly even if it suffered decreased sales of certain products for great lengths of time with very little extra expense. In 1968, Starr named Greenberg his successor. The company went public in 1969.[citation needed]

In the mid-2000s AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General's Office. Greenberg was ousted amid an accounting scandal in February 2005. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970.[3]

On June 15, 2008, under intense pressure due to financial losses and a falling stock price, Martin Sullivan resigned from the CEO position. He was replaced by Robert B. Willumstad, who had served as Chairman of the Board of Directors of the Company since 2006. Willumstad was forced to step down and was replaced by Edward M. Liddy on September 17, 2008.[citation needed]

[edit] Financial crisisFurther information: Subprime mortgage crisis, Financial crisis of 2007–2008, and Liquidity crisis of September 2008

[edit] September 2008 concerns about stability

AIG's share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.[9][10]. AIG's Financial Product division headed by Joseph Cassano had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[11]

As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman.[9] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company.[9] The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, and has asked private entities to supply short-term bridge loans to the company. In the meantime, New

York regulators have approved AIG for $20 billion in borrowing from its subsidiaries.[12]

[13]

On September 16, AIG's stock dropped 60 percent at the market's opening.[14] The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company.[15] Rating agencies Moody's and Standard and Poor's downgraded their credit ratings on AIG's credit on concerns over continuing losses on mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors.[16][15] The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.[17] Just before the bailout by the US Federal Reserve, AIG former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuked.[18]

[edit] Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" its regulated subsidiaries, and has an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a 79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends to AIG common and preferred shareholders.[3][5] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[5][19][20] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[21][6][3] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[22] On September 22, 2008, AIG was officially removed from the Dow Jones Industrial Average.[23] On October 3, AIG announced that they had drawn a total of $61 billion from the emergency loan.[24]

Maurice Greenberg, former CEO of AIG, has characterized the bailout as a nationalization of AIG.[25]

[edit] Lavish spending immediately after bailout

The following week, AIG executives participated in a lavish California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings.[26] The trip was planned long before the bailout, as a reward for top-performing life-insurance agents, not those involved in the firm's collapse.[27] Less than 24 hours after the news of the party was first

reported by the media, it was reported that the Federal Reserve had agreed to give AIG an additional loan of up to $37.8 billion. [28]

[edit] Settlement of credit default swaps

On October 21, 2008, those creditors of Lehman Brothers who bought credit default swaps to hedge them against Lehman bankruptcy will settle those accounts. The amount of the settlement is estimated to be between $100 billion and $400 billion.[29]

[edit] Business

In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and AIG American General is a top-ranked life insurer.[citation needed]

[edit] Insurance

[edit] Life insurance

AIG owns AIG American General, a life insurance company based in Houston, Texas.[citation needed]

[edit] Auto insurance

AIG sells auto insurance through AIG Direct. Policies include auto, motorcycle, recreation vehicle and commercial vehicle insurance. AIG purchased the remaining 39% that it did not own of online auto insurance specialist 21st Century Insurance in 2007 for $749 million.[30]

[edit] International holdings

[edit] Australia

AIG Life (Australia) underwrites over one million life insurance policies in Australia held through industry pension plans. The general insurance arm offers mainly corporate insurance and is among the top 10 insurers in Australia.[31]

[edit] Pakistan

Selling automobile insurance in Pakistan since 1949. Principal office is in Karachi and branch offices in Lahore, Islamabad and Faisalabad.

[edit] China

AIG owns 19.8% of People's Insurance Company of China (PICC) through direct and indirect holdings. PICC P&C[clarify] is China's largest insurer of casualty insurance.[citation

needed]

[edit] Hong Kong

AIG's American International Assurance operations include 2.2 million policy holders.[32]

[edit] India

AIG is the minority partner with the Tata Group in two insurance companies in India, holding 26 percent each in Tata AIG Life Insurance Co Ltd and Tata AIG General Insurance Co Ltd.[33]

[edit] Philippines

AIG owns Philippine American Life and General Insurance Company (Philamlife), the Philippines' biggest insurance company. It has a total asset of P170 billion ($3.6 billion). Philamlife serves over a million customers and maintains the widest network of over 200 offices and sales agencies nationwide.[34]

Philamlife, on October 3, 2008, announced it is among the assets being sold by AID to pay off debt to the U.S. government: "it had been identified for possible divestment along with some of its affiliates." AIG identified Philamlife as one of "extremely valuable" assets intended for sale. Philamlife president and CEO Jose Cuisia Jr. said in a statement: "Philamlife remains to be (a) stable and strongly capitalized organization. Our policy owners and clients can be assured that their interests are protected because of the company's financial strength. A change of ownership will not in anyway diminish policy owners' benefits and security. We will remain focused on daily execution of our business and continue to provide our policy owners and clients with the highest levels of service. Philamlife, the largest and most profitable insurance company in the country and the undisputed market leader for over 60 years, is a crown jewel for AIG and will surely attract local and international interest."[35] Cuisia said groups expressed interest to buy Philamlife, including the Yuchengco family which owns Rizal Commercial Banking Corporation. Another possible contender is the formidable Ayala Corporation that owns Bank of the Philippine Islands, Globe Telecom, and Ayala Land among others. Philamlife has total assets of 170 billion pesos ($3.6 billion), also has interests in banking, asset management and outsourcing.[36] But contrary to the report, Philamlife doesn't have any interest on AIG BPSI, an AIG owned outsourcing company based in the Philippines, that services other subsidiary companies of AIG like American General and others.

[edit] Singapore

AIA Singapore is a wholly owned subsidiary of AIG in Singapore. It has more than two million policies in force, more than 3,800 financial services consultants and 800 employees in its Singapore offices. General manager Mark O'Dell resigned on September 18, 2008 in response to policy holders queuing up to cash in their policies in the face of concern of the future of AIG.[37]

[edit] United Kingdom

AIG operates in the UK with the brands AIG UK, AIG Life and AIG Direct. It has about 3,000 employees, and sponsors the Manchester United football club.[38]

In response to redemption demands, AIG Life (UK) suspended redemptions of its AIG Premier Bond money market fund on September 19, 2008 in order to provide an orderly withdrawal of assets.[39]

[edit] Insurance holdings by state

[edit] California

AIG owns more than two dozen companies licensed to offer insurance in California, according to the California Insurance Commissioner. They include 21st Century Casualty Co.; 21st Century Insurance Co.; AIG Casualty Co.; AIG Centennial Insurance Co.; AIG Premier Insurance Co.; AIU Insurance Co.; American General Indemnity Co.; American Home Assurance Co.; American International Insurance Co. of California Inc.; Birmingham Fire Insurance Co. of Pennsylvania; Commerce And Industry Insurance Co.; GE Auto & Home Assurance Co.; GE Indemnity Insurance Co.; Granite State Insurance Co.; Hartford Steam Boiler Inspection and Insurance Co.; Insurance Co. of the State of Pennsylvania; Landmark Insurance Co.; National Union Fire Insurance Co. of Pittsburgh, Pa; New Hampshire Insurance Co.; Pacific Assurance; Putnam Reinsurance Co.; Transatlantic Reinsurance Co.; United Guaranty Commercial Insurance Co. of North Carolina; United Guaranty Credit Insurance Co.; United Guaranty Residential Insurance Co.; and Yosemite Insurance Co.[40]

[edit] Pennsylvania

Twenty AIG subsidiaries are licensed to do business in Pennsylvania, including National Union Fire Insurance Co. in Pittsburgh, believed to be the second largest AIG underwriter in the nation. Other subsidiaries include New Hampshire Insurance, Insurance Company of the State of Pennsylvania, Granite State Insurance and New Hampshire Indemnity.[41]

[edit] West Virginia

AIG writes property and casualty insurance, life and annuity, and workers' compensation insurance in West Virginia. It has 4.7% of the life insurance market and 2.7% of the property and casualty market, as of the end of 2007.[42].

[edit] Holdings

[edit] Mortgage lending

Since 2001 AIG has owned American General Finance Inc., an Evansville, Indiana firm with $29 billion of mortgage backed assets and more than 1,500 branches nationwide.[43]

[44]

[edit] Aerospace

AIG Tower in Hong Kong

AIG owns International Lease Finance Corporation (ILFC) , the world's largest aircraft leasing company, with hundreds of aircraft including the full range of Boeing and Airbus jetliners, as well as the McDonnell Douglas MD-11 and MD-80 Series. Total assets under lease are $55 billion as of June 30, 2008. Estimates of its value range from $5 billion to $14 billion based on a comparison with rivals.[45][46]

AIG is one of the owners of London City Airport, along with GE and Credit Suisse; it was purchased for £750m in 2006.[citation needed]

[edit] Real estate

AIG/Lincoln was established in 1997 as a strategic partnership between AIG Global Real Estate Investment Corporation, New York, a subsidiary of AIG - American International

Group, New York, and Lincoln Property Company, a Dallas based commercial real estate manager.[47].[48]. It has developed or is currently developing over 2.2 million square meters of real estate in Poland, Hungary, Romania, Czech Republic, Germany, Italy, Spain, Switzerland, Austria and Russia.[citation needed]

[edit] Telecommunications

As of August 2007, AIG Investments (through its member company AIG Capital Partners, Inc.) acquired a 90% stake in Bulgarian Telecommunications Company (BTC) from Viva Ventures Holding GmbH and certain minority shareholders. At the time, the estimated value of BTC was 1.7 billion euros ($2.3 billion).[49]

[edit] Ports

As of March 16, 2007, AIG Investments, a division of AIG, completed the purchase of 100% of the stock of P&O Ports North America from Dubai-based Dubai Ports World. At the time, the estimated price was $700m, though AIG did not disclose the exact figure because the number was too low to be deemed significant to the company's asset base.[50]

On July 2, 2007, Marine Terminals Corporation became part of the AIG Global Investment Group through its acquisition by AIG Highstar Capital. MTC provides the shipping community with a comprehensive network of stevedoring, terminal operating and related cargo handling services. Terms were not disclosed.[51]

[edit] Skiing

AIG owns Stowe Mountain Resort. AIG's connection to Stowe started when C.V. Starr, the company's founder, invested in the resort in 1946. It is AIG's sole ski business. A $300m, 10 year expansion was started in 2005.[52]

[edit] Other holdings

AIG owns Ocean Finance [53] a United Kingdom based company providing home owner loans, mortgages and remortgages.[54]

AIG is the principal sponsor of English football team Manchester United and the Japan Open Tennis Championships.[citation needed]

[edit] Subsidiary Holdings AIG American General Life Companies AIG Annuity Insurance Company AIG UK Limited AIG Financial Products Corp. AIG Hawaii Insurance Company , Inc. AIG Investments

o Utilities, Inc. AIG Retirement Services , Inc.

o AIG SunAmerica Life Assurance Company o The Variable Annuity Life Insurance Company

American General Finance Corporation American Life Insurance Company Brazos Capital Management , L.P., a mutual fund manager[55]

HSB Group , Inc., a specialty insurance company[56]

International Lease Finance Corporation Lexington Insurance Company SunAmerica Ventures , Inc.

o AIG Financial Advisors Transatlantic Holdings , Inc.

o Transatlantic Re (Brasil) Ltda.o Transatlantic Reinsurance Company (NYSE: TRH), 58% owned by

AIG[57]

United Guaranty Corporation

In November 2004, AIG reached US$126 million settlement with the U.S. Securities and Exchange Commission and the Justice Department partly resolving a number of regulatory matters, but the company still must cooperate with investigators continuing to probe the sale of a non-traditional insurance product[58].

On June 11, 2008, three stockholders, collectively owning 4% of the outstanding stock of AIG, delivered a letter to the Board of Directors of AIG seeking to oust CEO Martin Sullivan and make certain other management and Board of Directors changes. This letter was the latest volley in what the Wall Street Journal deemed a "public spat" between the Company's Board and management, on the one hand, and its key stockholders, and former CEO Maurice "Hank" Greenberg on the other hand. [59]

[edit] Accounting fraud claims

On October 14, 2004 the New York State Office of Attorney General Eliot Spitzer announced that it had commenced a civil action against Marsh & McLennan Companies for steering clients to preferred insurers with whom the company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers. The Attorney General announced in a release that two AIG executives pleaded guilty to criminal charges in connection with this illegal course of conduct. In early May 2005, AIG restated its financial position and issued a reduction in book value of USD $2.7 billion, a 3.3 percent reduction in net worth.

On February 9, 2006, AIG and the New York State Attorney General's office agreed to a settlement in which AIG would pay a fine of $1.6 billion.[60]

There is an ongoing fraud investigation that has been launched by the FBI after the collapse in stock price[61]

[edit] Corporate governance

[edit] Board of directors Ed Liddy – Chairman of the Board of Directors and Chief Executive Officer

(American International Group) Stephen F. Bollenback – Former Co-Chairman and CEO, Hilton Hotels

Corporation Martin S. Feldstein – Professor of Economics, Harvard University George L. Miles – President and Chief Executive Officer, WQED Multimedia Morris W. Offit – Chairman, Offit Capital Advisors LLC Michael H. Sutton – Consultant Fred H. Langhammer – Chairman, Global Affairs, and former CEO of The Estee

Lauder Companies, Inc. Virginia M. Rometty – Senior Vice President, Global Business Services, IBM

Corporation James F. Orr , III – Chairman of the Board of Trustees, The Rockefeller

Foundation Edmund S.W. Tse – Senior Vice Chairman, Life Insurance, American

International Group Suzanne Nora Johnson –

AIG successfully obtains revolving credit of $ 85 billion

Mumbai, 18/09/08: The recent developments in the global financial markets have been truly extraordinary. As the US financial crises goes through some challenging times, we wish to assure you that this does not have any immediate material impact on Tata AIG Life.

Tata AIG Life is well capitalized and is subject to stringent local regulatory and capital requirements. The Tata Group holds majority stake (74%) in the company and AIG and/or its affiliates hold a minority stake (26%)

The company is governed by the Insurance Regulatory and Development Authority and our local solvency margin as at the end of August 2008 stood at over 300% compared to the regulatory minimum of 150%.

The company continues to operate in the normal course to meet its obligations to our clients and policyholders.

The Indian business is robust and growing – Tata AIG Life’s branch distribution network expanded from only 80 offices to nearly 400 offices during the past 18 months, advisor strength has moved up from approximate

26,000 to 78,000 over the same period. Total revenues stand at Rs.2339 crores for the 07-08 fiscal.

Recent development at AIG:

The Federal Reserve Bank of New York is providing a two-year $85 billion secured revolving credit facility to AIG that will ensure that the company can meet its immediate liquidity needs. AIG is a solid company with over $1 trillion in assets and substantial equity. AIG believes that the loan, which is backed by profitable, well-capitalized operating subsidiaries, with substantial value, will protect all AIG policyholders and give sufficient time to conduct asset sales to repay the loan and enable AIG’s businesses to continue as substantial participants in their respective markets. AIG has strong well-positioned businesses in diverse markets around the world and a deep asset base.

INTRODUCTION TO INSUREANCE

WHAT IS INSURANCE

1. The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it. The benefit may be an income or some thing else. It is a benefit because it meets some of his needs. In the case of a factory or a cow, the product generated by is sold and income generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income.

2. Every asset is expected to last for a certain period of time during which it will

perform. After that, the benefit may not be available. There is a life time for a machine in a factory or a cow or a motor car. None of them will last fro ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life time, a substitute is made available. Thus, he makes sure that the value or income is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional. In that case, the owner and those deriving benefits there from, would be deprived of the benefit and the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations.

BRIEF HISTORY OF INSUREANCE

3. The business of insurance started with marine business. Traders, who used to gather in the Lloyd's coffee house in London, agreed to share the losses to their goods while being carried by ships. The losses used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship/ the first insurance policy was issued in 1583 in England. In India, insurance began in 1870 with life insurance being transacted

by an English company was the Albert. The first Indian insurance company was the Bombay Mutual Assurance Society Ltd, formed in 1970. This was followed by the Oriental Life Assurance Co.

4. Later, the Hindustan Cooperative was formed in Calcutta, the United India in Madras, the Bombay Life in Bombay, the National in Calcutta, the New India in Bombay, the Jupiter in Bombay and the Lakshmi in New Delhi. These were all Indian companies, started as a result of the swadeshi movement in the early 1900s. By the year 1956, when the life insurance business was nationalized and the Life Insurance Corporation of India (LIC) was formed on 1st September 1956, there were 170 companies and 75 provident fund societies transacting life insurance business in India. After the amendments to the relevant laws in 1999, the L.I.C. did not have the exclusive privilege of doing life insurance business in India. By 31/3/2002, eleven new insures had been registered and had begun to transact life insurance business in India.

PURPOSE & NEED OF INSURACE

5. Assets are insured, because they are likely to be destroyed, through accidental

occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. If such perils cab case damage it the asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to an owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building and the contents in it.

6 . The risk only means that there is a possibility of loss or damage. The damage may or may not happen. Insurance is done against the contingence that it may happen. There has to be an uncertainty about the risk. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of a human being, death is certain, but the time of death is uncertain. In the case of a person who is terminally ill, the time of earth is not uncertain, though not exactly known. He cannot be insured.

7. Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The peril can sometimes be avoided, through better safety and damage

control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. It only compensates the losses- and that too, not fully.

8 . Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.

9. The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ship are exposed to these risks, which are related to water damage, ship sinking, piracy, etc. Those owning factors are not exposed to these risks, but they are exposed to different kinds of risks like, fire, hailstorms, earthquakes, lightning, burglary, etc. Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them may suffer (all of them may

such losses at the same time) is divided into bearable small losses by all. In other words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.

10. If a Jumbo Jet with more than 350 passenger's crashes, the loss would run into crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at the same time. If 100 airline companies flying Jumbo Jets, come together into an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne by each airline would come down to a few lakhs of rupees. Thus, insurance is a business of "haring".

11. There are certain principles, which make it possible for insurance to remain a fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the costs of damage. This would be taking unfair advantage of an arrangement put into place

to protect people from the risks they are exposed to. The occurrence has to be random, accidental, and not the deliberate creation of the insured person.

12. The manner in which the loss is to be shared can be determined before-hand. It may be proportional to the risk that each person is exposed to. This would be indicative of the benefit he would receive if he the peril befell him. The share could be collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.

13. The collection to be made from each person in advance is determined on assumption. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experiences, how many person, on an average, may suffer losses.

Insurance as a security Tools

The United Nations Declaration of human Rights 1948 provides that "Everyone has a right to a standard of living adequate for the health and wellbeing of himself and his

family, including food, clothing, housing and medical care and necessary social services and the right to security the event of unemployment, sickness, disability, widowhood or other lack of livelihood in circumstances beyond the control."

When the bread winner dies, to that extent, the family's income dies. The economic condition of the family is affected, unless other arrangements come into being to restore the situation. Life insurance provides if this did not happen, another family would be pushed into the lower strata creates a cost on society. The lower strata create a cost on society. Poor people cost the nation by way of subsidies and doles and so on. Poor people also cost by way of larger growth in population, poor education and vagaries in behavior of children. Life insurance tends to reduce such costs. In this sense life insurance business is complementary to the state's efforts in social management.

Under a socialistic system the responsibility of full security would be placed upon the state to find resources for providing social security. In the capitalistic society, provisions of security are largely left to the individuals. The society provides instruments, which can be used in security

this aim. Insurance is one of them. In a capitalistic society too, there is a tendency to provide some social security by the state under some schemes, where members are required to contribute e.g. Social Security Schemes in U.K.

Global markets remained wobbly on Wednesday even as the $85-billion U.S. government bailout of America's largest insurer by assets, American International Group (AIG), calmed nerves somewhat. The U.S. Federal Reserve agreed to extend a two-year loan to the troubled AIG in exchange for a 79.9 per cent equity stake in the company and a change in the top management.

Markets in Hong Kong, Tokyo, Singapore and other parts of Asia recovered but gave up some or all of the gains as worries persisted about the health of the global financial system. AIG has a strong footprint in Asia with millions of policyholders in south-east Asia, China and Australia. The Tokyo market closed 1.2 per cent higher but others such as Hong Kong slipped 3.6 per cent and Shanghai 2.9 per cent.

Sentiment in the Indian market stayed depressed with the BSE Sensitive Index closing down 1.89 per cent. ICICI Bank fell a

further 5.25 per cent during the day closing at Rs. 560.30 on rumours (subsequently stoutly denied by the bank) that top managers were selling its shares in the market. The stock shed almost 11 per cent in the last two days.

The rupee rebounded from its two-year low of Tuesday versus the dollar gaining 54 paise to Rs. 46.34 as the Reserve Bank of India intervened to provide dollars to the market. The rupee has depreciated over 15 per cent against the dollar since April this year.

Russia faced its biggest financial crisis in a decade as inter-bank lending wound down despite the government injecting funds into the system. Trading was suspended in its two stock exchanges after one of them suffered a 10 per cent fall in its index in just an hour's trading. The government provided $44 billion to its three biggest banks to reassure the markets.

European market indices were marginally up in early trading. Sentiment received a boost as Britain's Lloyds TSB Group plc was reported to be in talks to buy the troubled HBOS, the country's largest mortgage lender. The spokespersons of the two banks,

however, refused to confirm or deny the news.

Commodity markets rebounded with gold and crude oil registering handsome gains. Crude oil was up $3.14 to $93.29 a barrel in morning trade in New York as the AIG bailout was seen as a relief for the global financial system. Gold was up just under one per cent at $786.38 an ounce.

Gov. David A. Paterson of New York said on Monday that the state would allow the American International Group, a big insurance company, to lend itself $20 billion to bolster its capital as it faces potentially disastrous credit downgrades.Skip to next paragraphRelatedTimes Topics: American International GroupAdd to Portfolio

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Shares in A.I.G. tumbled more than 60 percent on Monday morning as investors grew concerned that the firm lacked capital to withstand cuts to its debt rating. But Mr. Paterson reiterated the state's support of

the firm and declared A.I.G. "financially sound."

The firm approached the state for help, Mr. Paterson said, and government officials worked closely with the firm throughout the weekend. He vocally supported A.I.G.'s efforts to seek help from the Federal Reserve.

A.I.G. has sought a $40 billion bridge loan from the Federal Reserve as a lifeline, as the three-part rescue plan it had devised appeared to crumble, a person briefed on the matter said.

Mr. Paterson argued that New York taxpayers would not be put at risk by the state's involvement.

The announcement appeared to help arrest the decline in A.I.G.'s stock. Trading below $4 shortly before noon, the shares recovered to about $6 in the next half-hour — still a loss of almost 50 percent from their Friday close.

Ratings agencies had threatened to downgrade the insurance giant's credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One

person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.

A.I.G. has already raised $20 billion this year. But even that amount of capital has not averted a crisis.

The firm's sickly financial health was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. A.I.G. had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.

Eric Dinallo, the New York state insurance superintendent, has been deeply involved in discussions about A.I.G.'s survival, this person said.

J. C. Flowers & Company, a buyout firm focused on financial services firms, offered $8 billion for a stake in the business that would have given it an option to buy all of A.I.G. down the road. Kohlberg Kravis Roberts and TPG also said they would bid.

But all three withdrew at the last minute, citing anxiousness over the company's precarious financial health.

A.I.G.'s extraordinary move of reaching out to the Fed for help may spur other noninvestment banks to try a similar move. Companies ranging from General Electric to GMAC have been hurting badly and would desperately love the liquidity that the Fed would provide.

It is not clear whether the Fed will acquiesce to A.I.G.'s request.

Before seeking a lifeline, the firm had earlier been reported to be interested in selling its aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet. But people briefed on the matter said that unit bore special tax advantages that A.I.G. had decided would be lost on any other owner.

Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company's shares in recent days.

The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.

A.I.G.'s problems are not new. The company lost $13.2 billion in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.

But the company's outlook grew grimmer last week when Standard & Poor's warned that it was considering downgrading the company's debt as a result of further write-downs it might have to take.

As the credit storm has raged in recent months, insurance companies like A.I.G. have been better positioned than the nation's banks and brokerage firms to weather it because accounting rules do not require insurers to mark the investments held in their long-term portfolios to market. Insurance companies like A.I.G. can hold their investments until they mature, riding out the ups and downs in the market for those assets.

But the moment it began trying to raise capital, A.I.G. had to open its books to potential investors who were likely to take a sharp pencil to the company's portfolio

values, analysts said. And with Lehman Brothers last week providing investors with a valuation for the same types of assets held by A.I.G., subprime and Alt-A mortgage securities, the investment bank's marks can now be applied to the big insurer's books.

As of the most recent quarter, for example, A.I.G. had $20 billion of subprime mortgages marked at 69 cents on the dollar and $24 billion in Alt-A securities valued at 67 cents on the dollar.

But Lehman officials on a conference call with investors last week said it was valuing similar subprime mortgage securities to those held by A.I.G. at 34 cents on the dollar; its mark on the Alt-A holdings was 39 cents. Those valuations suggest almost a $14 billion decline in A.I.G.'s holdings, after taxes, an amount representing 18 percent of the company's book value.Skip to next paragraphRelatedTimes Topics: American International GroupAdd to Portfolio

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Additional write-downs may also be required in A.I.G.'s collateralized debt obligations, which the company does mark to market because they are held in a short-term account known as available for sale. The company valued $42 billion in high-grade holdings at 75 cents on the dollar, while it marked another $16 billion in lower-rated obligations at 70 cents.

A spokesman for A.I.G., Nicholas J. Ashooh, said it was inappropriate to compare the markdowns of Lehman Brothers' securities with those at A.I.G.

"We don't think that's valid, to look at somebody else's portfolio markdowns and then infer what A.I.G.'s might be, because there's so many variables," Mr. Ashooh said, "what kind of risk is in the portfolio, what kind of collateral there is, and how the marks were calculated. We think we use a very thorough and conservative approach that includes third-party input and input from the rating services."

A.I.G., which is based in New York, has also been under pressure from the derivatives contracts that its London-based financial products unit sold in connection with complex debt securities. Those contracts,

called credit default swaps, acted as a type of insurance on the debt securities, making them more attractive to buyers. The swaps also gave speculators an opportunity to bet on the debt securities' overall creditworthiness, which has declined in response to the turmoil in the housing markets.

When A.I.G.'s financial products unit sold the credit default swaps, it effectively promised to compensate buyers of the debt securities if the mortgages underlying them got into trouble. At the time, the securities were rated AAA, so it seemed at first that A.I.G. was not taking on inordinate risk.

But that picture changed as the housing crisis took hold and homeowners began to default. A.I.G. wrote down the value of its swap portfolio by $25 billion, telling investors that the markdowns did not represent a cash loss of that magnitude. It estimated possible cash payouts on the swaps of between $5 billion and $8 billion.

But because the debt securities covered by the swaps are so complex and opaque, it has been hard for investors to verify A.I.G.'s numbers on their own, and investors have grown impatient as A.I.G. reported big

losses they did not expect in the last two quarters.

A.I.G. also said recently that it might have to post collateral to its swap counterparties, heightening concerns that the company would have to raise capital in tight markets. A.I.G. said in a filing with the Securities and Exchange Commission that if its own credit were downgraded one notch by Moody's and Standard & Poor's, its swap contracts would require it to post collateral of about $13 billion.

In addition, A.I.G. said some of the contracts gave counterparties the option to terminate their swaps, which would cost A.I.G. between $4 billion and $5 billion. A.I.G. said that it did not expect all of its counterparties to exercise that option, however.

As a result, when S.& P. announced a negative outlook for A.I.G.'s credit on Friday, investors understood the company might soon have to produce up to $18 billion

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