AIG's demise puts regulators in focus

WASHINGTON, Sept. 18 (UPI) -- The demise of American International Group Inc. highlights a flaw in the way the insurance industry is regulated, a trade group said.

On the brink of failure, AIG, the nation's largest insurance company, was seized by federal regulators late Tuesday.

President of the American Insurance Association Marc Racicot said the industry should not be regulated "on a piecemeal basis at the state level." Instead, he said it should be guided by a federal regulatory system, Insurance Journal reported Thursday.

"Policymakers should look for solutions that avoid the potential for market crises and consider more effective ways of regulating the financial services sector and protecting consumers," Racicot said.

But, Racicot's position is not universally accepted.

"The key distinction here is that AIG's insurance subsidiaries did not cause this crisis," said Sandy Praeger, who heads the National Association of Insurance Commissioners.

AIG collapsed due to losses in its non-insurance, mortgage-related investments.

Praeger pointed out federal authorities regulate AIG's parent company, while state controls oversee its insurance subsidiaries, which were sound when the parent company collapsed.

The chief federal authority that oversees AIG's investment operations is the U.S. Office of Thrift Supervision , a banking regulator, the Insurance Journal reported.