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Marketplace Radio Program (NPR)
Jun 09, 2005

by David Brown (Host)/ Jamie Court (Commentator)

Cooking the books?

The following commentary by Jamie Court was broadcast on the Marketplace Radio program on NPR. Click here to listen to the audio of the commentary. Jamie's commentary starts at the 6 minute mark.
David Brown (Host): Maurice Greenberg's cut that last apron string. After years of running insurance giant AIG, he's tendered his resignation from the board. Greenberg and AIG's former CFO were accused of up fluffing the books. But consumer activist and commentator Jamie Court says, "isn't that just business as usual?"

Jamie Court (Commentator): Look, Americans trust insurers to charge them fairly. They figure their premiums are based on covering the claims that insurers actually have to pay out.

Insurers are supposed to set a certain amount of money aside to pay claims. They call that reserves.

But in the real world, reserves are how insurers cook their books.

These accounts are like a slush fund. Insurers manipulate them to show shareholders a brighter picture, or to have more money to gamble on the market when there is a good investment opportunity.

That's what really determines the price of premiums you pay.

If an insurer like AIG doesn't think it will meet its earnings target, all it has to do is shift a hundred mill or so over from its reserves to the profit column.

That's what one former AIG employee alleged happened. The nice name for it is under-reserving.

Elliot Spitzer's office says what piqued its interest in AIG was a sham transaction to hide under-reserving.

If AIG had simply told the truth and corrected its reserves, it would have to decrease profits. And that would wipe the smile off Wall Street's face.

On the other hand, if an insurance company wants to jack up premiums, or pay less taxes, it shifts money from the profit column over to reserves. That's called over-reserving.

Take California. Recently, state regulators found HMOs and insurers holding as much as 13 times more in reserve than the state required. No wonder Californians have skyrocketing premiums.

Americans need to wake up to the fact that insurer's pricing is driven by their investment opportunities. It's called the insurance cycle.

Insurers lower premiums during Wall Street booms to have more capital to invest. They overprice during investment lulls to make up for weak returns.

And too often regulators aren't looking. Leave it to insurers to make sure they're always covered first.

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