$85 Billion +......now that's a lot of money! How do seemingly good companies end up in a fix like this? I'm not smart enough to even begin to talk about that. All I know is that if I ran my business like AIG I'm pretty sure nobody would bail me out when I failed! What I am interested in is how this bail out will effect your AIG insurance policy. We'll talk a little about that in this hub.

An insurance company prices an insurance policy based on statistical information they have secured about the risk they want to insure. Rates are determined by the company. When a client wants to buy a policy the rates, previously determined by the company, are multiplied by the exposure basis (payroll, gross sales, value of property, number of units, etc) that the client presents to the company to develop the premium for any given risk. The insurance company collects premium and puts it in the bank. Money in the bank is then invested as directed many times by the board of directors of the insurance company. So, an insurance company has two streams of income, premium dollars generated from selling insurance policies and investment income. Not to bad so far.

Then comes claims, the product delivery. Claims are paid by the insurance company out of a combination of premiums received, investment income and reserves held back (ear marked money to pay claims.)

So to recap, premium and investments less claims and operating expenses equal a profit or loss.

Keep in mind my example is as basic as it gets, but you should now have an idea how insurance companies make or loose money.

You have to keep in mind that AIG is a gigantic company. From what I understand their assets are around $1.1 Trillion. The insurance side of AIG is just a part of this super large company. AIG's insurance policies are produced by individual separate subsidiaries of AIG. Each of these subsidiaries maintain assets available to pay claims. Within the United States those assets cannot be moved out of the subsidiaries without regulatory approval. Insurance is a state regulated product.

According to the Wall Street Journal, AIG's board stated that a government-backed loan of $85 billion would "protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis." What a bargain!

Because of the Fed's financial intervention, AIG's state regulated insurance subsidiaries should now be able to continue to operate as normal. The key word here is should.

As a consumer, policyholder, you should know that state regulators will carefully oversee each insurance subsidiary to ensure claims payments will continue. Each state has established a guarantee fund which state regulators can access to pay claims generated from insolvent insurance carriers. These funds are subject to certain maximums which could effect claim payments if used. If AIG claims exceed company assets, state regulators should, if necessary, be able to make payments out of the state fund.

AIG continued to suffer losses due to investments it made that were tied to sub-prime home mortgages. Combined with depressed rate pricing in its insurance segment due to the insurance industries current soft market. This combination, effecting essentially two of the three major financial segments of an insurance company, proved to be the undoing.

Your guess is as good as any ones! But one thing's certain it's a real blow for this insurance giant, one from which they may never recover.

Insurance policies within the United States are heavily regulated by the individual states. State regulators will oversee the reorganization activities making sure claims presented to AIG by policyholders are paid. If there's not enough money to pay claims the regulators will turn to state funds. State funds have caps and limits to claims.

At this point it becomes a personal decision each policyholder will have to make. Whether to stay with AIG during reorganization or to move policies to another carrier.

When bad things happen you have to go back to basics. If you are an AIG policyholder, contact your local insurance agent. Have your agent revisit your account. If you've decided to move your policy ask them to help. This could be a great time to review your policies and get a better handle on the insurance policies you have.

If you're involved in an active claim with an AIG policy relax. Keep working with your claims representative and be assured there are safeguards in place to make sure your claim will be handled as efficiently as possible.

Take this information for what it's worth, just an opinion!