Read more about the crisis fallout across other sectors of the financial services industry.

In the early stages of the current financial crisis, insurers were able to take comfort in the fact that the problems belonged to the banking industry. Even as the crisis worsened, insurers could take solace in the belief that the industry's regulatory framework, however onerous in many respects, had ensured limited exposure to bad debt. Indeed, the failure of AIG was properly understood as a demonstration of the strength of insurance companies, given that it was the holding company's dalliance in unregulated transactions that caused the failure, while the insurance operations of subsidiaries continued to exhibit vigorous financial health.

The sheer magnitude of the crisis, however, meant that insurers would be significantly affected in a variety of ways. As institutional investors, insurers would suffer both for their stock holdings in troubled companies and as a result of the declining values of their investments in general as the securities markets plummeted. General economic decline inevitably will have further consequences for insurers' bottom-line earnings in terms of both investment and premium income.

But whether insurers will benefit from consumer and investor distrust in banks and securities is an open question. Right or wrong, the failure of AIG implicates the entire insurance industry's involvement in the financial crisis, and that may affect insurers not only in terms of sales and investment, but also on the regulatory front.

Regulatory Fallout

As early as February 2007, Treasury Secretary Henry Paulson commented favorably on an optional federal charter (OFC), and his "Blueprint for Financial Regulatory Reform" reinforced support for an OFC. As the crisis worsened, a group of legislators led by New Hampshire Senator John Sununu made a public appeal in an essay published by The Wall Street Journal on Sept. 23 that was, in turn, tartly refuted by NAIC president and Kansas Insurance Commissioner Sandy Praeger in a letter to the Journal's editor three days later.

Among other points, Praeger noted that "AIG ... is a federally regulated holding company under the jurisdiction of a federal regulator. ... And its problems arose under the watch of a federal regulator."

Given the state-regulated insurance industry's performance relative to that of the banking industry, "The NAIC and other proponents of continued state regulation will have no problem making their case," comments Matthew Josefowicz, insurance practice leader for New York-based Novarica. "The crisis is likely to take the wind out of the sails of OFC."

But others are not so sanguine, pointing out that, as obvious as the contrast between the insurance and banking industries' performance may be to industry insiders, the public simply sees an out-of-control financial services industry. Given the federal government's lavish use of public funds to provide a remedy, the public will expect the government to play a role in prevention, according to the argument, and the insurance industry is likely to be affected along with other segments.

Federal insurance regulation will be on the agenda for both Congress and whomever is elected president, believes Howard Mills, chief adviser of Deloitte's insurance industry group and former New York insurance commissioner. "Parts of the Paulson Blueprint that were formerly seen as having no chance will now be looked at, and the idea of an OFC giving the federal government more of a say in the regulation of insurance will be very much on the table," Mills says. "I find it difficult to envision a situation where Congress is going to look at the regulation of the financial services industry and not insert itself more proactively in the business of insurance."