On Tuesday, the FED announced an $85 billion bailout package for insurance giant American International Group (AIG), in order to forestall a bankruptcy filing by AIG which was bleeding from losses it took from protection given to mortgage-backed securities investors. Now one would think this was something to do with Wall Street fatcats who might lose their expensive condos and upstate vacation homes, like what happened with Bear Stearns.

But with AIG, there’s one crucial difference. The company going under would have had a critical impact on many sectors which depend on insurance, one of which happens to be travel. This is where the story spreads from Wall Street to Main Street. AIG is the 18 largest company worldwide, and the world’s biggest insurer, with revenues of $110 billion last year, and it operates in more than 130 countries.

Had the FED not stepped in, AIG would have been forced to use up about $20 billion of its capital held by its subsidiaries, according to New York Governor Patterson. Which would have suddenly left them without the resources to fund their day-to-day business. For example, Stevens Point, Wisconsin based Travel Guard, which was acquired by AIG 2 years ago, is the 5th biggest employer in the city, and is in the middle of constructing a new $20 million HQ. All this would have been put in immediate jeopardy.

A whole lot of people have their travel insurance covered by AIG and its subsidiaries worldwide. If this insurance were to be considered unreliable, then that would have left a big part of the world grounded, unable to travel, until the situation cleared up and local and state authorities stepped in with default procedures.

Let’s face it - Your insurance company goes out of business. Somebody tells you that there’s a government agency or somebody else who will make good on your claims instead. Would you have been willing to trust these statements and take a risk? I don’t think so. Most people would have put their travel plans on hold.

Even if this situation had gone on for a couple of days, or a week, it would have meant a whole lot of travel companies going bust. Consider these stats from the TIA - Resident and international travelers spend $2 billion every day in the U.S., a total of 2.8 million rooms are sold every day in hotels across the nation, and 7.5 million people are directly employed by travel related companies.

Even a 1% change in the U.S. market would have meant a drop of 8.4 million visitors, and $2.2 billion in federal, state and local tax revenues. No visitors means direct losses for businesses like airlines, restaurants, shopping malls, and local transport agencies. And the trickle down losses to the rest of the town, and its other businesses, is incalculable.

If the travel industry is not already in a recession due to high gas prices and an uncertain economy, then AIG going down would surely and definitely have pushed it into one.

Posted on September 18th, 2008 by PLing
Filed under: Travel Insurance