Posted: February 3rd, 2015

AIG Case Study

Paper, Order, or Assignment Requirements

The aim of this assignment is as follows:

• Understand the ethics behind insurance business.
• Use what you have learnt so far on the course to this project

WHAT YOU HAVE TO DO:

You should submit a minimum of 800 words (no more than 1200) group case study. The recommended layout of your report is given in the following bullet points.

• Cover page
• Table of contents
• Introduction
• Analysis and evaluation
• Recommendations
• Conclusion
• References
• (First page and references and any appendices given do not count towards the minimum word limit).

Case study guidelines

1- Reserve the cover page to your name, student ID, course name, and university.

2- You should write in times new roman font, size 14, with 1.5 spaces, no bold or italic except for the section heads.

3- You should print double sided pages.

4- Pages should not have frames, shades or colors or other fancy decorations, just plain pages with no folders or covers, stapled from the top corner side.

5- Each individual should upload the soft copy (assignment) on the blackboard and the group should submit the hard copy in the next lecture time.

6- Failure to submit the soft copy online by due date is subject to mark deduction, even though you submit the hard copy the next lecture day.

7- Write your work in a form of essay, do not insert the questions and give answers

8- Maximum plagiarism allowed is 25%.

9- You need to pay attention to the rubric marking guidelines and try to incorporate the performance area to achieve the highest mark possible.

The case

American International Group (AIG) is the largest insurance company in the world, which went insolvent and was rescued by the US government during the global financial crisis. AIG- Financial Products division (AIG-FP) sold large quantities of derivatives called Credit Default Swaps (CDS). For American and international investors (mainly non-individuals) who purchased the CDS on Collateralized Debt Obligations (CDO’s) originally sold by investments banks such as Goldman Sachs, Lehman brothers, Morgan Stanley, and others, CDS works like an insurance policy, any investor who purchased a CDS from AIG, paid AIG a quarterly premium. In return, if the CDO’s fails to pay off or loses its value, AIG promise to cover the investors for their losses by paying the periodical return or even buying the CDO’s. Not only the owners of CDS can pay a premium to insure their CDOs, but also any speculator can do the same with AIG although he never owns any CDOs. AIG didn’t have to put aside any capital to cover for the potential losses; instead, AIG paid its employees and insurance salesmen large amount of bonuses once they find any investor who is willing to pay the premium. AIG risk management division and CEO’s were all aware of the risk involved with underwriting these policies.

In your work:

1- Discuss how and what motivated AIG to be part of the derivatives business.

2- Where the shareholders aware of what the CEO’s of AIG have put their company’s risk into?

3- What are (if existed) the ethical and unethical sides of AIG’s derivative business?

4- What are the outcomes of the AIG’s business practices on the company and its shareholders? What alternatives and solutions you would suggest to prevent this from happening?

Essential material to understand the topic:

http://www.forbes.com/2008/11/15/aig-credit-default-markets-equity-cx_md_1110markets24.html