Another big American firm almost went under. What’s happening now?

American International Group (AIG), was once the world’s biggest insurer. It has now fallen on desparate times after being caught the wrong side of the credit crunch. Unless it had borrowed $85 billion, it may have had to file for bankruptcy.

That is big money, but why exactly should I care?

AIG is not just an American company. It operates in more than 130 countries worldwide and is very active in Britain. It is the top seller of investment bonds in Britain. You may also have bought travel, life or household cover from AIG.

Do I need to worry about that?

Almost certainly not. AIG in the UK is a subsidiary of the American parent, but because it is an insurance company it is separately regulated and has to have its own pool of cash to meet policyholder needs.

The company is regulated in Britain by the Financial Services Authority. Policyholders would also able to draw on the Financial Services Compensation Scheme. This guarantees investments up to £48,000 per person. It will pay the first £2,000 of a pension or long-term life insurance policy, plus 90 per cent of the remainder of the claim. The same is true of general insurance policies.

So, why should I be concerned?

The main problem with any collapse of AIG would have been the knock-on effect it would have had on market confidence across the globe, particularly coming so shortly after the bankruptcy of Lehman Brothers.

AIG is such a big company - it insures everything from loans to local authorities in America to bonds bought and sold in the London market. It also reinsurers other companies’ risks. Some of the world’s biggest financial institutions would probably start suffering serious losses if AIG was to go under. The effect on the equity markets might have dented the value of your policy.

How did all this happen?

AIG’s biggest problem was that it insured American mortgages, particularly those that had been parcelled up and sold on to other banks and financial companies. When the American housing market fell so dramatically, it had to pay up. It also has to post capital to guarantee some of its other whizzy financial exposures, including highly structured derivatives. The problem is that it no longer had enough cash to meet its obligations.

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