Insurance company management is all about controlling risk

It's not often that I find something I totally disagree with on National Review's blog The Corner, but today I came across something incredible.

In a comment about the AIG bailout, Mark Hemingway wrote in part:

". . . AIG underwrites a massive amount of credit default swaps — which are very similar to insurance contracts for debt instruments. While I wouldn't say AIG couldn't have done anything to avoid their predicament, in some important respects, AIG's financial burdens were not created through their own mismanagement so much as being left holding the bag on these contracts after the failings of its customers. . ."

My comment on this is that AIG is an Insurance Company. The core business of an Insurance Company is to insure risks. The essential core of insuring risks is to avoid taking on so much of any one kind of risk as to put at risk the company's ability to survive the failure of any one type of risk. Insurance companies justify their existence and make their profits precisely by being responsible for "holding the bag" when the risks they insure go bad. AIG's management thus failed in not exercising the prudence which is the most essential characteristic of an insurance company. If that isn't mismanagement, I don't know what is.

Note that Mr. Hemingways comment above was made within a longer post about the wisdom of the government bailout of AIG and of statements by Joe Biden and Sarah Palin on that bailout. As it happens I don't know enough about the details of how AIG's failure might have affected other imprudent and mismanaged companies, so I can't comment on the wisdom or otherwise of his entire post beyond saying that his argument seems reasonable to me. You can read his entire post for yourself at:
http://corner.nationalreview.com/post/?q=NWU3ZDk1Y2U0NjU0YTBlMTcxZTliMjcxNDI1YTYwMmE=