By Donna Childs

NEW YORK (Dow Jones)—Described as a "black hole," American International Group Inc. (AIG) is largely inscrutable - but not to everyone. Like the proverbial canary in the coal mine, key reinsurance markets delved deep into the operations of AIG and concluded that they could not sustain life. Had investment banks had the benefit of the same insight, they might have averted the counterparty risks that required a substantial bailout orchestrated by the U.S. Treasury. Why did reinsurance markets possess the insight that had eluded investment banks*?>*

Investment bankers understand single transactions and fees for insurance company clients, such as bond offerings, sidecars or equity issuance.

Reinsurance, which is contingent financing for underwriting risks, contains all of these features with an element of continuity that becomes an intangible asset between the insurer and reinsurer.

Reinsurance companies, therefore, have a much longer time horizon than investment banks. With a potential long-term exposure to AIG, reinsurance markets carefully scrutinized AIG's business as part of their underwriting due diligence.

Because of the longevity of AIG's business commitments, the long-tail nature of certain of its liabilities and its pricing practices, including those at AIG's London-based Financial Products unit, leading reinsurance markets concluded, in the phrase of one provider, that "making a return on reinsuring AIG was an accomplishment if not a rarity."

Having reached this conclusion years ago, leading reinsurance markets declined to participate in certain of AIG's transactions and thus averted the costly lessons learned by investment banks with credit counterparty exposure to AIG and ultimately, because of the systemic risk involved, to the U.S. Treasury.

Indeed, the perspective of the reinsurance markets on AIG is of longer duration than that of investment banks. Imagine, for example, if investment banks raised capital for insurance companies by underwriting equity and debt offerings and then holding those securities on their balance sheets for decades.

That is, in effect, what the reinsurance industry does when it provides capital to underwrite risk-taking capacity in the insurance industry. For certain so-called "long-tailed" lines of business, in which AIG specializes, such as mortality risk in life insurance or commercial liability in property-casualty insurance, the reinsurer's capital is at risk for decades.

Many years may pass between the time the reinsurer underwrites capital capacity for the insurance company and the time the claim is made. The investment bank, by contrast, finishes its transaction and collects its fee almost immediately. Meanwhile, AIG's "black hole" status came up at the U.S. Senate Banking Committee hearing this week. Treasury Secretary Timothy Geithner responded that the federal government does not want AIG to default and so is providing assistance in meeting its obligations. Geithner's efforts to assist AIG in meeting its obligations would be better informed by discussions with those who had followed AIG's opaque operations far longer than he has done.

Investment banks covering the financial services sector should also initiate discussions with the reinsurance markets. After all, canaries saved human lives by repeated deep dives into dangerous mines and there is always the next one.