Aon Corporation has made a proposal to the US Congress that an insurance risk pool be set up for troubled assets as one of the strategies in dealing with the ever spiralling global financial crisis.

The insurance, reinsurance and risk management services provider — which is headquartered in Chicago but has a substantial reinsurance presence in Bermuda — provided testimony on Tuesday before the US House Committee on Financial Services in Washington, DC.

The company's general counsel, Cameron Findlay, reiterated for US lawmakers some of the proposals submitted by Aon following a call last month from the US Treasury for suggestions for a guarantee programme for troubled assets.

Mr. Findlay said Aon's plan would address a primary cause of the current US liquidity problem — "the hundreds of billion of dollars of illiquid assets that reside on the ledger of American financial institutions".

The Aon plan would use a combination of risk retention, risk pooling and government backstop liquidity to insure the nebulous risk and draws on precedents set when dealing with other "seemingly insurmountable" risks such as the Price-Anderson Nuclear Indemnity Act — a 1957 plan which required all members of the nuclear industry to participate in an insurance pool and protected the industry from claims caused by nuclear accidents.

"Insurance plays a fundamental role in the operation of the world's financial markets," Mr. Findlay said, speaking on behalf of the Council of Insurance Agents and Brokers on Tuesday. "Any coordinated effort to combat the turbulence roiling in those markets should consider the potential for an insurance component."

Without that insurance component, efforts to throw money at the problems may be doomed, he suggested. "As long as the problems created by depressed valuation of these assets in the capital markets remain, no matter the volume of capital infusions, financial institutions will have a difficult time playing their critical role in the functioning of our economy."

Mr. Findlay urged the US Treasury to exercise its authority to "establish a programme to insure the value of troubled and illiquid assets".

The Aon plan would allow the sharing of risk via an "asset stabilisation pool".

One of the key benefits of the pool plan is that it "does not rely on well functioning capital markets for price discovery and will not flood the market with distressed assets", Aon president and CEO Gregory Case said in the original submission to the Treasury made on October 28.

"Participants in the asset stabilisation pool would have a portion of the principal and interest from specific, illiquid assets guaranteed," Mr. Findlay said. This insurance pool would insulate asset holders (primarily banks but also other financial institutions like pension funds) from value declines associated with non-payment of principal and interest.

Asset holders would be required to retain a percentage of the shortfall of principal and interest, subject to a maximum annual payout per asset, Mr. Findlay explained.

"Asset holders would be reimbursed from the pool for a shortfall in principal or interest once such amounts exceed their retention in a single year. To receive the benefit of such coverage, participating institutions would have to pay premiums into the pool. Each year, actuaries would calculate the level of premium needed to fund guarantee payments for the following year. Premium payments to the pool would be capped up by the government. In the event that payments from the pool exceeded premium collections, the government would lend the pool funds needed to make good on the guarantees."

The government would then be reimbursed by premiums the following year. The US Treasury would also play an important role in regulating the pool by managing the rate of collection of premiums.

Aon said its plan would work well for certain asset types — such as mortgage back securities and other instruments with long maturities and periodic principal and interest — by providing stability of these assets. It would be less useful for other instruments such as credit default swaps, however.

Aon spokesman David Prosperi told The Royal Gazette the presentation was well received by the committee. "In response to a question from a member of the committee, Treasury Secretary (Henry) Paulson said that our proposal was of interest to Treasury and they were going to review it," he said. "In total, I think we created some momentum for the initiative."

Mr. Prosperi said Aon believes it is vital that the insurance industry engage in the bailout efforts.

"We responded to the request for comment by the US Treasury Department in light of the passage of the Emergency Economic Stabilisation Act because we feel strongly that insurance should play a critical tole in developing solutions for resolving the current economic situation," he said.