Thursday, December 31, 2009

Happy New Year

Thank you for your interest in The Insurance Bellwether this year. Hopefully, it will continue to bring you items of interest throughout 2010.

Warmest wishes for a wonderful New Year.

Jim Connolly

Wednesday, December 23, 2009

Sullivan Says New Suitability Model Is Important To Consumers

A much debated change to an annuity suitability model regulation was unanimously adopted by the Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., on December 21.

The revised model will now be presented to the NAIC’s executive committee and plenary for full adoption. The “A” Committee had received the work of the Annuity Suitability working group during the NAIC’s winter meeting Dec. 5-10 in San Francisco. During that meeting, Connecticut Insurance Commissioner Tom Sullivan deferred a vote for two weeks so that the revised draft could be read and limited technical comments submitted.

In an interview with The Insurance Bellwether, Sullivan explained that he wanted to strike a balance. “I didn’t want to accept the draft in too hasty a fashion,” he said. But, Sullivan added, “I also did not want to unearth or undo all the hard work of the working group.” In November, the working group voted 13-2 to advance the revised draft model to the “A” Committee. California and Vermont voted against moving the model, citing the need for further work, maintaining that the changes did not go far enough to protect consumers.

Sullivan said that “it is the role of regulators to protect consumers. This is all about providing a stronger consumer-friendly model.”

The model tried to parallel whenever possible, requirements developed by FINRA, New York. One of the important features in the revised model, he continued, is the requirement that the recommendation be reviewed at the company level so that a second set of eyes studies the producer’s recommendation.

The American Council of Life Insurers, Washington, had expressed support for the concept of suitability protections for consumers, but said that it could not support the revisions because of factors that included placing too much strict liability on companies to make sure that a transaction is suitable.

Sullivan said that while he appreciated those concerns, the model also reflects the reality that because of human nature, “there cannot be a cop on every corner.” But he said that points in the model including holding an insurer responsible for suitability even if oversight is being handled by a third party, is important for consumer protection.

Saturday, December 19, 2009

Moody’s: Life Insurers Can Handle Any Commercial Mortgage Losses

A new report issued by Moody’s Investors Service, New York, offers some comfort to insurers, policyholders and investors who fear that commercial mortgages will hurt companies’ ratings.

The agency starts its report by noting that “Insurers’ commercial mortgage losses will grow, but will not result in many rating downgrades unless commercial property values fall much further than expected.”

The concern is that despite the recent rebound of credit and equity markets, commercial real estate is a lagging indicator, and thus, loss rates on both commercial mortgage loans and commercial mortgage-backed securities held as investments by U.S. life insurers will continue to grow.

The saving grace for many insurers, according to the report titled, “U.S. Life Insurers’ Commercial Mortgage Exposure & Losses Are Manageable,” is the high quality of their investment holdings. Investments in CMBS are “primarily originally rated Aaa-rated tranches (mostly super-senior and mezzanine Aaa) with modest exposure to recent problematic vintages of 2006-2008.”

While life insurers could face losses of $9-11 billion over the next 2-3 years that “will dampen earnings,” it will not result in many ratings downgrades, he added.
But the remote scenario run in stress testing that results in $40-45 billion would have a major capital impact that would result in “many downgrades-some being multi-notch.”

Approximately 16% of invested assets of U.S. life insurers are in CMLs and CMBS, Moody’s says. This amounts to 150% of regulatory capital. And, roughly $28-$36 billion, or 10-12% of CML portfolios annually will be maturing over the next two years, good news for insurers, according to the report. And, life insurers have the capacity to work with borrowers to extend or refinance loans, the Moody’s report notes.

“Commercial mortgages loans, while the second largest asset class after bonds, have been maintained at a moderate-sized 9% of invested assets for many years during the CRE boom over the past decade. In addition, we estimate that the industry held around $200 billion of CMBS as of year-end 2008 representing about 7% of invested assets,” Moody’s estimates. Additionally, “life insurers hold less than 1% of invested assets in real estate equity,” the rating agency continued. And, Moody’s notes the diversification of commercial loan portfolios by type and geography.

However, Moody’s says that the one area that bears watching is how CML portfolios are evaluated. The report explains that there are differences among companies in their use of external and internal property appraisals, the frequency of those appraisals and the discount rate used in evaluating properties.

Friday, December 18, 2009

Goldman Sachs To Discontinue Life Settlement Index

Goldman Sachs, New York has discontinued its life settlement index (QXX), according to company spokesman Michael DuVally. The index which began in 2007 was discontinued because “there was not sufficient commercial activity associated with the index.”

Interviews with life settlement industry executives note that this has been a difficult year both for the life settlement industry as well as global financial markets.

This news item was initially posted at

Thursday, December 17, 2009

Academy Says PBA Is Close But Much Work Remains in 2010

If 2009 was a turning point for a principles-based approach to reserving and capital requirements, 2010, will be the year to finalize the project, according to speakers during this week’s quarterly call sponsored by the American Academy of Actuaries, Washington.

Donna Claire, who is spearheading the massive four year effort involving regulators, actuaries and the American Council of Life Insurers, Washington, introduced speakers who detailed some of the work that was done and the work that still needed to be accomplished.

Alaska regulator Katie Campbell spoke of a number of major issues to resolve before a piece of the Valuation Manual, VM-20, dealing with life insurance, is finalized. The Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., has given the project until August 2010 to be completed.

The Valuation Manual is the roadmap that is needed to implement changes to the revised Standard Valuation Law, passed in September 2009 by the NAIC. The law and manual are scheduled to go to state legislatures as a package starting in 2011.
Among the issues that need to be resolved on this important piece of the Manual, according to Campbell, are:

􀂄 ACLI’s net premium reserve (NPR) floor – formulaic minimum reserve floor
􀂄 Asset default assumption and reinvestment spread methodology
􀂄 Appropriate level of aggregation
􀂄 Appropriate level of and guidance on margins
􀂄 Prescribed assumptions in the absence of credible relevant data
􀂄 Reporting requirements
􀂄 Experience reporting, and,
􀂄 Economic scenarios

Dave Neve, chair of the Academy’s Life Reserves working group, and a life actuary with Aviva USA, noted that VM 20 is “the most significant remaining outstanding issue.” He said that as part of the remaining work, the ACLI expects to have net premium reserve language ready by the start of January. The NPR, based on prescribed assumptions, would only differ between companies because of differences in policy structure.

By the spring 2010 NAIC meeting, VM-20 language should be ready that will reflect asset default costs including treatment of “all major general account asset types and a fail-safe for “all other” type of assets.

Philip Barlow, a regulator with the insurance department in the District of Columbia, and chair of the NAIC’s Life Risk-based Capital working group, said that there are a number of projects underway that are connected to the PBA initiative. The working group, according to Barlow, has exposed a C3 Phase III report that has received feedback from industry. C3 Phase III examines the interest rate and market risk component of the Life Risk Based Capital framework.

Among the comments received were concerns related to the double counting of a diversification benefit, an altered definition of C3 risk and scope concerns that the focus should be on UL with secondary guarantees and not on group insurance. Other suggestions included simplified documentation and better coordination with asset adequacy analysis.

As a result of the comments, according to Barlow, the working group will consider a materiality test and initially limit the scope provided that there is a clear definition of all products with significant tail risk, risk that is outside the norm. The ACLI agreed to submit specific proposals for both items by Jan. 4, 2010.
Barlow explained that the working group is hoping to finalize C3 Phase III at the spring NAIC meeting at which time it will decide whether a 2010 implementation date is appropriate. If the project is not finalized at the spring 2010 meeting, there will not be a 2010 implementation date, he said.

Barlow also said that the C3 Phase IV project which will roll up annuity business from C3 Phase I and II will begin once the C3 Phase III project is finished. However, he said that it will not be a long project life Phases I and II were.

Todd Erkis of Towers Perrin described a practice note for the C3 Phase III project which is a guideline that can be used to help conform to the new requirements once they are finalized. The practice note is available at:

Monday, December 14, 2009

NCSL Drafts Resolution Opposing NAIC’s NISC Proposal

Following a contentious challenge to a blueprint to create a national insurance body titled the National Insurance Supervisory Commission, state legislators developed a draft resolution opposing the effort by the National Association of Insurance Commissioners, Kansas City, Mo.

The resolution was drafted during the meeting of the Communications, Financial Services and Interstate Commerce Committee on December 11 during the annual meeting of the National Conference of State Legislatures, Washington.

Rep. Brian Kennedy, chairman of the NCSL CFI Committee, and state rep. D-Hopkinton, R.I., emphasized that this is a working draft and additional time will be spent on the issue. The resolution is expected to be finalized during the NSCL’s Spring Forum in Washington. The committee voted to unanimously proceed on moving forward with the resolution.

Kennedy said that Ohio Director Mary Jo Hudson, spoke about the proposal while the committee was debating the issue.

During the NAIC meeting in San Francisco last week, Jane Cline, the new NAIC president and West Virginia insurance commissioner said that this is strictly a working draft and that no decision to pursue this plan has been finalized. The remark was a response a contentious exchange between state insurance legislators and regulators during the NAIC meeting.

The draft resolution resolves that:
--the NISC proposal to be a premature and misguided effort that will not appease those who only desire full federal control of the business of insurance;
--the NISC proposal is an unwarranted preemption of sovereign rights of states and in particular, the constitutional authority of state legislatures to decide state insurance policy;
--the NCSL is opposed to the establishment of NISC;
--that NCSL calls upon the National Association of Insurance Commissioners to cease from any further consideration and advocacy of the NISC proposal;
--The NCSL will ask our colleagues on state legislative committees that have jurisdiction for insurance to begin inquiries into the NISC proposal and to determine the position of each state’s insurance department’s participation in the development of such a proposal; and,
--The NCSL calls upon the NAIC to work with state legislators and governors on mutual efforts to modernize and streamline insurance regulation that is not predicated on a preemption of state legislative authority to make state policy.

Saturday, December 12, 2009

Birny, We Salute You

San Francisco
An era truly came to an end during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo. this past week. During the consumer liaison meeting, NAIC funded representative Birny Birnbaum announced that he would no longer be attending NAIC meetings after a dozen years of weighing in on everything from market conduct analysis (right from the start) to credit scoring (a project that he says has gotten some cursory review but no meaningful change from regulators.) He will continue his work with the Center for Economic Justice in Austin, Texas and will continue to weigh in on issues as they come up.

I can tell you that after attending the NAIC for many years, when Birny got up to speak, you came to attention and you poised your pen to take notes. Many of my journalist colleagues did the same. As did industry reps sitting in on meetings and hearings. As one put it, “he was a tough adversary.”

Joel Ario, Pennsylvania insurance commissioner, noted during consumer liaison, how Birnbaum had spurred on everyone by raising issues that were often not popular and how he had made the NAIC better because of it.

During the meeting, I had a chance to catch up with Birnbaum and ask him about his time spent as a funded consumer rep.

Birnbaum was very definite in his “sense that all regulators here believe that one of their jobs is to protect consumers, although there are different views on how best to do that. There is not a lack of will.” However, he restated what he had said earlier in consumer liaison that there is “an institutional bias in the regulatory structure.”

The reason, he continued, is that the industry has enormous resources that are generated by policyholder supplied funds that are used to present industry viewpoints.

And, he said he believes that for many commissioners who are looking for the next step, the fact that industry jobs may be the main alternative many have for the next career move, adds to that institutional bias.

Birnbaum reiterated three suggestions he offered in parting remarks:
--use a Texas model that would create a government agency funded rep by charging 10-15 cents per policy;
--Create a Consumer Insurance Board; or
--Include a flyer with every policy mailing which would require insurers to ask consumers if it was acceptable that a portion of premium was used to lobby for industry positions.

Birnbaum also said that the NAIC would benefit from restructuring its consumer program and to separate consumer reps that actually work with consumer organizations from academics. Both are valuable to the process, he noted. However, they bring different things to the table, according to Birnbaum.

Another parting recommendation Birnbaum offered was to both increase the current budgeted $120,000 for consumer reps and to increase flexibility so that, depending on the issue, some or all of the reps could attend each meeting. Any money saved could be used for different consumer rep initiatives, Birnbaum added.

While Birnbaum says that insurance commissioners have not given enough analysis and attention to issues of unfair discrimination such as redlining, he did praise them for taking a leadership role on issues including climate change.

He urged the NAIC to be less “reactive” to headlines and more proactive to addressing real consumer concerns. Birnbaum added, it has been “reactive in the last few years to how it can protect its turf.” But he said that he still believes they can take the lead in protecting consumers.

Tuesday, December 8, 2009

New NAIC Officers Take The Helm

San Francisco
Following an uncontested election by the full body of the National Association of Insurance Commissioners, Kansas City, Mo., the newly elected 2010 officers spoke on some of the critical issues the NAIC and state-based regulation face.

The new officers are:
• President: West Virginia Insurance Commissioner Jane Cline
• President-Elect: Iowa Insurance Commissioner Susan Voss
• Vice President: Florida Insurance Commissioner Kevin McCarty; and,
• Secretary-Treasurer: Oklahoma Insurance Commissioner Kim Holland.

Cline said that a top priority will be to follow closely what is going on in the Washington health care debate and to be responsive in any manner that facilitates that discussion.

Preserving state-based regulation will be a key part of the work in 2010 whether it is the National Insurance Supervisory Commission or any other proposal, she added. As regulatory modernization ideas surface, Cline says that “constructive dialogue with all stakeholders” will be an important part of any work at the NAIC.

The NAIC’s Holland added that the NAIC will be focused on speed-to-market initiatives and enhancing consumer protections. Holland calls NISC a draft document, adding that it is simply one way in which regulators can meet their obligation to continue to look for ways to improve state-based regulation.

And, President Cline said that she intends to reach out to all state officials including governors and state Rep. Robert Damron, D-Nicholasville, Ky., the newly elected president of the National Conference of Insurance Legislators, Troy, N.Y. During the meeting here, NCOIL challenged the NAIC’s NISC effort and warned the NAIC not to make a deal to embed provisions in federal regulation to set itself up as a defacto federal lawmaker. The NAIC’s Holland acknowledged that “people have strong opinions” and said that the task at hand is to “take ample opportunity to find common good.”

The best consumer protection, Holland continued, is to balance consumer rights with a strong insurance market that provides consumers with choice. She said that her “objective is fairness.” Health care will be part of that choice and “regardless of what bill passes, will require dramatic responses from states.” Consequently, Holland said, it is important to prepare leaders in the states and within insurance departments for these changes. Toward, that end, according to Holland, the NAIC has been working with the Department of Health and Human Services.

And, in terms of providing consumers with information, “market regulation is where the rubber meets the road,” Holland continued.

Cline reiterated that “first and foremost, my efforts will be to ensure consumer protections. She stated that it is a balancing act because if restrictions are “too costly or cumbersome,” the insurance market, and consequently, consumer choice, will be diminished.

And, when asked about the “continual drumbeat” from consumers who believe that regulators side too frequently with insurers, Holland responded that “We appreciate any drumbeat. It doesn’t allow us to get complacent. It doesn’t hurt to be reminded… [that we are pressing for consumer protections.]”

The NAIC’s Voss, discussed potential changes regarding suitability of annuities and other insurance products, noting that the NAIC is developing a good relation with FINRA, Washington. And, following the Old Mutual decision, there is further work being done to make changes to Rule 151A developed by the Securities and Exchange Commission, Washington, she added.

On amendments to the Suitability in Annuity Transactions Model Regulation, Voss said that she believes that consumer representatives are supportive of the effort. She added that the industry must realize that eventually it is accountable for the sale of a product. Voss said that she believes the model is close to broad acceptance by many parties.

Monday, December 7, 2009

Suitability, Principles-based Reserves And More

San Francisco
Major regulatory efforts designed to align state-based regulation with global solvency initiatives were discussed during the winter meeting of the National Association of Insurance Commissioners here.

The NAIC adopted a controversial deferred-tax asset proposal designed to give temporary capital relief to life insurers during its plenary session here. The vote was 33-22.

Among the projects that were reviewed by the NAIC, Kansas City, Mo., on December 6 were the next steps to be taken on amendments to the Suitability in Annuities Transactions model regulation. During the Life Insurance and Annuities “A” Committee meeting, Connecticut Insurance Commissioner Tom Sullivan, chair of the “A” Committee, said that comments would continue to be received through December 14 and a December 18 conference call would be held to vote on the amended model. Sullivan clarified that no substantive changes would be considered. Susan Voss, Iowa insurance commissioner and NAIC president-elect, said that the process would be completely open.

During the same meeting, Larry Bruning, chief actuary with the Kansas Insurance department and chair of the Life and Health Actuarial Task Force, detailed the need for a time extension to work on the Valuation Manual, the roadmap for implementing an amended Standard Valuation Law that was adopted during the fall national meeting at National Harbord, Md.

Bruning explained that much of the work of the Valuation Manual was done including the following components: VM 0, the table of contents; VM 1, the definition section; VM 21, addressing variable annuities; VM 26, addressing credit life and disability insurance; and, VM 30, addressing an Actuarial Opinion and Memorandum.

What still needs work, he told the “A” Committee, is VM 20, which addresses life insurance. The reason, it still needs work, according to Bruning, is that the American Council of Life Insurers, Washington, has asked for a net premium valuation approach to address any concerns of the Treasury Department so that life insurers could continue to get deductions for changes in reserves. The time is also needed, Bruning continued, to put a formulaic floor in place. The ACLI has indicated that its work would be completed no later than mid-year 2010, he added.

Wisconsin Commissioner Sean Dilweg said that it was “troubling” to see the project delayed and a promise to have it done by year-end not met. The SVL was adopted on the condition that the Valuation Manual would be completed by year-end and that both would be brought to state legislatures as a package.

Paul Graham of the ACLI, urged regulators to give the project more time because life insurance was not yet a part of the manual. An extra six months, he said, would give regulators time to ready the manual for the 2011 legislative session.

After hearing testimony, the “A” Committee granted an extension that would be no later than the summer national meeting in August 2010.

With regard to international work, updates on efforts of the International Association of Insurance Supervisors, Basel, Switzerland, and the Solvency Modernization Initiative Task Force. The updates were provided during the International Insurance Relations “G” Committee.

Attendees at the session, including Dave Snyder of the American Insurance Association, Washington, said that the work needs to be a balance of preparing for global changes to the solvency framework and a need to avoid overregulation that is really banking oversight. “We need to be careful not to be swept into regulations that are not appropriate for insurance. The crisis was really a banking crisis.”

During the meeting California Insurance Commissioner, Steve Poizner, detailed a new regulation that would prevent insurers from having indirect investment in Iran. Federal law already bans direct investment. The new requirements had many attendees wondering how you define an indirect investment. For instance, several attendees wondered if there is an investment in a company’s bonds and that company had an investment in a company that did business in Iran, would that fall under the new requirement? And a couple of attendees said that they wondered how the new requirement would mesh with existing requirements of the Securities and Exchange Commission, Washington.

Sunday, December 6, 2009

NCOIL To NAIC: Don’t Sell Us Up The Potomac

San Francisco
State legislators angrily warned state insurance regulators not to cut a deal with Congress to make regulators the defacto federal regulator through either the National Insurance Supervisory Commission or any other mechanism embedded in Congressional bills.

State insurance commissioners responded that the proposal was just that: a proposal that was up for discussion, one option among many.

During the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., here, state Rep. Brian Kennedy, D-Hopkinton, R.I., warned during a forum that if regulators tried to embed legislation to remove legislators’ authority to create law for insurance, he would seek a resolution at the meeting of the National Conference of State Legislatures, Washington, next week to oppose the proposal and to have legislatures prevent state insurance department’s participation in any such program.

Kennedy also asked how the NAIC proposed to get a new compact enacted when some states had still not enacted the Interstate Insurance Product Regulation Commission, Washington.

State Rep. Bob Damron, D-Nicholasville, Ky., and president of the National Conference of Insurance Legislators, Troy, N.Y., started his remarks by stating that if “the NAIC would just oppose federal regulation, we wouldn’t be here today.” He cautioned that “if this appears in a federal bill, you’re going to have trouble. Legislatures will totally rebel.”

In an earlier dialogue between state legislators and regulators, Damron had said that it was unwise to start offering such options before federal regulation is seriously considered because it diminishes the bargaining power of states. “We do not need to be responsive to the federal government. Our response should be that you failed at most everything. This is a consumer issue.”

Roger Sevigny, New Hampshire commissioner and NAIC president, emphasized that this is only a proposal and there was no attempt to cut out state legislators from efforts to maintain state control of insurance regulation. In fact, he maintained, both regulators and legislators wanted the same thing.

In the earlier dialogue, Illinois Director Michael McRaith noted that there are state legislators who agree with what the NAIC is trying to do and suggested that while “there is value in rhetoric, what is really more important is constructive engagement.”

Jane Cline, West Virginia insurance commissioner and NAIC President Elect, emphasized that the NAIC is “looking at ways to be responsive while still protecting state-based regulation. There is no determination where this will be housed, how it will look or what the involvement of state regulators or state legislators will be.”

Birny Birnbaum of the Center for Economic Justice, Austin, Texas, said that the IIPRC has had a lack of consumer participation and “instead of higher standards, it has been just the opposite even when individual states have had higher standards.” Any such commission would need a more formalized consumer advisory committee, he added.

Trade groups also weighed in on the issue.

There is a lot of need for uniformity and reciprocity across the country, said David Eppstein of PIA National, Alexandria, Va. “But, frankly, we are nervous about turning to the federal government. You don’t know what you are going to get when you turn to the federal government. This could grow into something that you didn’t intend it to be.”

Deirdre Manna of the Property Casualty Insurers Association of America, Des Plaines, Ill., said that PCI was supportive of modernization and uniform regulation that would “ensure the least, lightest touch of federal regulation of the property-casualty industry.”

Manna cited concerns over duplication of regulation and that NISC would concentrate too much power and offer too little oversight.

Uniformity is important to producers, said Ron Panneton of the National Association of Insurance and Financial Advisors, Falls Church, Va. He also suggested that regulators reach out and create a stronger relationship with state legislators.

Saturday, December 5, 2009

NAIC Hears Different Stories On What’s Best For Annuity Consumers

San Francisco

State insurance commissioners heard very different views on what is best for annuity consumers who buy guarantee riders.

During a hearing of the Interstate Insurance Product Regulation Commission, Washington, state legislators, consumer advocates and the life settlement industry made the case for a consumer’s right to sell guaranteed living benefit and minimum death benefit riders sold with individual deferred variable and non-variable annuities.

Life insurers argued that what is in the consumer’s best interest is availability of product. That availability will go away if life insurers are forced to factor in the ability to sell these guarantees to institutional investors into pricing assumptions, they warned.

The IIPRC hearing was held on December 4 during the winter meeting of the Kansas City, Mo.-based National Association of Insurance Commissioners here. The issue has been brewing for several months as Brian Staples of Right LLC, Versailles, Ky., representing the Life Insurance Settlement Association, Orlando, Fla., argued that to deny a consumer the right to sell what they have purchased is to take away a valuable asset. State insurance legislators at the National Conference of Insurance Legislators, Troy, N.Y., agreed following testimony at its recent annual meeting a little over two weeks ago.

During the hearing, state Rep. Bob Damron, D-Nicholasville, Ky., and the new NCOIL president, said that these guarantees are being used to market annuity products and that to take away the right to sell what seniors have purchased is “just wrong. For anyone to say that this is not anti-consumer makes me think that they have not checked the definition.” And, he continued, even if some states have already approved product filings with termination provisions, it is still an anti-consumer measure.

State Rep. Brian Kennedy, D-Hopkinton, R.I., noted that the bottom line should be to ensure the best interest of consumers, not what is in the best interest of insurers.

Ryan Wilson, representing AARP, Washington, echoed those comments and Brendan Bridgeland of the Center for Insurance Research, Cambridge, Mass., said that he had not seen any data or studies to support insurers’ assumption that guarantees would be sold or institutional investors would buy them.

Life insurers disagreed. Maureen Adolph, representing Prudential Financial, Newark, N.J., said that there is a tremendous need for steady income in retirement. While annuities can fill the gap, she said that Prudential has learned that very few contract holders are willing to give up control over their money and annuitize products. Annuity guarantees are a “21st Century Solution,” she continued. In Prudential’s case, contract holders can opt to receive up to 6% of the contract value at the time of retirement without annuitizing their contract. This option has proved “extremely popular,” she noted, with 90% of buyers choosing these lifetime guarantees. If these guarantees are subject to assignment, then price increases will follow, hurting consumers, according to Adolph.

Dave Sandberg, representing Allianz Life Ins. Co. of America, Minneapolis, said that consumers who purchase guarantees are not really buying an asset in as traditionally defined, but rather “the promise of lifetime income.” The pricing issue is a straightforward financial issue, he continued. The insurer does not count on the contract holder to sell those benefits. If policyholders use the features to provide income, obligations are spread out over time, he said. But, if these features are sold to institutional investors, then there is a “huge concentration exposure that will require additional capital and reserves,” Sandberg explained.

Elaine Leighton, representing John Hancock Financial Services in its Buffalo, N.Y. office, said that she would support prominent disclosures on contracts noting the termination provisions.

The discussion raised the issue that the proposed IIPRC standards allow companies to sell these features without termination rights. Consequently, it allows the market the greatest flexibility by letting companies choose how to sell these features, the discussion among regulators pointed out.

But Staples argued that if 90% of consumers are opting for these guarantees, then what happens if those consumers decide at some point that “the product is not meeting their needs or expectations?” Their one option would be an option to sell, he said.

Ohio Insurance Director Mary Jo Hudson, who is also IIPRC chair, said that the comments will help the IIPRC in determining whether to fully adopt these standards or to continue to work on them. She urged anyone who still wanted to weigh in on the standards to do so before the end of the comment period on December 28. If the standards continue are ultimately adopted in their current form, they probably would be in place in April 2010.

Friday, December 4, 2009

PBA Details Create A Devil Of A Discussion

San Francisco

Regulators are planning to ask for more time to develop a Valuation Manual that is the roadmap for a new principles-based approach to reserving and capital.

In a proposed letter that is being discussed and could be sent to the Life and Annuities “A” Committee during the winter meeting of the Kansas City, Mo.-based National Association of Insurance Commissioners here, a request will be made to give member of the Life & Health Actuarial Task Force until mid-2010 to hammer out details of the Manual. The Manual provides direction for revisions to the Standard Valuation Manual that was adopted during the fall NAIC meeting in National Harbor, Md. But those revisions were adopted with the understanding that the SVL and Manual would be delivered to legislatures as a package and the Manual would be completed by the end of 2009. Because of this timeline, the technical nature of the work and differences of opinion that have resulted in extended discussion over points in the Manual, LHATF regulators have to request permission to extend the deadline for a finished product.

That difference of opinion was evident during a discussion about creating a methodology to calculate asset default costs as part of a principles-based approach. The report was delivered by Gary Falde and Alan Routhenstein who were representing the American Academy of Actuaries, Washington.

Fred Andersen, a New York regulator, said that “regulators could spend thousands of hours creating models or just limit spreads that are offered.”

During the ensuing discussion, Joe Musgrove, an Arkansas regulator said that any system that is put in place must ensure that regulators are not inadvertently encouraging companies to lead on the forefront of investing in exotic securities. “Had we done that two years ago, we wouldn’t have had companies with credit default swaps sitting on their books right now.” Later, he added, that “if a company wants to take a risk, it should be done with an investor’s share of the money and not with the insured’s share.” He noted that companies had to come to regulators over the last two years with an emergency, and if regulators don’t oversee more exotic investments there may not be as big a reserve the next time a situation arises.

But the Academy’s Falde argued that commercial mortgages are a “core investment,” one that insurers are well practiced in managing. New York’s Andersen responded that it is a regulator’s duty to develop standards that reflect the lessons of the current financial crisis. Falde told regulators that the current residential mortgage-backed securities project at the NAIC would help address the types of securities that wouldn’t fit into the Academy’s new methodology.

To address his concerns, Andersen proposed a motion that securities or assets not independently rated would have a prescribed investment return rate within the proposed Academy methodology. The valuation net investment earned rate would be capped at the prescribed rate and deterministic reserves would be capped at a prescribed rate.

Prior to the vote, Paul Graham of the American Council of Life Insurers, Washington, suggested that there are other considerations that should be factored into the motion such as how to treat prepayments and call provisions. He noted that the NAIC’s Valuation of Securities Task Force is struggling with these issues right now and that the motion was “too simplistic of a solution to really reflect the risk of the products.”

And, Ed Stephenson of Barnert Global and the Group of North American Insurance Enterprises, both in New York, recommended that RMBS not be in the scope of the motion because the issue was currently being looked at in the VOS Task Force.

When the motion was called, LHATF members approved it by a vote of 8 to 4, with one Utah abstaining.

Wednesday, December 2, 2009

NAIC Gets Ready to Wrap Up 2009, Prep for 2010

When state insurance regulators meet in San Francisco starting tomorrow they will be looking at issues including advancing an annuity suitability model that cleared a hurdle on Dec. 1, holding a hearing on an insurance compact commission that recently had state legislators riled up, and having more discussions on a new rating system that is being developed and a new federal insurance office proposal that is being discussed in Congress.

The meeting of the National Association of Insurance Commissioners starts just days after a suitability of annuity sales working group overwhelmingly advanced revisions to the Suitability in Annuity Transactions model regulation. The model was adopted and will pass to the Life Insurance and Annuities “A” Committee by a vote of 13-2 with one abstention.
Among the discussion points that preceded the vote was a concern by Vermont and California that there was still work that needed to be done and the vote should be delayed. Points regulators raised included a concern that it would be the responsibility of a company for every transaction to be reviewed and that if the work is contracted out, that it not absolve a company from making sure that the work was completed. There was also concern that the definition of ‘recommendation’ was too narrow.

Consumer advocate Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, asked that additional language be considered that he said would be consumer friendly but members of the working group said that the discussion had gone on for a year and could go on for a lot longer if allowed. They said that it was time to vote on the model and move it up to “A” Committee and toward adoption.

But insurers and producers urged that there be more discussion on the issue. Ron Panneton of the National Association of Insurance and Financial Advisors, Falls Church, Va., said there are still several areas that need work in order for the model to be more uniformly adopted. And, Eric DuPont of Met Life told regulators that because of the lack of consensus among regulators, the revisions will probably not be uniformly adopted. A lack of uniformity requires different tweaks to compliance systems and additional training and is very expensive for companies, he added.

Separately, a regulatory modernization public forum will be held on Dec 5 to discuss the current National Insurance Supervisory Commission proposal. At the meeting of the National Conference of Insurance Legislators, Troy, N.Y., two weeks ago, state legislators expressed anger that a discussion on the NISC, which they said had been promised, had never materialized.

The discussion comes at the NAIC expresses support for the FIO proposal and maintains its position that state regulation must be preserved and NCOIL is reiterating the authority of states to regulate insurance. Both positions are made in separate letters to Congress.

In a recent interview, State Rep. Robert Damron, D-Nicholasville, Ky., and the new NCOIL president, said that state legislators do not support the positions the NAIC has taken in Washington, which is why NCOIL pressed for the hearing. He said that state legislators would never support any proposal which would force states to cede power and that states not only regulate insurance but perform important functions such as gathering data that is then transmitted to the NAIC.

Tuesday, November 24, 2009

The Final Piece

Putting the final touches on the Valuation Manual, the roadmap for a principles-based approach to reserving and capital, is the significant task that still awaits regulators when they meet early next month during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo.

Technically, the Manual needs to be completed by year-end but will probably be finished in 2010 before it is brought before the full NAIC body for possible adoption. It will then be brought to legislatures along with the revised Standard Valuation Law which was passed by NAIC in September. The SVL was passed on condition that the Manual be completed by the end of December but so much work has been invested in the project that in all likelihood, that deadline could be extended.

At the annual meeting of the National Conference of Insurance Legislators, Troy, N.Y., last week, Larry Bruning, chief actuary in Kansas and chair of the NAIC’s Life and Health Actuarial Task Force and Nancy Bennett, a fellow with the American Academy of Actuaries, Washington, testified before state legislators. The testimony was both an update and an explanation of why the project is a public policy issue that should receive serious consideration when it hits their state houses.

Bruning is confident that the issues that still remain concerning the Manual will be resolved. Bennett said that are some major issues such as a net premium floor that need to be finalized but said that she believes the Manual can be completed. The net premium floor is being added at the request of life insurers to address potential tax issues that could impact life insurance products. Bennett added, “What does it mean to have the Valuation Manual done. Technically, it is a living, breathing document.” Pieces that are still being worked on include VM 20 which addresses reinsurance, among other points.

Bennett says that if too many restrictions are placed on PBA, then it defeats the intent of the project, to accurately reflect the capital and reserves of a company. However, she said that formulaic requirements may act as “training wheels” to make regulators and others comfortable with the system. At some point, those “training wheels” can be removed when there is more comfort with the new approach, she added.

Saturday, November 21, 2009

NCOIL To NAIC: Where’s the State Team?

By Jim Connolly
New Orleans
State insurance legislators here called out state insurance regulators for what they maintain was an unkept promise to hold a summit of state officials and create a state team to examine the possibility of an interstate compact to thwart the threat of federal insurance regulation.

During the annual meeting of the National Conference of Insurance Legislators, Troy, N.Y., the dialogue between NCOIL legislators and members of the National Association of Insurance Commissioners, Kansas City, Mo., started with a discussion of a Systemic Risk bill advancing in Congress and how the latest version of a Federal Insurance Office concept is unacceptable to state legislators.

Ohio Insurance Director Mary Jo Hudson explained that FIO is “truly about information and not about regulation.” However, she did say to legislators on the NCOIL-NAIC dialogue panel that there are direct and indirect attempts to preempt state authority and that tone in Congress requires immediate action to carve out insurance from possible federal preemption.

But state legislators including state Rep. Bob Damron, D-Nicholasville-Ky.; Rep. George Keiser, R-Bismarck, N.D.; Rep. Brian Kennedy, D-Hopkinton, R.I. and Sen. Lena Taylor, D-Milwaukee, Wisc., asserted that commissioners had promised a summit of state legislators, regulators, attorneys general, and representatives from governors’ offices within two weeks after the fall NAIC meeting in National Harbor, Md. The summit was supposed to discuss the viability of creating a national insurance compact. They continued, that rather than create a state team, the NAIC was negotiating for itself without necessary input from other state constituents.

Hudson responded by saying that it was never the intent of NAIC to ignore a commitment and that she personally was unaware that such a commitment had been extended. But, she continued, since the proposal had been made, she would work to make it happen.

But, Taylor responded by saying that the issue “really goes to the point of whether you speak out of both sides of your mouth.” Later, she said that one’s word is one’s integrity and expressed doubt about how it is even possible to work with a group that didn’t follow through on a commitment.

Rep. Craig Eiland, D-Galveston, Texas, said that recommended that NCOIL either get a definite date when the summit would be sponsored by the NAIC or raise the issue at its executive committee meeting on Nov. 22 of how NCOIL could put one together.

NCOIL Advances Credit Default Model; Defers on MCAS

By Jim Connolly
New Orleans
A model developed by the National Conference of Insurance Legislators, Troy, N.Y., to regulate credit default swaps following the collapse of American International Group, New York, was advanced out of NCOIL’s financial services and investment product committee here during the group’s annual meeting. It will now go before the full executive committee on Sunday, Nov. 22.

During the State-Federal Relations session, a decision was made to defer any possible action on NCOIL’s development of a Market Conduct Annual Statement Act. The motion to defer was made by state Sen. James Seward, R-N.Y. and agreed to by other state legislators. Seward had sponsored the introduction of the model. The model has the support of trade groups including the American Council of Life Insurers, Washington, and the Property Casualty Insurers Association of America, Des Plaines, Ill.

The deferral will allow NCOIL’s state-federal relations committee time to review new information presented to it by the National Association of Insurance Commissioners, Kansas City, Mo.

Specifically, a proposal used and recommended by Oklahoma provides a framework for providing data to the NAIC and maintaining confidentiality. The proposal as well as the status of the work on market conduct analysis was presented to the committee by Ohio Insurance Director Mary Jo Hudson.

The Oklahoma bill requires that the market conduct annual statement be filed annually with an NAIC form and instructions on or before the last day of June; the MCAS is considered examination workpapers; the NAIC can be sent data if a confidentiality agreement is signed; a filing fee goes to the NAIC which acts as an agent of the insurance department; and the Oklahoma department receive a filing fee.

Hudson said that 29 states are participating by providing life insurance and property-casualty data and that there is a proposal for data to be gathered and held by the NAIC, a proposal that would ensure the confidentiality of data. Hudson noted that the current NCOIL MCAS model would create additional hoops that regulators would have to jump through.

Neil Alldredge, vice president-state and regulatory affairs, with the National Association of Mutual Insurance Companies, Indianapolis, said that NAMIC supports the model but also noted that the NAIC has changed its direction and does not want all data to be made public as opposed to using it for market conduct reasons.

Eric Goldberg, Associate General Counsel & Manager, State Programs, with the American Insurance Association, Washington, said that the NAIC functioning as a vendor cannot establish confidentiality provisions. There is a danger making such information public, according to Goldberg. The public does not understand such information and would “abuse” it, he added.

Birny Birnbaum, executive director for the Center for Economic Justice, Austin, Texas, spoke for the CEJ and the Consumer Federation of America, Washington, said that a statistical agent framework would keep confidentiality requirements in place. He added that there is currently very little information available for information such as non-renewals and the settlement of claims and that such information should be provided.

Seward asked whether there was a timetable on when the NAIC would initiate MCAS, to which the NAIC’s Hudson said that there still is a lot of work to be done but it could be mid-year 2010.

Rep. Virginia Milkey of Vermont said that the issue of not making information public disturbed her, particularly the inference that “consumers are too stupid to use information. That particularly bothers me. The market works when consumers have information to apply.”

Friday, November 20, 2009

NCOIL Warned International Changes Will Critically Impact American Companies

By Jim Connolly
New Orleans
State insurance legislators received a sobering assessment of what United States insurers face as new global solvency and accounting initiatives hurdle toward completion over the next several years.

The discussion took place during the annual meeting of the Troy, N.Y.-based National Conference of Insurance Legislators here.

“We are talking about a race of the kind we have never seen before for global capital and reinsurance,” said Dave Snyder, vice president and assistant general counsel with the American Insurance Association, Washington. Snyder framed the critical nature of these global changes during a description of Solvency II and how it will bring Europe up to date with the U.S. and create a European-wide regulatory system.

Consequently, he continued, it is critical that the U.S. ensure effective and efficient regulation to compete internationally in order to bring premium dollars and jobs back to the states. This addresses the ability of American insurers to remain competitive on the global stage, he added.

Snyder said that the reason this issue is important to NCOIL legislators is that insurance regulatory issues are going to be decided outside of U.S. borders. All these efforts “very much underscore a global regulatory environment.”

Ed Stephenson of Barnert Global, representing the Group of North American Insurance Enterprises, both in New York, noted not only the importance of these issues to U.S. insurers but the tight timeline in which they are being developed. The work being done by the Committee of European Insurance and Occupational Pensions Supervisors, Frankfurt, Germany, is targeted for completion in 2010, he noted. “Imagine all of the insurance regulation and everything the NAIC puts forth being completed in 18 months,” he said. Fifty papers have produced 20,000 comments, Stephenson continued.

That urgency to complete work is also evident in accounting work being done by the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London. A joint insurance contracts project is scheduled to have an exposure released by April 2010 so that the new requirements would be implemented by mid-2011. By June of 2011, there will only be 6 board members will remain on the Boards and there is a concern that if there is not something in place, the whole issue may need to be re-deliberated, according to Stephenson.

But differences exist between the approaches of the two boards. The U.S. is tying the issue to its revenue recognition project while the IASB is moving more toward intermediate measurement, he explained.

Stephenson explained that GNAIE members have five major concerns over the treatment of: acquisition costs, discount rates, the treatment of participation features, unbundling the insurance part of the contract from the investment part of the contract; and for property-casualty insurers, post claims reserving would run more than one year. However, the good news for P-C insurers, he continued, is that treatment of short-term contracts would look more like U.S. GAAP.

The potential danger, Stephenson continued, is that the ability to enter the insurance market could be irreparably impaired. If a company didn’t have the book of business to offset the liability upfront, then it would be unable to participate in the market, he added. It could also upend treatment of deferred acquisition costs and change companies’ relationships with agents, Stephenson continued.

Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, who is based in Washington, expressed concern over how work on systemic risk would change how insurers handle insurance groups. And, another issue he urged legislators to watch is the possible overlapping or regulatory requirements and regulatory agencies to whom jurisdictions would have to report.

It is an issue that the National Association of Insurance Commissioners, Kansas City, Mo., is also watching, according to Bob Tomlinson, assistant commissioner with the Kansas insurance department. For instance, he said that one proposal under consideration would require a parent company could be required to maintain solvency collateral and would be required to legally transfer collateral to smaller companies within the group. But, there is a lack of a definition of what a legal requirement is, he added.

Hip Deep In Trouble?

State insurance commissioners have a right to be angry that twice in recent memory, they have been handed a big mess—troubled bond insurers and A.I.G. But I wonder if the biggest mess they face awaits if they wade hip deep into the rating game.

The rating agency “E” working group of the National Association of Insurance Commissioners, Kansas City, Mo., just concluded its second public hearing examining reasons for recent rating shortcomings, including municipal bond ratings. It is one of several reviews planned prior to presenting its findings to the NAIC and possibly (more like probably) to Washington. The NAIC also announced on Nov. 17 that it has selected PIMCO as a financial modeler to help regulators determine risk-based capital requirements for RMBS.

One of the panelists said that if regulators decide to put less reliance on rating agencies, there is no need to change the system that currently exists. That’s a thought worth holding on to. Reinventing the wheel is costly and time consuming, even if there is plenty of talent among regulators and the staff of the Securities Valuation Office.

The complexities of rating residential mortgage-backed securities and the heat it has caused the rating agencies offer a cautionary tale. Now granted, a part of that tale is a certain laxness that existed in rating these complex securities as well as a lack of logic. It didn’t take a financial modeler to figure out that a lot of people who shouldn’t be getting mortgages were and eventually reality catches up, in this case with investors including insurers who hold these securities.

But it also doesn’t take a financial modeler to determine that if the NAIC, in its final report, actually does decide to take the plunge into ratings, that it is a tremendous commitment of resources. I wonder if what they are wading into is quick sand where the rating agencies are currently mired.

Wednesday, November 18, 2009

The Secret Sauce?

Today I did something I haven’t done before: write a story in which the American Council of Life Insurers, Washington; and the Life Insurance Settlement Association, Orlando, Fla., found some common ground.

[Full disclosure: for those of you who don’t know, I was recently appointed managing editor of the Life Settlement Review. However, these views are entirely my own.]

The common ground was the realization that STOLI is bad for everyone. I think it is a common ground everyone has realized but this is the first time I can recall it being verbalized. Or, perhaps it was just verbalized separately at different times in different ways. The verbalization was a reaction to a New York state life settlement law enacted on November 16 in a special session.

The New York insurance department, New York state Senator Neil Breslin and Assemblyman Joseph Morelle deserve a lot of credit for crafting legislation that is generally getting such a warm reception.

A total of 38 states have legislation that address life settlements or viatical settlements in some way: a model developed by the National Association of Insurance Commissioners, Kansas City, Mo.; a model developed by the National Conference of Insurance Legislators, Troy, N.Y.; or a hybrid approach. But for those states that have yet to enact a law or for those who are considering changes to their existing law, the New York law may be well worth a look.

Maybe, just maybe New York has the secret sauce.

Thursday, November 5, 2009

NAIC Votes To Develop Its Own RMBS Tools

The National Association of Insurance Commissioners voted to develop its own residential mortgage backed securities tools rather than rely on ratings from ratings agencies in determining company risk-based capital requirements for 2009.

In order for regulators to implement a new model that would assess RMBS, the process must be developed in the six weeks before year-end. As described on a conference call this afternoon, a vendor and a consultant to oversee the project and help develop assumptions for the NAIC model will have to be retained. The cost this model will be paid for by the insurers that use it, according to the discussion.

Virginia regulator Doug Stolte said that the NAIC, Kansas City, Mo., has had concerns about the rating agencies’ ratings of these instruments for the past few years. The ratings do not consider the amount of loss that is expected but rather the probability of loss, he explained.

This is a short-term proposal, according to Mike Moriarity, a New York regulator. The model the NAIC is advancing would look at expected losses and incorporate those results into the RBC formula for capital charges, he added. So, if a company purchased RMBS at a discount or the company’s portfolio was written down, those events would be considered for RBC, Moriarity explained.

South Carolina Director Scott Richardson wanted to know if what regulators were voting on was less stringent that what is currently used to determine RBC for residential mortgage-backed securities. Wisconsin Commissioner Sean Dilweg responded that it is not necessarily the case, and that what it would do would be to provide a more exact accounting of the securities.

It was noted that rating agencies declared that the securities were four times more risky than in 2008. “So, either they were wrong last year or this year,” Dilweg said. It was also noted by Roger Sevigny, NAIC president and New Hampshire commissioner, that last year, rating agency ratings of municipal bonds wrapped by guarantees were decoupled from RBC calculations.

Utah Commissioner Kent Michie said that he was “skeptical” that contractors could turn around the project in such a short time.
New York’s Moriarity explained that said that regulators have the prerogative to use rating agencies in RBC calculations or to change to another model if ratings are not working.

It was noted that RBC for the life industry is roughly $120 billion and there is $11 billion in RBC for RMBS if ratings are used, approximately 10% of total RBC. South Carolina’s Richardson then asked if the difference was small whether it would matter if regulators took another year to develop the model.

Richardson then alleged that Wall Street had wrapped high quality mortgages with junk mortgages for the purposes of hiding the junk. Utah’s Michie said that regulators could not be certain of that for a fact.

Louisiana’s Commissioner Jim Donelon also wanted to know “What’s the rush?” He noted that the NAIC was hoping to accomplish this plan in less than 60 day. And, he asked why there was the need to do it so quickly and how much was in the budget to achieve this end.
Concern was raised that “we will really be severely criticized for doing this on such a rushed basis on such toxic assets that consumer groups have opposed and companies are in favor of.”

The discussion ended in a vote by the NAIC’s executive committee in which there were two “no” votes, Louisiana and South Dakota, and was followed by a vote by its plenary, or full body, in which there were four “no” votes. “No” votes at the Plenary level included Georgia, Louisiana, Montana and South Dakota.

The vote was preceded by a request from the Center for Economic Justice, Austin, Texas, not to adopt the plan. In a letter from Birny Birnbaum, executive director, he urged commissioners to reject the plan because “the proposal picks one class of securities – at the urging of industry – for capital relief while ignoring other types of securities which, utilizing the same alternative methodology, may require more capital. The end result will be less capital protecting consumers than under current rules.

Birnbaum also notes that the proposal is being “rushed through the NAIC without the necessary transparency.” And, Birnbaum continues, there is no reason to do so. Birnbaum asserts that the additional $9 billion in capital insurers would be required to pony up if rating agency ratings continue to be used as criteria in RBC calculations “is not a crisis requiring the rushed action before the NAIC today.”
RMBS show are very risky because mortgage delinquencies and defaults show no signs of abating, according to Birnbaum. Consequently, capital requirements should not be diminished, he maintained.

Tuesday, November 3, 2009

Restoring Confidence

Confidence is a theme that seems to be surfacing a lot lately. The issue came up this week when the Committee of European Securities Regulators, Paris, said that many of the 96 financial services companies including insurers who were surveyed did not meet mandatory disclosure requirements in their 2008 annual reports.

While there have been no similar findings that there is a widespread problem with mandatory disclosures in U.S. filings, there has been a call for greater transparency both in GAAP and statutory insurance filings for a number of years.
And, much of the work of the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London, has to do with ensuring that there is adequate transparency so that investors can make truly informed decisions.

Why should such emphasis be placed on restoring confidence to a still skittish investing public? The opening remarks by Robert Kerzner, president and CEO of LIMRA and LOMA, Hartford, Conn., and Atlanta, respectively, during the organizations’ annual meeting in New York last week provide some insight into the importance of confidence.

Kerzner detailed the slip in confidence in life insurers. “Our industry really took it on the chin. There was a virtual collapse in our business. In October 2008, barely 12% of consumers have strong confidence in the insurance industry.” Kerzner noted that at least part of the poor showing can be attributed to a reaction to A.I.G.’s problems as well as negative comments from politicians. As he spoke, a clip from an interview with Nancy Pelosi, Speaker of the House, ran in the background. The outlook was a little less bleak in October 2009 with 18% of those polled expressing confidence in the industry.

Attendees were told by consumers were nearly twice as likely to listen to parents or other relatives than to a life agent or broker (27% compared with 15%,) more than twice as likely to listen to a financial advisor (34% to 15%) and neck-in-neck with their human resources department (14% to 15%.) That says a lot when consumers trust HR more than their life agent or broker.

Kerzner went on to note that there are opportunities for the industry as well as challenges. The challenge, he continued, even though there will be signs of recovery in 2010, consumers have changed their behavior.

I think that this lack of confidence and spotty transparency with financial services in general is a wonderful opportunity for insurers to step up and offer better transparency both with regulatory and statutory financial data that it makes available as well as the cost of products and commissions that consumers pay.
Perhaps, if the industry can take that first step, it can reach out to the Generation X and Y folk that Kerzner says is important to life insurers’ future. Not to mention, the legions of boomers and those that are marching with time into boomer territory.

Sunday, November 1, 2009

Moody’s Examines Life Insurance Creditworthiness, Outlook On Brokers

This past week Moody’s Investors Service in New York released two interesting reports: one that examines life insurance creditworthiness and a second that takes a look at the outlook for insurance brokerages.

The life insurance report, examines the difference between Moody’s ratings and market measures and why the difference exists. The report starts with the divergence between the market which “has at times signaled a high likelihood of default on some insurers that Moody’s has rated within the investment grade category. Moody’s maintains that its ratings have proved accurate given the events in the market and consequently, sought to find out why the divergent opinion exists, according to Scott Robinson, Moody’s senior vice president, explained. The report is based on interviews with both buy and sell-side analysts, he adds.

One potential reason for the difference, Robinson explained, was that the market view may reflect the “extraordinary volatility” in the life insurance market over the past year. But, he noted that since March of this year, the market view has moved back toward Moody’s credit ratings. Even so, the Moody’s report found that the continued gap between the market’s assessment and Moody’s assessment of life insurers suggest that the market believes that the life insurance sector remains under pressure.

Among the reasons cited for the divergence in assessing the industry is the view by some investors that life insurers may still be hurt by investment losses in asset classes including residential mortgage-backed securities, hybrid securities and commercial real estate investments which may face additional losses in the future. Some investors, according to the Moody’s report, may be basing their expectations on the actual market prices of investments held by life insurers rather than expected economic losses.

There was also concern about a “run on the bank” scenario in which one major life insurance failure could prompt surrenders in other insurers, the report continues.
The second report on the Insurance Brokerage Outlook notes that brokers face significant challenges in light of a soft commercial P&C insurance market, the global economic downturn and high financial leverage among privately held firms which were purchased through LBOS or recapitalizations in 2006-2007. These leveraged, private firms have fallen short of their revenue and profit projections but are countering that shortfall with reduced costs and investments that have stable operating margins, the report states.

One of the strength of these brokers, according to Bruce Ballentine, vice president and senior credit officer, is that their largest expense, a variable one, is salaries and benefits at approximately 50-65% of revenues. Capital expenditures, typically less than 20% of a broker’s EBITDA, are limited and mainly related to management information systems.

Consequently, cash flows are fairly consistent, the report continues. When debt maturity approaches in 2013-2015, financial flexibility should improve as these smaller private brokers prepare for a refinancing or full recapitalization. At this point, according to Ballentine, there should be more consolidation in this segment of the industry.

The Moody’s report offers a picture of a “highly fragmented” market. It says that “For instance, there are approximately 890 regional firms (yearly revenues of $5 million to $500 million per firm) and 5,100 local firms (yearly revenues of $1.25 million to $5 million per firm). Together these two categories account for approximately $23 billion or 44% of yearly brokerage revenues in the US. Logical acquisition candidates include firms whose owners are nearing retirement age as well as firms eager to tap into the additional resources that a national or global firm can offer.”

Monday, October 26, 2009

LIMRA’s CEO Panel Discusses Business In A Tough Economy

New York
A panel of CEOs offered their take on a business landscape that by all accounts at the annual LIMRA meeting here is one of the toughest in recent memory.

During the first day of the 2009 meeting the panel addressed issues posed by Robert Kerzner, LIMRA’s president and CEO that included distribution, rating agencies and the best structure for a life insurer. The three panelists included Robert Chappell, chairman, president and CEO of Penn Mutual Life Ins. Co., Philadelphia; Donald Guloien, president and CEO of Manulife Financial, Toronto; and Theodore Mathas, chairman, president and CEO with New York Life Ins. Co. in New York.

The panelists began by discussing the current economic climate and the lessons that have been learned over the past year. Manulife’s Guloien said he believes we are halfway through the cycle but continues to be concerned about the level of unemployment and the impact that will have on the ability to sell life insurance. The need for better risk management techniques is a lesson that has been learned from this experience, he added. “There has been too much emphasis on quant techniques and not enough emphasis on seat of your pants judgment,” Guloien added.

Penn Mutual’s Chappell discussed facing the “unknown and unknowable” and said that companies have to protect themselves against the unknown by maintaining sufficient capital so that they can keep their promises. He said that companies have eliminated 30-40% of their employee base to improve corporate profits and it is going to take the economy a while to rebound.

New York Life’s Mathas said that there are a few lessons to be learned from the current economic client but “we’ll have to wait and see if they stick. Models have supplanted judgment,” he noted. Sophisticated companies and rating agencies have relied on modeling to help them assess risk, Mathas added. “A model should help you understand risk and not get you comfortable with a level of risk,” he continued. “If a GPS says take a right turn off of a cliff, you are still supposed to look out a window,” Mathas added.

In response to a question from Kerzner on how much capital a company should hold, Mathas responded that “We make guarantees. We should hold more capital than what is would be economically efficient to hold because we make guarantees. That is what we are supposed to do.” Over 20 years, it might be too much to hold in 19 of those years but in the 20th year, a company should be glad it did, he added.

The panelists were then asked by Kerzner whether recent rating agency downgrades are an overreaction or whether they are justified. Chappell said that rating agencies assessed where life insurers are today and projected that out into the future. But in the recent market, there was an inflection point that turned the economic environment topsy-turvy for insurers, he continued. He added that the agencies “piled on” and will probably continue in 2010 when assessing holding of commercial mortgage-backed securities. This could put insurers in a “much deeper hole,” Chappell added.

Guloien said that life insurers have been blaming rating agencies for not catching weaknesses when rating securities but many of these companies have internal departments that should have caught these weaknesses.

And, he added, there is a new reality to which companies need to adjust. Both regulators which are dealing with gaps in oversight and those which consider themselves lucky to have avoided problems they would need to deal with directly will be looking more carefully at life insurers going forward, he predicted.

New York Life’s Mathas said that rating agencies deserve blame but so do others.
When asked about distribution, he added that it is one of the biggest issues that his company focuses on. Mathas maintained that a career agency system was still the best way to distribute life insurance and New York Life does nothing to infringe on that system. For instance, Mathas said that the company does have a direct marketing effort through the AARP, Washington, but that the size of the policies sold are so small that a career agent could not make a living selling them. Consequently, the effort is not competing with agents, he added.

On the issue of mutual versus stock company, Chappell said that the mutual structure is better suited to keep a promise that can span decades. He cited a recent claim on a policy issued in 1927 on a man who was a month shy of turning 112. Stock companies are thinking more on a short-term basis, he added.

Mathas agreed that for a long-term guarantee, the mutual model is “superior.” Part of the way that a stock company increases the value of its stock is to buy it back and increase ROE, he explained. But mutual companies are able to retain the extra capital, he continued. However, Mathas did say that there are well run stock companies.

Guloien noted companies like Mutual Benefit Life and Confederation Life which failed and said that the strength of a company really depends on how well run the company is and not on whether it is a mutual or stock company.

Sunday, October 18, 2009

Few Deals, Much Interest

The Oct. 13 release of a report on life settlement securitizations authored by Standard & Poor’s Corp., New York, is just the latest in renewed interest in life settlement securitizations. Like life insurance, mortgages or any other asset, these transactions pool policies, cut them up like a pie into bonds and sell pieces to investors.

The S&P report says that life settlement securitizations have “attracted investors’ interest in waves over time.” And, it continues, there is renewed interest expressed in the investment class. It goes onto say that investors and originators can see potential benefits such as a lack of correlation to the economy, but there are also inherent risks.

Among the risks and difficulties it cites are the accuracy of actuarial assumptions on the 100+ lives that underlie a transaction. The report, “Uncovering The Challenges In Rating Life Settlement Securitizations,” cites the potential for cash flow mismatch and the uncertainty it creates for payment to investors. S&P analysts Winston Chang and Gary Martucci write that statistical credibility is unlikely to be achieved with a pool of less than 1,000 lives. And factors examined including age, smoking status and gender is not broad enough. Factors including genetic information, occupational histories and living environments also need to be considered, according to Chang and Martucci.

S&P cites a second concern over the ‘insurable interest’ of policies which are sold to an investor and then packaged and sold again to investors who purchase securities. ’If there is an abuse of insurable interest can the policy be enforced?’ the rating agency asks.

The agency also cites a third concern: the accuracy of independent medical reviews used by originators in these securitizations. It goes on to explain that in mortality underwriting insurers “misunderwrite” a very limited portion of their policies and the law of large numbers minimizes that action. In the case of life settlements, the impact is less clear, according to S&P. It states that medical underwriters get a flat rate for each policy written and review the existing medical file rather than require a new physical exam, leaving open a greater risk for underwriting error. It also cites limited historical data comparing projected and actual mortality rates.

Chang and Martucci also raise the issue of the timing of cash flows, noting that a statutory period for payment of death benefits is not as defined as predetermined payment dates for notes. The potential cash flow mismatch could result in a missed payment and default, it added. It also cites a situation where the death of the individual cannot be verified, creating the possibility of years of delay in a payment of a death benefit.

S&P leaves open the possibility of rating these transactions after it addressed the concerns cited in the report and created and published criteria for rating securitizations of this asset class.

To get a better sense of where this market is going, I think it is also worthwhile to read testimony delivered on Sept. 24 before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises ( Several threads came out of that testimony: there have been only a handful of life settlement securitizations, there are a limited amount and type of policies that would be suitable for securitization, so the market’s growth may well be exaggerated; and this is a market that is only suitable for institutional investors.
So, the issue of whether life settlement securitizations ever grow big enough to become a cause for concern may never materialize.

And in theory, one would assume that the fact that institutional investors who are supposed to be conducting due diligence efforts would take care of some of the issues raised by the S&P report including how medical underwriting is done. Then again, given how much due diligence was done on RMBS, maybe that is too optimistic. But nevertheless, the institutional investors who package these transactions and the buyers of these bonds will for the most part be sophisticated investors, not your average investor.

On the issue of insurable interest, there is the potential that there are STOLI policies in the marketplace that could end up in these pools. But with efforts of the National Association of Insurance Commissioners, Kansas City, Mo. and the National Conference of Insurance Legislators, Troy, N.Y., legislation is popping up in states to attempt to tamp down stranger originated policies. Differences exist in the models developed by these organizations and there are differences in philosophy among trade groups weighing in on them including the American Council of Life Insurers, Washington, and the Life Insurance Settlement Association, Orlando, Fla., but the one commonality is the opposition to STOLI.

So, if a regulatory-legislative effort is successful, STOLI may not go away but may be diminished to the point that this could be scratched off S&P’s list of concerns.

Thursday, October 15, 2009

Cost, Such an Inconvenient (And Convenient) Word

Earlier this week, the Sen. Finance Committee passed a health care reform bill introduced by Sen. Max Baucus, D-Mont., the Committee’s chairman. The passage follows an alternative bill passed by the Senate Health Education Labor and Pensions Committee in July. The bills must now be melded into a new bill. The House is also working to blend several bills.

Good news, right? Well that depends on whom you ask. While in theory everyone is on board with health care reform, cost is a word that keeps creeping into the debate. This is a fair enough issue to raise. Do we want to saddle ourselves and our children with the burden of paying huge tabs for more comprehensive health care? Well, no.

But it is also fair to examine cost in a couple of different ways.
First, as many in the debate are raising, is the issue of dollars and cents.
America’s Health Insurance Plans, Washington, delivered sticker shock findings of a recent PricewaterhouseCoopers report which found that a family policy today with an average cost of $12,300 will rise to:
• $15,500 in 2013 under current law and to $17,200 if these provisions are implemented.
• $18,400 in 2016 under current law and to $21,300 if these provisions are implemented.
• $21,900 in 2019 under current law and to $25,900 if these provisions are implemented.

Labor, who you would think would be squarely behind reform, is arguing that at least as far as the Baucus proposal is concerned, the measure would tax the average person imposing a 40% excise tax on insurers of employer-sponsored health plans. Affected plans would be those with benefits of over $8,000 for individual coverage and over $21,000 for families.

But the White House has a few bullet points of its own that emphasize health care savings. It argues that its plan:
• Won’t add a dime to the deficit and is paid for upfront. The President’s plan will not add one dime to the deficit today or in the future and is paid for in a fiscally responsible way. It begins the process of reforming the health care system so that we can further curb health care cost growth over the long term, and invests in quality improvements, consumer protections, prevention, and premium assistance. The plan fully pays for this investment through health system savings and new revenue including a fee on insurance companies that sell very expensive plans.
• Requires additional cuts if savings are not realized. Under the plan, if the savings promised at the time of enactment don’t materialize, the President will be required to put forth additional savings to ensure that the plan does not add to the deficit.
• Implements a number of delivery system reforms that begin to rein in health care costs and align incentives for hospitals, physicians, and others to improve quality. The President’s plan includes proposals that will improve the way care is delivered to emphasize quality over quantity, including: incentives for hospitals to prevent avoidable readmissions, pilots for new "bundled" payments in Medicare, and support for new models of delivering care through medical homes and accountable care organizations that focus on a coordinated approach to care and outcomes.
• Creates an independent commission of doctors and medical experts to identify waste, fraud and abuse in the health care system. The President’s plan will create an independent Commission, made up of doctors and medical experts, to make recommendations to Congress each year on how to promote greater efficiency and higher quality in Medicare. The Commission will not be authorized to propose or implement Medicare changes that ration care or affect benefits, eligibility or beneficiary access to care. It will ensure that your tax dollars go directly to caring for seniors.
• Orders immediate medical malpractice reform projects that could help doctors focus on putting their patients first, not on practicing defensive medicine. The President’s plan instructs the Secretary of Health and Human Services to move forward on awarding medical malpractice demonstration grants to states funded by the Agency for Healthcare Research and Quality as soon as possible.
• Requires large employers to cover their employees and individuals who can afford it to buy insurance so everyone shares in the responsibility of reform. Under the President’s plan, large businesses – those with more than 50 workers – will be required to offer their workers coverage or pay a fee to help cover the cost of making coverage affordable in the exchange. This will ensure that workers in firms not offering coverage will have affordable coverage options for themselves and their families. Individuals who can afford it will have a responsibility to purchase coverage – but there will be a "hardship exemption" for those who cannot.

To look at cost as just dollars and cents is too narrow an approach. I think the more realistic and valuable way is to look at cost as a broader issue and to incorporate opportunity cost and reputational cost as well as the cost to the economy.

If everyone is truly on board with health care reform that will give people access to care and not just offering lip service, then there must be a willingness to look at opportunity cost. We are probably the closest we’ve ever been to having meaningful reform to our system. There are people who have fallen through the cracks or at risk of falling through the cracks. How much longer are we going to wait before we take action? The moment is now. If we don’t seize it, it might be years before we come close again. We can’t wait.

And, if pure reason can’t move us (and if it can’t, that is a sad commentary on our state of affairs,) then maybe vanity can. We are paying a high price in terms of reputational cost. How can we say we are a leader among nations when so many of our citizens are uninsured and many more risk being uninsured? How do you define ‘leader among nations?’ If we continue to let our people go without basic care, we are certainly not a leader when measured by compassion or common decency. We’re fooling ourselves. We believe our own press releases.

So, the next time you hear cost being used as a reason to oppose health care, be expansive and think beyond dollars and cents. Reality is far broader.

Thursday, October 8, 2009

Deferred Tax Asset Discussion Deferred

A call to discuss a controversial proposal for surplus relief by allowing deferred tax assets to be part of statutory surplus is postponed as staff at the National Association of Insurance Commissioners, Kansas City, Mo., gathers last minute comments and does additional work needed to prepare for the call. It is likely that the call will be rescheduled for some time after the meeting of the International Association of Insurance Supervisors, Zurich, Switzerland, after Oct. 15.

The change to SSAP 10, which would provide life insurers with more leeway in applying deferred tax assets was first introduced in November 2008 as part of a package presented by the American Council of Life Insurers, Washington, to provide what it maintained was an immediate need for capital relief following the financial crisis that hit a year ago.

In January 2009, after a public hearing, regulators said that the request was not an emergency, but that they would be willing to look at the issue through the normal channels at the NAIC. Iowa and Ohio, through permitted practices, allowed DTA to be applied as the ACLI had requested.

In a joint letter on Oct. 6, the Consumer Federation of America, Washington, and the Center for Economic Justice, Austin, Texas, opposed the proposed changes and called on the NAIC to “force those states, including Iowa and Ohio, which allowed changes to DTA calculations by bulletin earlier this year, to rescind those bulletins and provide uniform consumer protections across all states.”

The two consumer groups called the proposed changes “another giveaway to insurers at the cost of consumer protection” by reducing surplus with non-liquid assets. The two groups cite the Virginia insurance department which they say questioned the fact that no impact studies have been done. CFA and CEJ say that the proposal will actually speed the decline of troubled companies because as an insurer’s capital position weakens, the insurer will lose the DTA included in surplus and risk-based capital.

Both groups allege that the fact that the relief is limited to stronger insurers suggests that the proposal is “not about consumer protection, but about puffing up insurer surplus and credit ratings.”

When asked whether the use of permitted practices was a backdoor way to implement proposals still being discussed at the NAIC, Birny Birnbaum, CEJ executive director, said that “it is among the problems.” He noted that insurers are major employers in Iowa and Ohio.

Wednesday, September 30, 2009

‘The 30-Day Project’ Wraps Up

This installment of comments completes ‘The 30-Day Project,’ an effort to mark Life Insurance Awareness Month by asking average Joes and Janes three questions:

--What is the first thing that you think of when someone says the word ‘life insurance?’
--What is the best thing about life insurance?
--What is the worst thing about it?

Here are the final round of comments—30 comments for the 30 days of September. I hope you have found this interesting, helpful, or maybe, just a little different. I thought it was refreshing and informative to move away from the many industry experts and just listen to the perceptions of everyday people.

Housekeeper—The money it provided when my husband died. The security it gave me in retirement. The worst thing was making payments when I worked three jobs and had eight children to take care of. But I made the payments and now I’m glad I did.

Manager of café—Not necessary. If you have a family it might be worth it. But, I have bills and don’t make a lot.

Lawyer—Estate planning. It can make it easier to pass on money to heirs. It can be expensive to implement but not as expensive as a large estate tax bill.

Handyman—I don’t need it. The cost is a lot but my wife still wants me to get it. (After questioning.) I have a child and another one. I’ll save and that will be there if they need it.

Retiree—Passing money on. I have a son who is struggling, so I will be able to pass some money to him. The payments were sometimes hard to meet.

Crossing guard—Protection. If anything happens to me, my family will have some protection. The cost is hard.

Maintenance worker—My family. I have children and a wife who need protection. The money could be used for other things.

Poll worker-Protection; caring enough for your family; not protecting them enough.
Social worker—Protection; knowing you are doing the right thing; being fair to all my children.

Caterer—Drain. It can provide money but I need to put my resources into my business.

Office worker—Keeps things steady if someone dies. I think it at least provides something definite when other things are up in the air after a death. It can be expensive though.

Friday, September 25, 2009

NAIC Wrap Up

National Harbor, Md.

When state insurance regulators met this here this week, they accomplished quite a bit. Namely, they adopted a number of major initiatives, advanced an item on deferred tax assets which will now be taken up by the full body of the National Association of Insurance Commissioners, discussed a proposal on residential mortgage-backed securities, market and held a hearing on rating agency responsibility for the financial crisis last year. The last item is part of the process NAIC is undertaking as it considers starting its own ratings initiative.

During the executive/plenary session held on September 23, the full body of the NAIC acted several items that were part of a proposal requested by the American Council of Life Insurers, Washington, last November. ACLI had requested a package of nine items as an emergency request. The NAIC held a public hearing at the end of January 2009 and decided that while some of the items had merit, the items did not need to be advanced on an emergency basis. Consequently, it remanded the request back to appropriate working groups for further consideration.

Among the items that were part of this package and are now fully adopted by the NAIC are:
--amendments to a model regulation permitting the recognition of preferred mortality tables for use in determining minimum reserve liabilities; These amendments allow the 2001 tables to be used prior to January 2007;
--amendments for the adoption to the Valuation of Life Insurance Policies model regulation; These amendments remove restrictions on the use of X-factors. X-factors are experience determinants that the ACLI says allows companies to more accurately reflect actual mortality experience.
--adoption of amendments to the Actuarial Opinion and Memorandum Regulation;
--amendments for adoption of actuarial guideline 1c—interpretation of the calculation of the segment length with respect to the Life Insurance Policy model regulation contingent on adoption of the preferred mortality table changes; The changes are an effort to clarify Regulation Triple-X calculations to prevent technical requirements of the calculation from diminishing the impact of the other requested items.

Another item that is part of the ACLI package is the deferred tax asset request. It has just passed out of the NAIC’s “E” Committee and will now come before Executive/Plenary. The Accounting request concerned the limit on admissible DTAs following GAAP rules for DTAs instead of statutory rules. A DTA is an offset against future taxes. The item that will go before the Executive/Plenary permits increased use of that asset and allows a 3-year carryback. It also prevents DTAs from being used for determining any regulatory triggers that involve admitted assets or statutory surplus. The provision sunsets at the end of 2010 but may be revisited by regulators.

Another financial issue that is working its way through the NAIC is an ACLI request to ease capital requirements for insurers’ holdings of residential mortgage-backed securities. Ratings applied to these “AAA”-rated securities have recently been downgraded, in many cases by several notches. Consequently, the ACLI submitted a Sept. 10 request that NAIC requirements be eased. The issue revolves around whether the rating agencies properly rated them. The ACLI is proposing that an independent third party firm model RMBS losses held by insurers. The results, according to the ACLI letter, will then be applied to a formula which will be applied to determine which of the six NAIC ratings the securities should be assigned.

The issue of the reliability of ratings from rating agencies was delved in a public hearing yesterday. During that hearing, state insurance commissioners repeatedly questioned how meticulous the ratings process of the major ratings agencies.
Representatives for the ratings agencies said that ratings should be used in conjunction with other regulatory tools and that there are various types of ratings that create a broader picture of a company’s strength.

Illinois Director Michael McRaith wondered whether regulators are too reliant on ratings from the major agencies and whether sufficient resources are devoted to the structure to develop these ratings. Grace Osborn of Standard & Poor’s, New York countered that there were ample resources to ensure the robustness of these ratings.

Newly appointed New York Superintendent James Wrynn asked which ratings regulators could rely on and how credibility could be restored to the process. And Connecticut Insurance Commissioner Tom Sullivan asked how regulators can be assured that a herd mentality does not exist putting pressure on analysts to upgrade or downgrade insurers.

Producer licensing and health issues were also finalized during the Executive/Plenary session. Revised Uniform Applications for producer licensing was adopted as was amendments to the long-term care insurance model act and model regulation.

The producer licensing changes proceeded even though New York maintained that renewals should include new background checks because people’s circumstances change. Additionally, New York said that there should be four additional questions included related to: bankruptcy, delinquent taxes, inappropriate use of funds and termination for misconduct.

The changes to the Long-Term Care model are based on laws that Iowa developed on the issue to address prompt-pay and recission issues.