Tuesday, June 30, 2009

Ohio Puts Amended Rule In Place To Identify ‘Hazardous’ Insurers

The Ohio insurance department will put in place amendments to the Hazardous Financial Condition Rule (3901-3-04) that it says will facilitate the department’s surveillance of the financial condition of insurers by setting out standards which the superintendent can use to identify insurers whose condition of their business is hazardous to policyholders, creditors or the general public. The rule was finalized on June 25 and is expected to become effective on July 5. A public hearing was held on May 21. More to come when the final rule is posted.

How Transferable Are Annuity Guarantees?

An annuity subgroup that is working to create uniform standards for annuity filings, particularly those with guarantees, focused part of its discussion on whether there should be floors in guaranteed benefits, particularly on negative resets in guaranteed minimum death benefits for deferred variable annuities. Arkansas regulator Joe Musgrove was one of several regulators who expressed concern that a guaranteed benefit with floors could be meaningless guarantee.

The subgroup is part of a the Interstate Compact National Standards (EX) working group of the National Association of Insurance Commissioners, Kansas City, Mo.
The issue of creating a standard is considered important enough to delay adopting the standard so more work can be done on reaching an agreement that is acceptable to all parties. Life insurers have expressed concern that if contracts are sold to institutional parties, that the use of the guarantees associated with those contracts would be different from the use by individuals: i.e. more likely to be exercised.

Brian Staples of Right LLC, Versailles, Ky., raised the issue of contract holder rights by limiting guarantees and asked regulators what the regulatory benefit would be. Regulators offered several reasons why a standard is needed. One argument stated that if the guarantee is not regulated, it will be priced out of the market and consumers will lose. Regulating the guarantee when it is sold to an institutional investor “strikes a balance.” It was also pointed out that there are consumers who want these contracts and nothing should be done to limit them.

And Florida noted that in addition to protecting consumers, regulators also have the responsibility to protect insurance companies from uses of life insurance that they were never intended for.

Staples said that the issue will be brought up at the state level.

Monday, June 29, 2009

On a Supreme Court decision, and a Proposed Financial Overhaul

It will be interesting to see if a U.S. Supreme Court decision today will have any impact on insurers down the road if a federal charter or optional federal charter for insurers does become a reality. The decision finds that state attorneys general could investigate national banks for lending discrimination among other crimes if they do so through the courts.

The court found that states still can enforce fair-lending laws even if national banks come under federal banking regulation.

Last week, the Obama administration released its plan for an overhaul of financial services regulation. The plan does not take a position on whether insurance should be federally regulated or should continue to be regulated by the states. And it does not reference an optional federal charter.

But, if some form of federal regulation is put in place, it will be interesting to watch and see if the Court decision or the reasoning that went into the decision will be used by states to retain authority to regulate insurers.

The long awaited Obama plan has drawn reaction from many in the insurance industry, including the plan to create a Consumer Financial Protection Agency. During a hearing last week, Gary Hughes, executive vice president and general counsel with the American Council of Life Insurers testified before the U.S. House of Representatives Committee on Capital Markets, Insurance and Government Sponsored Enterprises.
Hughes told the House committee that the interests of life insurance consumers would not be well served by establishing a CFPA. He cites four reasons why insurance products currently have adequate protections. According to Hughes, life insurance products are already heavily regulated; have not contributed to the present financial crisis; the regulation of life insurance is tied to solvency and should not be separated with a separate agency; and, that the in-depth understanding of life insurance would not exist at the federal level and within a CFPA.

Ralph Tyler, Maryland insurance commissioner on behalf of the National Association of Insurance Commissioners, Kansas City, Mo., noted the states have “a wide range of consumer protection tools” and consequently, a new agency is not necessary and would cause overlaps that “lead to preemption of state laws and rules designed specifically to address the complexities of insurance.”

Tyler noted state consumer protections including the Unfair Trade Practices Act, and company and producer licensing. Tyler concludes that a competing federal regulator in the form of the agency “no matter how innocuously envisioned, will ultimately erode a state system that is inherently centrist and undeniably effective.”

Comment on the Obama plan was also offered by Moody’s Investors Service in a commentary titled a “Preliminary Assessment of the Obama Administration’s Regulatory Reform Proposal.”

The new plan creates offsetting dynamics involving, on one hand higher capital requirements, leverage limits, consolidated supervision and more restrictions on products (the latter resulting from a Consumer Protection Agency), which make financial institutions safer while, on the other hand, increasing these firms’ cost of funding and, therefore, making them less profitable, according to Jean-Francois Tremblay, a Moody’s vice president-senior analyst. This may be an overall positive factor for creditors, whereas equity investors might see the lower expected EPS negatively. We would expect a safer company to also have lower borrowing costs, he adds.

The special comment offers an initial assessment including the following:
On a proposed Office of National Insurance, the Moody’s report states from a credit perspective that:

• Insurers have generally maintained strong relationships with their state regulators and have been able to achieve modifications in state rules, forbearance of certain statutory requirements, and have received latitude in getting regulatory approval to extract dividends and/or assets from operating companies. National oversight may reduce this flexibility. This could potentially put downward pressure on the ratings of these firms, but it will take time to resolve and there is no immediate implication. Furthermore, such ratings pressure can potentially be offset by other, positive implications arising from a more consistent regulatory framework across institutions and products.
• The lack of uniformity, both nationally and internationally, may have distorted competition and led to poor and sometimes riskier product innovation and, ultimately, higher insurance costs. The new federal regulatory body is expected to have the powers to address these shortcomings, including the power to propose regulations of financial instruments that are designed to look like insurance products, but that in fact are financial products that could present a systemic risk. More uniform and stringent prudential standards would make for a healthier, arbitrage-free competitive environment that would improve the comparability of firms and products and should culminate in a credit positive for policyholders and senior creditors.

• The revised, broader resolution powers pose a potential risk to junior creditors of an insurance holding company. Under the proposal, if an insurance company were failing, the ONI would consult with the Federal Reserve and the FDIC to determine which parts of the insurance group to support. It would have the power to sell or transfer all or any part of the assets of the firm in receivership to a bridge institution or other entity. This means that a number of creditors, especially the most junior ones, could be left with the part of the original entity that holds the underperforming assets. We will closely monitor how the resolution proposal evolves throughout the legislative process and how likely this scenario could materialize.

• For financial guarantors, the elements of the proposal relating to improved reporting and required retained interest in securitization by lenders may, if enacted, diminish the value added by guarantors as the proposals would be expected to improve transparency and alignment of interest between issuers and investors.

Sunday, June 28, 2009

Ratings Roundup

Here are some of the ratings that were issued by A.M. Best Co., Oldwick, N.J.; and Moody’s Investors Service and Standard and Poor’s Corp., both in New York, in the previous week.

Among the ratings that were issued are:

Bankers Life Ins. Co. has had its financial strength rating downgraded to ‘B-‘ (Fair) from ‘B’ (Fair) and the issuer credit rating to ‘bb-‘ from ‘bb’ by A.M. Best. The outlook for both ratings has been revised to ‘negative’ from ‘stable’. A.M. Best said that the action reflects “weak capital levels on both an absolute and risk-adjusted basis” due in part to the company’s increased exposure to below investment grade bonds resulting from downgrades in prime and Alt-A residential mortgage-backed securities.

However, Best also noted Bankers Life’s good surrender charge protection on its in-force annuity portfolio; decreasing disintermediation risk and the recent improvement in the company’s earnings performance.

MBIA Inc. has had its senior debt rating downgraded to ‘Ba3’ from ‘Ba1’ and a ‘negative’ outlook assigned by Moody’s. The rating agency also confirmed the ‘Baa1’ rating of National Public Finance Guarantee Corp. with a ‘developing’ outlook and changed the rating outook of MBIA Insurance Corp. and supported insurance subsidiaries to ‘negative.’

Moody's said that the confirmation of National's rating with a developing outlook, despite its strong capital profile and operational infrastructure, reflects the uncertainty caused by ongoing litigation challenging the recent restructuring of the group, and the extended timeframe over which such uncertainty may persist. Creditors and counterparties have sued MBIA, requesting that the February 17, 2009 restructuring of the group that led to National's capitalization with some of MBIA Insurance Corp's resources be reversed.

The downgrade of MBIA Inc.'s senior debt rating to Ba3, and downgrade of MBIA Insurance Corporation's surplus notes and preferred stocks ratings reflects the continued severe stress faced by MBIA Insurance Corp as a result of its exposure to ABS CDOs and RMBS securities.

Phoenix Cos. Inc.’s universal shelf registration has been assigned a ‘B+’ senior unsecured debt rating. The company’s other ratings are unaffected as is its ‘negative’ outlook. “The negative outlook primarily reflects the risks inherent in managing the competing tasks that Phoenix faces, which are rebuilding statutory capital to levels commensurate with the rating and providing cash to the holding company to cover its obligations. An additional risk is the execution of a new strategic direction for Phoenix of offering private labeling services for other insurance companies.” Moody's assigns Aa3 IFS rating to Principal National Life

Principal National Life Ins. Co., a unit of Principal Financial Group, has been assigned an ‘Aa3’ insurance financial strength rating by Moody’s. “The ratings are based on PNLIC's reinsurance agreement with its sister company, Principal Life Insurance Company (Principal Life -- IFS rating at Aa3, stable), for 100% of its liabilities, and on its full integration with Principal Life. Principal Life is the PFG's primary life insurance operating subsidiary.”

Prudential Financial, Inc.’s senior debt rating of ‘Baa2’ and the ‘A2’ long term financial strength rating of Prudential Ins. Co. of America and its affiliates have been affirmed by Moody’s. Additionally, the outlook on the company has been changed to ‘stable’ from ‘negative.’ The actions were prompted by Prudential’s recent $2.4 billion capital raising effort--$1.4 billion in common equity and $1 billion in senor debt.

However, Moody’s said that it will continue to monitor Prudential’s exposure to investment losses from real estate related, corporate and structured asset classes as well as its exposure to variable annuities.
Sun Life Financial Inc.’s senior unsecured debentures have been assigned an ‘A+’ by Standard and Poor’s. The proceeds from the senior unsecured debt will be used for general corporate purposes and will be treated as operational rather than financial leverage.

Wednesday, June 24, 2009

Checkmate? Insurance Bills On Hold As New York Senate Bickers

The New York state Senate power struggle between Democrats and Republicans for leadership of the body is threatening to hold up several insurance bills.

As of June 24, the battle continues with Governor David Paterson calling an emergency session and promising to continue doing so until the impasse is broken. After a defection of two Democratic state senators to the Republican party and then the return of one, the Chamber is tied at 31-31. Efforts to create joint leadership are currently failing. The Governor is threatening to go to court to get action if the Senate is not back in session on June 25.

Among the bills that are on hold and potentially in danger is a Life Settlement bill that developed by the New York insurance department. The New York state assembly has passed A 7131, sponsored by Assembly insurance committee chairman Joe Morelle, D-132nd A.D.

Other bills that are on hold until the feud is settled are:
--a package of four bills introduced by the Governor that will (1) extend the period of time for the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage from 18 to 36 months; (2) permit families to cover their young adult dependents through age 29 under their job-based insurance; (3) require health insurers to get approval from the Superintendent of Insurance before increasing premium rates; and (4) enact a series of managed care reforms to protect the ability of consumers who have health insurance to timely access necessary health services.

Among the provisions this package include is the reduction of a prompt-pay time frame from 45 days to 15 days for electronically submitted claims so doctors and hospitals are paid more quickly and the prior approval of health insurance rates instead of the current “file and use” system in which premium rate increases do not have to first be justified to the New York Insurance Department.

The Governor’s bill is considered important for young adults because the 19-29 age group represents 31% of uninsured New Yorkers, according to a statement from the Governor’s office.

Tuesday, June 23, 2009

President Obama Addresses Health Care, Consumer Protections

President Obama’s press conference earlier this afternoon offered some interesting points for the insurance industry. Here are some takes from the address and the question and answered that followed with the White House press core.

On health care, the President offered the following:

Any plan would have to control cost; “Unless we act, one out of every five dollars that we earn will be spent on health care within a decade. And the amount our government spends on Medicare and Medicaid will eventually grow larger than what our government spends on everything else today.”

So, any bill that arrives from Congress that doesn’t control costs won’t be a bill he says he will be able to support.

On insurance companies, he offered the following:

A public health plan would be an important tool to “discipline insurance companies.” An exchange or marketplace plan would provide an option that is not profit driven and would keep down administrative costs as well as offer quality care at a “reasonable price.”

On the possibility of driving insurers out of business:

“Why would it drive private insurers out of business? If private insurers say that the marketplace provides the best quality health care, if they tell us that they're offering a good deal, then why is it that the government -- which they say can't run anything -- suddenly is going to drive them out of business? That's not logical.”
But just conceptually, the notion that all these insurance companies who say they're giving consumers the best possible deal, that they can't compete against a public plan as one option, with consumers making the decision what's the best deal. That defies logic, which is why I think you've seen in the polling data overwhelming support for a public plan.”

On financial services reform:

“I would say that all financial regulators didn't do everything that needed to be done to prevent the crisis from happening.“

He also noted that there were too many gaps in regulation and not sufficient laws on the books such as in the non-banking sector.

The Fed should deal with systemic risk in any financial services oversight reform and a separate agency should address consumer protection, he added.

Part of that consumer protection includes annuities, he noted.

“But that's not the only part of financial regulation. One of the things that we're putting a huge amount of emphasis on is the issue of consumer protection -- whether it's subprime loans that were given out because nobody was paying attention to what was being peddled to consumers, whether it's how credit cards are handled, how annuities are dealt with, what people can expect in terms of understanding their 401(k)s. There's a whole bunch of financial transactions out there where consumers are not protected the way they should, and that's why we said we're going to put forward a consumer financial protection agency whose only job it is to focus on those issues.”

Friday, June 19, 2009

Obama Regulatory Plan Answers Questions, Creates More

President Obama’ financial services regulatory reform plan, announced on June 17, is answering some questions and creating more.

Insurance trade groups with varying positions on insurance regulation and the National Association of Insurance Commissioners, have all found points they like in the plan, but also points of clarification that they were still awaiting.
The plan calls for the Federal Reserve in consultation with the U.S. Treasury Department and external experts to propose recommendations by Oct. 1, 2009. It is in response to the financial meltdown last September that helped drag down an already straggling economy.

The plan would:
• Recommend firms for identification as Tier 1 Financial Holding Companies (Tier 1 FHCs) that should be under consolidated supervision by the Federal Reserve ;
• Create a Financial Services Oversight Council, chaired by Treasury to fill regulatory gaps that would include heads of federal financial regulators;
• Create an Office of National Insurance;
• Create a Consumer Financial Protection Agency to focus on consumers in the credit, savings and payment market;
• Better regulate securitizations which the white paper says actually concentrates risk as well as money market mutual funds;
• Call on accounting bodies including the Securities and Exchange Commission and the Financial Accounting Standards Board and the International Accounting Standards Board to review accounting standards to provide forward-looking loan loss provision practices that include a broader range of available credit information;
• A review of fair value accounting rules; as well as many other points.

Among the points that are still open are is whether in the long term, insurance should be regulated by the states or the federal government. In the short term, the paper states that “functionally regulated and depository institution subsidiaries of a Tier 1 FHC [financial holding company—read too big to fail.] should continue to be supervised and regulated primarily by their functional or bank regulator, as the case may be.”

But it also states that “Increased national uniformity [can come] through either a federal charter or effective action by the states.” Other points that the Obama plan make is that “the current crisis did not stem from widespread problems in the insurance industry,” but it also notes that the current system of insurance regulation is “highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient.”

During a press conference yesterday, NAIC CEO Terri Vaughan commended the “stability and strength” which the Obama plan could provide to the financial services industry and said that it was consistent with the “collaborative effort and information sharing” that state insurance commissioners want to see. Vaughan said that state regulators should be part of the council that is being proposed.

And she says that while it is a “fair statement” that works need to be done on uniformity, she says that work is under way as evidenced by 36 states participating in the Interstate Insurance Product Regulation Commission, a single point of filing for life insurance products.

She also notes that it is uncertain how broad the scope of the new Consumer Council would be and that it should not duplicate consumer protections that the state insurance system currently affords. Vaughan says that work on suitability of annuity products and the Unfair Trade Practices Act are needed and if the Council ultimately does encompass insurance regulation, it sets a floor that states could go beyond with current laws and regulations.

Consumer groups praised the plan for the federal Consumer Financial Protection Agency, noting that it would eliminate allowing financial institutions to “shop around” for the “weakest form of regulation.” The joint statement was made by groups including the Consumer Federation of America, U.S. PIRG, Public Citizen, Consumers Union, the National Consumer Law Center, the Center for Responsible Lending, Consumer Action and Consumer Action.

All the major trade groups also weighed in on the Obama plan. The following is a thumbnail:
--The American Insurance Association and the American Council of Life Insurers noted that the White Paper says that insurance is systemically important to the American people as well as being a global enterprise and the state regulatory system is inefficient. It also noted that the paper identifies a federal charter as an option and applauded the proposal to create an Office of National Insurance.
--The National Association of Mutual Insurance Companies said that the White Paper implicitly recognized that property-casualty companies had performed “exceptionally well throughout this crisis and do not pose a risk to the financial system.” NAMIC also noted that the ONI proposal paralleled a proposal for an Office of Insurance Information which NAMIC has endorsed. And, it said that the paper leaves open the possibility that an ONI could be undertaken through the current state-based regulatory system.
--The Property Casualty Insurers Association of America also said it is pleased that the paper acknowledged insurers did not cause the current crisis and agrees that a federal systemic risk overseer is needed and that the plan will not create a duplicative layer of federal regulation for well capitalized property-casualty insurers.

Monday, June 15, 2009

NAIC Summer Meeting Coverage--Mortgage Factors, Rating Agencies, Suitability And Tight Budgets

Shuttling between the Minneapolis Convention Center and the National Association of Insurance Commissioners host hotel, regulators managed to cover a lot of ground.

RBC Mortgage Factors
The morning started with the American Council of Life Insurers and Nationwide Companies making its case before the Capital Adequacy “E” Task Force to reconsider a temporary mortgage factor used to establish risk-based capital. They had made their case to the Life Risk-based Capital Working Group, to no avail.

The problem is the temporary nature of the change which would alter the factor known as the mortgage experience adjustment factor to a range of 75%-125% from 50%-350%. The ACLI and regulators are working on a permanent fix and this was viewed as a place marker until that work was completed.

John Bruins of the ACLI and Charles Breitstadt of Nationwide Companies argued that the temporary nature of the change for 2009 will create volatility in company portfolios. And, they argued, it is not just the volatility but the uncertainty surrounding what the change will be and how companies should plan for it.
Lou Felice of New York said that the group would leave open the possibility of revisiting the issue if a permanent factor is not found by year end. The discussion followed with the adoption of the proposal.

The group also took up an ACLI proposal on residential mortgage-backed securities addressing how rating agency downgrades in some cases to ‘CCC’ from ‘AAA’ in a fell swoop was impacting RBC charges. And, the problem, according to ACLI, is that by basing RBC charges on ratings, the rating agencies making the assignments look at first dollar losses, not the potential magnitude of loss. Industry is arguing that there should also be an examination of the security’s seniority in the capital structure.

There was a discussion among regulators and industry about how it might be worth considering if RBC was not so tied to rating agencies’ ratings.

Rating agencies
The topic of rating agencies came up again later during the NAIC Industry Liaison Committee when Deirdre Manna of the Property Casualty Insurers Association of America asked whether the NAIC intended to start its own system of rating municipal bonds. Susan Voss, Iowa insurance commissioner and NAIC vice president, said that there was no intention at this time. The NAIC has not filed for NRSRO with the Securities and Exchange Commission, she said. Although she added that the during a visit with the rating agencies, they acknowledged that they had missed the boat on rating many of these securities, a fact she said she found “disheartening.” Manna replied, “we agree that there is a problem with rating agencies, we just don’t think that the NAIC should become one.”

During the exchange, Manna also raised the issue of the NAIC budget, requesting that because of tight budgets and bad times all around, it be zero growth this year. Voss said that there is a careful line by line look at how the NAIC can save money and said that she would make industry’s concerns known.

Suitability came up again in the Life & Annuities “A” Committee. The ACLI took another pass at getting an exposure draft of the latest suitability model put aside in favor of creating a guidance document. The Insurance Marketplace Standards Association’s Don Walters expressed support for the idea but the “A” Committee wasn’t convinced. Its members plan to continue with the development of a model. Birny Birnbaum, an NAIC funded consumer and executive director with the Center for Economic Justice noted how the previous model was a 4-year “struggle from the get go.” He asked why IMSA couldn’t create guidance to the exclusion of the development of a model. And, then he questioned IMSA, saying that it is supposed to be “an honest broker which monitors insurance. “It would be a grave mistake to do anything to stop what the working group is doing and offer interpretive guidance. What is it anyway, but a desk draw rule that the industry has asked [regulators] to stop doing.”

Sunday, June 14, 2009

NAIC Day 1—Annuities, Health Reform and PBR For Good Measure

The following are some of the issues that were discussed on June 13 during the summer meeting of the National Association of Insurance Commissioners here in Minneapolis.

Annuity Suitability

A new annuity suitability model was exposed in spite of very vocal opposition from groups including the American Council of Life Insurers, the Insurance Marketplace Standards Association, the National Association of Variable Annuities and the National Association of Insurance and Financial Advisors. Iowa and Ohio declined to vote for exposure saying that the changes were less than a day old and that the draft with the changes had not even been handed out to regulators. Jim Mumford of Iowa declined to vote on a document that he hadn’t seen. Other regulators who voted to expose the changes noted that the draft was being exposed in order to provide everyone an opportunity to offer further comment and that it was not being advanced at this point.

Reasons for the strident opposition included the cost of verifying the suitability of contracts and creating a “bright line” test for age. During the discussion, it was also reiterated from a June 12 working group session that the amended model makes the insurer responsible for each sale of an annuity and the suitability review. So, the previous concept of a ‘red flag’ section within the model is no longer necessary. Joe Musgrove of Arkansas says that the insurer can choose the method to accomplish this end, as long as it gets done.

It was also noted that under the Unfair Trade Practices Act in place in most states, a pattern of abuse has to be established, not just a single instance of misconduct.
There was also a lengthy discussion over whether Section 13 should be removed. The section would require producers to compare the features of an annuity and “any financial product, other than a security that is not an annuity that is replaced or is the source of funds for the solicited sale.” It also would prohibit the sale of an annuity if the source of funding was a reverse mortgage.

Don Walters of IMSA recommended that an interpretive guideline be developed rather than a new model because it would provide “clarity” to a model that is already in place in many states. He noted that U.S. Sen. Herb Kohl, D-Wisc., is promising to revisit the issue and that it is specious to believe that this model will be put in place in states. If the issue is revisited by the senator, Walters asked “What will the NAIC have to report?”

Lee Covington of NAVA said that the draft references FINRA rules and it would be good to get FINRA’s input and see if there should be a discussion about harmonizing FINRA Rule 2821 which addresses VA suitability with the NAIC suitability draft.

National Health Insurance Reform

Sally McCarty, former Indiana insurance commissioner and currently, an NAIC funded consumer representative urged commissioners to support a public health option as Congress develops bills to address health care reform. The request was made during the NAIC Consumer Liaison Committee session. Pennsylvania insurance commissioner Joel Ario explained that the NAIC has not taken a position in the debate because there is no consensus among membership. To speak on an issue in which there is no consensus will diminish the NAIC’s voice when it speaks on issues in which it does have consensus, Ario added.

Credit Scoring

Credit scoring was also addressed during the session. Birny Birnbaum, a funded consumer who is also executive director of the Center for Economic Justice, cited statistics indicating a worsening economy and said that factors such as banks closing credit card accounts are negatively affecting the credit scores of responsible consumers. To use credit scores in underwriting without actuarial proof to justify the use of those scores is wrong, he said. He noted that the NAIC does not have a credit scoring model while the National Conference of Insurance Legislators does, although he noted that the NCOIL model could be improved. Earlier in the day, during the NAIC State Government Liaison Committee, Oklahoma Commissioner Kim Holland said that both consumer reps and insurers had offered cogent arguments regarding the use of credit scoring during a recent NAIC hearing in Washington and insurers had emphasized that it was a legitimate underwriting tool.

Market Conduct Annual Statement

During that session, responding to a question from state Rep. George Keiser, R-Bismarck, and an NCOIL vice president, Holland said that a lengthy survey is being sent to seven states of varying sizes to find out which market conduct ratios they use or don’t use. The survey will help provide clarity and offer consumers valuable information that will help them assess a company before buying a product, Holland says.

Systemic Risk and Principles-Based Reserving

Also during the Government Liaison session, the question of a systemic risk regulator was raised. Terri Vaughan, the NAIC’s CEO, said emphatically lawmakers are “clearly going to create” systemic risk oversight and regulators must now determine how to organize themselves in a national system. But NCOIL’s Keiser said that the constant use of the term “a seat at the table” creates the public perception that NAIC supports federal regulation and it is necessary to get the message out that a “state solution is the right solution.”

The issue of a principles-based reserving system was also raised. The discussion comes on the heels of a critical article in The Washington Post which cites campaign contributions to commissioners involved with the development of PBR received from insurers who support PBR. It notes PBR is being developed at a time when there is great concern about government giving all companies too much freedom and not enough regulatory oversight.

When asked, the NAIC’s Vaughan responded that in the current environment, there is a need to rethink the use of internal models which would change the ability of regulators to oversee what is going on as companies determine reserving. She says that the current project is a combination of principles-based and rules-based reserving that has both a minimum floor and a deterministic approach to reserving that is more conservative. A new system is needed because regulators were spending countless hours creating new actuarial guidelines as new products and product features were developed.

Climate Change and Global Warming Task Force

Industry representatives say that a decision not to develop guidelines to determine how to answer a survey of 8 questions is disappointing because the guidance would have helped create more uniform answers.


The Reinsurance “E” Task Force voted to open up the Credit for Reinsurance Model Act and Regulation for further work. One interested party wondered if it would provide an opportunity to bring national reinsurers and port of entry reinsurers, two new categories for reinsurers for other countries more firmly under the auspices of the NAIC. The two categories were created under the Reinsurance Regulatory Modernization Act of 2009 which seeks to address a global world in which many countries have one insurance regulator rather than a system of many jurisdictional regulators such as the U.S. state-based system of regulation.

Thursday, June 11, 2009

Pop Open The Champagne (Well At Least Crack A Smile)

After 4 years, efforts to create a principles-based system of reserving took a major step forward when the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., adopted a revised Standard Valuation Law model. The vote of 10 to 0 with New York abstaining took place late this afternoon in Minneapolis at the start of the NAIC’s summer meeting here.

New York abstained because there are still questions that are unanswered, according to the discussion. It had proposed two amendments both of which were not brought to a vote because of motions other regulators adopted. The proposed New York amendments addressed the issue of whether deposit contracts are covered and whether the SVL should be applied retroactively.

LHATF regulators maintained that the model allows states to cover deposit contracts if their laws require it and making language in the model more restrictive was not necessary and might even require another exposure of the document. They also said that previous contract restrictions would prevent retroactive application of an amended SVL because earlier versions of the law are actually named in many older contracts.

The reaction following approval of the project which had hundreds of actuaries, regulators and industry executives working thousands of hours ranged from joy to cautious optimism. Some reaction is more tempered because a major issue that still needs to be considered is whether a change to the SVL will impact the tax treatment of life insurance and how a solution can be developed.

The project was advanced but with the provision that LHATF will recommend that it not be fully adopted by the NAIC until a Valuation Manual, a living document that explains how to apply the SVL, is completed. John Bruins, a life actuary with the American Council of Life Insurers, Washington, and Norm Hill, a life actuary, said that principles-based reserving should not be brought to legislatures in pieces but as a comprehensive package.

Life insurers argue that the current reserving system does not accurately reflect the risk in a life insurance company and regulators criticize how the 150-year old system does not provide nimble, flexible reserving.

Donna Claire, who is spearheading the effort of the American Academy of Actuaries, Washington, to put a principles-based reserving system in place, expressed her joy that a major piece of the PBR project had received the nod, with a pithy, “Yes! Yes! Yes!” when asked for her reaction.

“We have a piece of the package-a significant piece,” offered the ACLI’s Bruins. And, Paul Graham, a life actuary who is also arguing the case for the ACLI, said, “a lot of hard work has culminated [in this vote] but there is still a lot to do.”
Larry Bruning, chief actuary with the Kansas insurance department and LHATF vice chair with Leslie Jones of South Carolina, said that the new SVL model will help to create a system where regulators do not have to apply band-aids to reserving products that come up as products are developed or change.

And, he said, a complete package that is ready to be brought to legislatures does not have to wait until all products have new reserving guidelines but could be ready if life insurance requirements are created. A portion of the new reserving requirements addressing term insurance and universal life insurance would be a sufficient start to show how the system is being developed.

What still remains to be addressed and what is critical, said Bruning, is how the Treasury will view a new SVL. Technically, the tax treatment of life insurance is tied to an older, more conservative version of the SVL. Treasury can give its blessing to the new SVL. Or, if it declines, Bruning said that regulators will have to see if a net premium methodology offered by ACLI will be acceptable to regulators.
Bruning said that the SVL and the Valuation Manual could be fully adopted by the NAIC in 2010-2011. However, it would not become operative until 75% of states adopt the new model.

He also addressed the issue of bringing a new system to legislatures that some view as relaxing requirements following a national financial meltdown that many Americans attribute to lax regulation-although not necessarily lax insurance regulation.
The new system is actually requiring better protection by looking at risk that go beyond mortality and interest rate risk, Bruning explained. Companies will have to account for counterparty, liquidity, legal and business risks, among other risks, he added.

NAIC's LHATF passes amended SVL model

At the LHATF meeting of the National Association of Insurance Commisioners summer meeting, an amended SVL passed 10 to 0 with N.Y. abstaining. The vote was half an hour ago. Details later.

Friday, June 5, 2009

Capital and Surplus—The Debate Continues

The capital and surplus argument continues. If you remember, late last year, there was a request by the American Council of Life Insurers, Washington, to advance a 9-point proposal to release what it says are redundant reserves to help insurers cope with what everyone would agree are trying financial times. It is the corporate equivalent of the average Joe and Jane digging for change in their sofa.

The request culminated in a Jan. 27 public hearing and a cliff-hanger public vote which denied immediate relief but did allow for the request to be considered using the typical process at the National Association of Insurance Commissioners, Kansas City, Mo.

Well, fast forward to early June. Task forces are taking action in order to move their capital and surplus assignments up to their parent committees so commissioners can take action on it either at the summer NAIC meeting next week or shortly thereafter. The NAIC’s Life & Health Actuarial Task Force did so earlier this week. It reviewed Model 815 which addresses using preferred mortality tables retroactively, one of the proposals that life insurers say would help them pinpoint the correct amount of reserves they should hold.

The group looked at three amendments: two from the ACLI and one from California. One amendment to the model which allowed for commissioners to rely on the opinion of a company’s domestic commissioner sailed through. The other two required enough discussion to push back a potential vote of LHATF’s parent, the Life & Annuities “A” Committee to the NAIC summer meeting next week.

ACLI’s Paul Graham argued that if a company seeks retroactivity, it would have to show reserves are adequate when the request is made, that any accounting issues can be worked out later and that the test would have to apply to all 2001 CSO policies so that there would not be any gaming.

But regulators expressed concerns ranging from locking into retroactivity by block of business to issues of discrepancy with reinsurance requirements in the NAIC’s accounting practices and procedures manual. For instance, Sheldon Summers, a life actuary with the California department, asked what would happen if the amount of reserve credit exceeds the income it expects to receive from a policyholder.
The motion to allow retroactivity failed in a 7-6 vote with New York abstaining.
LHATF then looked at a motion from California which replaced the current document up for exposure with a version that reflects California’s issues on accounting and reinsurance. That motion passed with a 7-4 vote and Connecticut and New York abstaining.

The ACLI then withdrew a request to review a related request on Model 830 because it paralleled its requests it made in Model 815. LHATF then advanced guidelines 1C which addresses segmentation and 822 which reduces X-factors on deficiency reserves, in preparation for the summer meeting.

Wednesday, June 3, 2009

Variable Annuities Discussed During S&P’s Insurance Conference

There was a very interesting and very crowded session on variable annuities yesterday during the annual insurance conference offered by Standard & Poor’s Corp. The session started with a question from Robert Hafner, associate director with Standard & Poor’s Corp. on the state of the variable annuity market.

In the short term, VA carriers will be adjusting their products, offering lower interest rates and increasing fees as well as bolstering their hedging programs, according to Kenneth Mungan, principal and financial risk management practice leader with Milliman, Inc. In the long term, they will need to rethink their whole product.

While adjustments will be made, there will be “no sharp turns to the left or to the right,” according to Frederick Crawford, executive vice president & chief financial officer with Lincoln Financial Group. Lincoln will review product design, pricing, and its guarantees, he told attendees of a session on variable annuities.

Milliman’s Mungan pointed out that investors in VA writers do not have the appetite for leverage and unhedged product lines and insurers will need to offer guarantees on a sustainable basis, keeping this in mind. “As long as there is a sustainable model, there will be plenty of investors,” he said.

Mungan also cautioned that “the solution might be sewing the seeds of the next crisis.” If business sold now is later viewed as unattractive to the contract holder, then there may be disintermediation in the future, he explained.

Michael Wells, chief operating officer with Jackson National Life Ins. Co., says that his company has a different approach. A portion of Jackson National’s VA portfolio has subaccounts in passive index products that are easier to hedge and efforts are made to sell products that can be internally hedged. Additionally, products are sold that allow the company to adjust features and withdraw features which have unfavorable pricing. Wells also says that if a GMAB annuity is going to be sold, there needs to be more flexible pricing at the point of sale.

Milliman’s Mungan said that while any carrier can buy a derivative hedge, reinsurance may be even more valuable because it is a validation of the product. If a reinsurer feels confident enough to offer reinsurance on a particular product, “it is an external validation of that product.”

Tuesday, June 2, 2009

Level Talk About A Jolted Industry

I always look forward to the Wall Street analysts’ panel during Standard & Poor’s annual insurance conference because the talk gets right to the heart of the matter. This year was no different, with the discussion tackling everything from variable annuities to CDS. It started with David Havens, a managing director with Hexagon Securities warning attendees that “it is way too early to say that the worst is over. We may be scraping the bottom, but some of the [current] problems may be weighing on the insurance industry for quite some time.”

That’s enough to get anyone’s attention. Just to make sure the crowded room was listening, Jimmy Bhullar, a senior life insurance analyst with J.P. Morgan followed with the observation that variable annuities do have a future. “The product has a future but I don’t know if some of the companies selling them have a future,” he remarked. Those that can do a good job of risk management will have a future ahead of them, he noted.

Part of the issue, are the generous terms carriers offered to distributors and generous guarantee terms in the product that can be as high as 7% return on the product, according to the discussion. For those who can offer ‘plain vanilla’ products without aggressive guarantees, there is a good future, Bhullar says.
When the issue turned to a discussion of accepting TARP money, there was a general opinion that accepting it was a negative for a company, suggesting an “underlying issue.” It was also noted that banks want to pay back TARP money to be free of any government requirements.

The impact of future inflation was also raised during the analysts’ discussion. Jay Cohen, a managing director of Bank of America-Merrill Lynch, cited risks such as the devaluing of financial assets and on the liability side, the impact on loss reserves. The real risk is not inflation so much as “surprising inflation,” he added.
On insurance linked securities, it was acknowledged that CAT bonds are on ice for a while. Havens explained that TALF related assets need to be securitized first before insurance related markets are securitized.

Monday, June 1, 2009

Standard & Poor's Insurance Meeting Coverage

Standard & Poor's is holding its annual insurance meeting today and tomorrow in New York. Look for live updates at Jimsconn at twitter.com and Jim Connolly on Linkedin.