State insurance legislators discussed everything from principles-based reserving to Rule 151A during the summer meeting of the National Conference of Insurance Legislators, Troy, N.Y. But the real issue of the first day of the summer meeting here was a model law that would regulate credit default swaps, an area some industry representatives question is actually insurance.
After a lengthy discussion of whether to advance the model, a decision was made to defer a decision so that more work could be completed. The discussion on July 9 comes a day before Congress is expected to discuss how the financial instruments should be treated.
The following is a breakout of what state legislators and speakers at the meeting had to say:
Regulation 151A: Susan Voss, Iowa insurance commissioner and vice president of the National Association of Insurance Commissioners, Kansas City, Mo., said the issue would be one of several discussed with Mary Shapiro, chairman of the Securities and Exchange Commission, when regulators meet with her next week. Voss also discussed an effort in Congress that would exempt fixed annuity products from being regulated as securities when they are insurance products and that was gaining sponsorship.
Voss was joined by Jim Poolman, a former North Dakota insurance commissioner who is now representing American Equity. Poolman told legislators that a court decision on a suit filed in District Court in the District of Columbia that challenges the SEC ruling could be handed down by the end of August. The decision, he says, could: vacate the rule if it finds that it violated federal law; remand the issue back to the SEC; or put it through as written.
Suitability: The NAIC’s Voss said that a lot of the work on the model update should be completed by the fall NAIC meeting in September. John Gerni, regional vice president-state relations with the American Council of Life Insurers, Washington, expressed concern that the proposal is “overly prescriptive” and Voss responded that this is not the intent of regulators.
Principles-based Reserving: Paul Graham, the ACLI’s chief actuary, said the current NAIC draft is “rule intensive,” noting that there are 191 pages of rules on how to determine reserves to replace four to five pages that had previously been part of the Standard Valuation Law. Voss responded that regulators wanted to ensure that there are sufficient reserves. “We are trying to right size reserves so that people are buying products at the right price.”
State rep. Bob Damron, D-Nicholasville, Ky., and NCOIL president-elect, responded that companies have expressed concern to him that the large companies will be given an advantage over smaller ones but Voss said that she had spoken with larger companies that will have greater capital requirements if PBR is put in place. Damron said that if there is a perception that reserves are being reduced, then it could support the argument for federal regulation.
But Nancy Bennett, a senior fellow with the American Academy of Actuaries, Washington, said that the essence of PBR is that “it aligns risk with reserves, making companies safer.”
Credit Default Swaps: Delegate Bob Marshall of Virginia said that financial guarantees are insurance even if they are not called such. And, he asserted that they need to be regulated. “My constituency is now paying for your market decisions. Regulation is needed for the common good…We can’t continue this roulette wheel game that is going on. We need governance here.”
George Keiser, R-Fargo, N.D., and NCOIL vice president, concurred, noting that the NCOIL model draft grandfathers currently underwritten financial guarantees unless there is a substantial change in the language of existing contracts or there are new contracts. The model draft is spearheaded by Assemblyman Joseph Morelle, D-Rochester, New York.
And he responded to the assertion by industry that regulating CDS might shrink the availability of these products and credit. “I have never seen it more difficult to get credit in my life. For us to go back to where we were [not regulating CDS] is not acceptable.”
But Robert Pickel, CEO of the International Swaps and Derivatives Association, New York, said that CDS play an “important role in the economy,” lowering the cost of borrowing. He said the markets are very sensitive to uncertainties, “and that whether or not regulation of CDS as insurance would impact the market remains to be seen.”
The ACLI’s Gerni said that it is possible a change in the market will diminish the availability of these financial instruments. And, for instance, he explained that in the case of General Motors bonds which declined to a value of zero, life insurers that were hedged with CDS came out “the significant winner.”
Dave Sandberg, representing the Academy, explained that by using a traditional actuarial approach for these products, the possibility of these products unraveling in the future is not addressed. “Unless you tie reserving to the actual risk, you might be surprised,” he explained.