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.”