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.