Friday, December 31, 2010

S&P Looks at 2011

Standard & Poor’s Corp., New York, is reporting that 2011 will be a year for more optimism in the insurance industry, although not exuberant optimism.
The rating agency offered its assessment of different insurance sectors in commentaries released earlier this month. S&P’s take on 2011 is as follows:

Life Insurance
The life insurance market’s outlook is revised to ‘stable’ from ‘negative’ due to stronger balance sheets, recovering financial markets and less risky liability profiles. For instance, according to S&P, variable annuity writers have increased their hedging of older in-force business and have made new offerings less risky by lowering guaranteed benefit bases, making investment elections more restrictive and charging higher fees.

However, the good news is tempered by some sobering observations: fierce competition, the impact of low interest rates on profitability and the potential for commercial real estate losses.

Many companies are offering “commoditized products through independent distribution where competitive pricing and producer compensation are crucial to sales.” For instance, during 2010, some companies have seen sales of term life insurance rise or fall by 20% or more, reflecting their pricing actions or the actions of their competitors, according to S&P.

And, low interest rates could impact the interest margin between earned and credited rates for fixed annuities and universal life insurance as well as variable annuity writers. Most insurers have “room to maneuver before reaching contractual guaranteed minimum interest rates on more recent blocks of business, but “interest-sensitive products will be constrained until rates pick up.” Rates will be manageable in 2011 but could be a drag on earnings if rates don’t increase by 2012, the rating agency says.

In spite of these challenges, S&P maintains that there are bright spots for life insurers: retirement income and the underinsured middle market. The key for insurers will be to overcome the products’ greater risks than those presented by traditional life insurance products.


Property-casualty insurers faired pretty well during the recent economic downturn, according to S&P. However, this segment of the industry will continue to contend with issues such as lower interest rates and weak pricing, the rating agency adds.
There is a real divide between how commercial and personal lines are performing, according to S&P. While personal lines have shown improvement since 2008 because of factors including more favorable pricing, commercial lines are challenged by a sustained soft market marked by price cutting that is reducing profits, says S&P. Lower pricing and decreased investment income has strained earnings, the rating agency adds. And, it says, commercial lines with long-tails where companies usually don’t know about or settle claims for at least a year might be concealing “the unfavorable market's full effect on profitability.”


Health insurers performed better than expected in 2010, S&P says. And, going forward, industry risk appears to be moderating and business opportunities measured by growth and retention and access to capital are stabilizing, it continues. However, margins are expected to be thinner than 2010 results and even with an increase in payroll employment, growth is expected to be slow, S&P adds.

Workers Compensation

S&P offers its assessment of this segment of the industry by noting that “the U.S. property/casualty (P/C) workers' compensation insurance industry has reported underwriting losses in all but three of the past 20 years. And future underwriting profitability in this sector doesn't look promising, at least
over the next two years.”

Thursday, December 23, 2010

NAIC’s IIPRC and NIPR Bodies Elect Officers

Two affiliate bodies of the National Association of Insurance Commissioners, Kansas City, Mo., have held year-end elections.

The Interstate Insurance Product Regulation Commission (IIPRC) elected new 2011 officers during a special election Dec. 20. The new officers are: New Hampshire Insurance Commissioner Roger A. Sevigny, chair; North Carolina Insurance Commissioner Wayne Goodwin, vice chair; and Missouri Insurance Director John M. Huff, treasurer. The new officers assume their roles immediately.

And, the board of directors of the National Insurance Producer Registry (NIPR) elected its 2011 officers on Wednesday, Dec. 15 during a teleconference meeting.

Alaska Insurance Director Linda Hall was re-elected NIPR president. Hall has been a member of the NIPR board since June 2003 and served as president since December 2004.

William Anderson, senior vice president of law and government relations for the National Association of Insurance and Financial Advisors, Falls Church, Va., was re-elected vice president. Kentucky Insurance Commissioner Sharon P. Clark was elected secretary/treasurer.

NIPR is governed by a 13-member board of directors, with six members representing the NAIC and six members representing industry trade associations (including three producer trade associations). The NAIC Chief Executive Officer Terri Vaughan serves as an ex-officio voting board member.

Tuesday, December 21, 2010

Citigroup Insurance Agencies Agree to Pay $2 Million Sales Practice Fine

Three Citigroup-affiliated insurance agencies have paid a $2 million fine to New York to resolve insurance law violations committed from 2003 to 2007, New York State Insurance Superintendent James J. Wrynn announced on Dec. 21.

The violations found by the department included failure to disclose required information comparing policies or contracts being replaced with their potential replacements, and inaccurate or incomplete disclosure of policy or contract values or surrender charges, according to the New York department.

The agencies included: Citicorp Insurance Agency, Inc.; Citicorp Investment Services; and SBHU Life Agency, Inc.

The violations involved the Department's Regulation 60. When a transaction involving the replacement of an existing life insurance policy or annuity contract is likely to occur, Regulation 60 requires the agent or broker to present to the applicant specific information including the primary reason for recommending the new life insurance policy or annuity contract and why the existing policy or contract does not meet the applicant's objectives. In addition, the agent or broker must have the applicant acknowledge that both forms have been received and read. This was not always done or not always done properly, the Department's examination found.

The Department examination also uncovered issues surrounding complaints filed by consumers after buying annuities or life insurance policies. The complaint process was flawed for various reasons, including that complaints were sometimes not reported to the insurance company that issued the annuity or policy; the reasons for denial of a complaint were not properly explained to consumers; supervisors with a financial interest in the outcome of complaints were allowed to rule on complaints; and proper documentation to allow Department review of complaint handling was not maintained.

In addition, the examination found that sales of some life insurance policies and annuity contracts were in violation of the agencies' own suitability standards.

The agencies are promising to take remedial action, according to the New York department. They have agreed to create policies and procedures to address the Regulation 60 violations, fix the complaint process, make sure all life insurance and annuity sales comply with applicable suitability standards and take any other steps necessary to prevent a recurrence of the violations. They will file reports with the Department within 90 days, with follow-up reports every 120 days as the Department deems necessary.

Monday, December 20, 2010

NAIC Adopts Retained Asset Accounts (RAA) Bulletin, Initiates PPACA Agent Group

State insurance commissioners finished up business and prepared to start new work as 2010 winds down.

During a conference call last week, the executive committee and the plenary of the National Association of Insurance Commissioners, Kansas City, Mo. took action on over 11 items including a controversial issue on how to better regulate retained asset accounts. RAAs and beneficiaries understanding of those death benefit options generated public debate starting in July of this year.

The bulletin includes a disclosure that RAAs are, in general, protected by state guaranty associations, according to Roger Sevigny, New Hampshire commissioner and former NAIC president. Sevigny spearheaded the RAA effort. The point had been debated because of concern that it could be used as a marketing tool but ultimately, it was decided that since the information is delivered at the point of claim, that would not be an issue.

Commissioners also passed a motion to establish a committee to look at the impact of the Patient Protection and Affordability Act (PPACA) on producers both before and after a medical loss ratio provision adopted by the NAIC earlier this year. The goal of the new group is to examine and ameliorate some of the impact on the marketplace and its agents who may lose commissions.

There was some discussion when New Jersey Insurance Commissioner Tom Considine expressed concern that the charge was overly broad because it would not just look at the impact on producers but also consumers and the insurance market. But Florida Insurance Commissioner Kevin McCarty emphasized that the focus would be narrow. As the discussion continued, three additional states, Delaware, South Dakota and Wisconsin asked to be added to the NAIC working group.

A third issue that was discussed was a recommendation to the U.S. Department of Health and Human Services on a rate filing disclosure form. The NAIC was charged with providing recommendations under the new PPACA law as detailed by Oregon Director Teresa Miller.

The discussion focused on two amendments: one technical removing a heading and a second offered by America’s Health Insurance Plans, Washington, and Blue Cross/Blue Shield, Chicago, which recommending rate filing form disclosure on a 12-month rolling basis rather than on a month-to-month basis.

Miller questioned the introduction of an amendment two days before a vote when the issue had been discussed and vetted for months. She said that the last minute nature of the proposal would not be fair because it would not give interested parties sufficient time to discuss the issue. She did not address the merit of the proposal.
South Carolina’s Scott Richardson said that the proposal did seem to have merit but New York regulator Lou Felice said that a month to month review could provide regulators with a tool for early detection of unfavorable trends.

Iowa Insurance Commissioner and NAIC President Elect Susan Voss reminded commissioners that these are just recommendations to HHS. Sandy Praeger, Kansas insurance commissioner, former NAIC president, suggested that a cover letter explain the proposal along with the NAIC work and say that this could be something the HHS may want to consider.

Wednesday, December 15, 2010

Employer Match a Real Incentive, LIMRA Finds

An employer matching contribution nearly triples the odds of employees contributing to their defined contribution plan, according to a new study by LIMRA, Windsor, Conn. It is the single most significant factor in determining whether employees contribute to a defined contribution plan, the study finds.

Age, household income and education had a fraction of the impact of an employer match for both not-for-profit and for-profit employees when it came to participating in DC plans,” according to Cecilia Shiner, a LIMRA analyst.

“While most employees we surveyed only contribute amounts equal to or less than their employer’s match, LIMRA found that for-profit employees are the most likely to contribute amounts greater than the amount necessary to receive the maximum employer match,” said Shiner.

Sixty-seven percent of employees who have a DC plan available to them participate in the plan; on average they contribute eight percent of their salaries. Employees who do not contribute to their DC plans say they cannot afford to do so; but 36 percent of those intend to start or resume contributing within the next 12 months.

Employees recognize the importance of saving for retirement. Besides emergencies and unemployment, employees cite retirement as the most important reason for saving. Yet 59 percent of employees believe they have not planned enough for retirement, and over 60 percent have less than $100,000 in household retirement savings.

LIMRA research found that women are especially ill-equipped for retirement. Although their participation rates are equal to those of men, their DC plan balances are significantly smaller. Half of women have $15,000 or less saved in their DC plan.

Female workers must confront the challenge of saving for extended average longevity, despite work disruptions for caregiving, as well as lower average salaries. Regardless of employer type, women are more likely to earn less than their spouse or partner.

The study examined almost 2,500 employees, who did not work for the federal government or military, were not self-employed, and were eligible to participate in a DC plan.

Monday, December 13, 2010

Donelon, McRaith Elected to NAIC Posts

Members of the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., held a special interim election during a conference call. Louisiana Insurance Commissioner James J. Donelon was elected NAIC Vice President and Illinois Insurance Director Michael T. McRaith was elected NAIC Secretary-Treasurer.

Donelon and McRaith join NAIC President Susan E. Voss and NAIC President-Elect Kevin M. McCarty, who were elected in October. The newly elected officers will assume their duties on Jan. 1, 2011.

Donelon was appointed Louisiana Insurance Commissioner in February 2006 and has been re-elected twice to the position. A retired State Judge Advocate for the Louisiana Army National Guard, Donelon’s career at the Department of Insurance includes serving as Chief Deputy Commissioner and Executive Counsel.

McRaith worked 15 years in private practice as an attorney in Chicago prior to his appointment as Illinois Insurance Director, most recently as a partner with an international law firm where he represented national and regional financial institutions. He serves as President of the Board of Directors for the Illinois Comprehensive Health Insurance Plan (a high-risk health insurance pool), and serves on the Board of Directors for the AIDS Foundation of Chicago and the American Foundation for Suicide Prevention, Chicago Chapter.

Sunday, December 12, 2010

New York Announces First Settlement Licenses

The New York insurance department announced on December 10 that two life settlement providers were the first to be licensed under the state’s new life settlement law. The providers are FairMarket Life Settlements Corp., St. Louis Park, Minn. and Magna Life Settlements Inc., Miami.

The Act was signed into law in Nov. 2009 and became fully effective on May 18, 2010. The law marks the first time the life settlement industry has been regulated in New York.

"This represents an important next step in protecting consumers by regulating the life settlement industry. The Department continues to review additional license applications and will issue more licenses as these reviews are completed," Insurance Superintendent James Wrynn says.

Twenty-nine other entities, which were doing business in New York legally before the new law took effect and have met specific requirements under New York's Life Settlement Act, may continue to operate as life settlement providers pending the disposition of their license applications. A complete list of these entities is available at this location on the Department's website, Settlement List

The law requires that an owner of a policy entering into a life settlement must receive a consumer information booklet and other disclosures providing the critical information that the consumer needs to make a decision to sell the policy. This information must include the amounts of all offers and counter-offers, as well as the fees paid to life settlement brokers, who are the entities or individuals that bring policy owners together with life settlement providers to complete transactions.

The law also includes safeguards to protect against the unlawful release of information concerning the identities of insured individuals and policy owners and information about the medical or financial status of insured individuals.

Saturday, December 11, 2010

A Look Into the Future May Move You to Save More

One of the more interesting stories this week was one reported by John Berman and Jennifer Metz of ABC News with Diane Sawyer. It featured a virtual human interaction lab that offered a glimpse of what people will look like in retirement. (see ABC's Look into the Future)

The behavioral-finance researcher behind the work, Hal Ersner-Hershfield of Northwestern University's Kellogg School of Management, believes that a look into the future will give people the opportunity to see if they have saved enough for retirement. It allows people to develop empathy for their future selves. That connection with the future self makes future needs seem real and saving for retirement more necessary, he argues in the piece.

Ersner-Hershfield believes the connection is important enough to prompt him to develop a web-based tool and an iPhone app to offer everyone a glimpse of their future selves.

One can’t help but wonder what use insurers and their producers could make of this tool when they argue that a client needs life insurance or an annuity.

Monday, December 6, 2010

ILMA Releases Life Settlement Provider Best Practices

The Institutional Life Markets Association (ILMA), Washington, released life settlement provider best practices which it says focuses on disclosure and due diligence.

The best practices, according to ILMA, focus on on providers certifying the intermediary (broker, agent, financial advisor, or attorney); guidance to providers on transferred policies; whether policy premiums have been financed; anti-fraud plans including retention of a medical professional or underwriter capable of comparing policy applications to medical records for material discrepancies; and privacy policies; and direction on state and federal laws and regulations compliance.

ILMA’s provider best practices are “an important step toward standardizing life settlement origination practices,” said Jack Kelly, ILMA managing director. “Providers following the same, transparent procedures and diligence will protect consumers and investors while fostering confidence in this viable investment option.”

To view the complete document, go to: ILMA Best Practices

Saturday, December 4, 2010

ACLI Applauds KORUS Accord

An agreement between the United States and South Korea which will eliminate some barriers that will allow American companies to conduct more business is receiving kudos from the American Council of Life Insurers, Washington.

President Barack Obama announced the agreement on December 3. According to the ACLI, “The agreement would open the door for U.S. insurers to introduce new and innovative life insurance and retirement security products to South Korean consumers.”

ACLI explains that while the South Korean insurance market is the eighth largest in the world, it has long been dominated by government-owned companies. The disadvantage that private sector companies faced will be limited with the enactment of KORUS which would make all parties adhere to the same regulations.

Wednesday, December 1, 2010

NCOIL’s Keiser Takes Reins, Appoints Chairs

North Dakota state representative George Keiser took over as President of the National Conference of Insurance Legislators, Troy, N.Y. Keiser named NCOIL chairs to advance the work of the group of state insurance legislators through 2011.
The slate of incoming NCOIL officers also includes Sen. Carroll Leavell (N.M.) as President-Elect, Sen. Vi Simpson (Ind.) as Vice President, Rep. Charles Curtiss (Tenn.) as Secretary, and Rep. Greg Wren (Ala.) as Treasurer.

In one of his first duties as President, Rep. Keiser announced 2011 Committee Chair appointments:

Financial Services & Investment Products: Assem. Joseph Morelle (N.Y.)
Health, Long-Term Care & Health Retirement Issues: Rep. Barb Byrum (Mich.)
International Insurance Issues: Sen. Travis Holdman (Ind.)
Life Insurance & Financial Planning: Sen. Mike Hall (W.V.)
Natural Disaster Insurance Legislation
(Subcommittee): Sen. Dean Kirby (Miss.)
NCOIL-NAIC Liaison: Rep. Kathleen Keenan (Vt.)
Property-Casualty Insurance: Rep. Chuck Kleckley (La.)
State-Federal Relations: Sen. Keith Faber (Ohio)
Workers’ Compensation Insurance: Rep. William E. Sandifer, III (S.C.)

Keiser assumes the role from state Rep. Robert Damron, Ky., immediate past president.

Wednesday, November 24, 2010

Lessons Taught, Opportunity Sought

The lessons of the last financial crisis were painful for many insurers but with some new experience under their belts, tremendous opportunity exists.

The message was delivered both by executives of Ernst & Young , New York, who discussed a research paper based on interviews with CEOs and panelists speaking during the annual life insurance executive conference sponsored by E&Y, The National Underwriter Co., and its parent, Summit Business Media, Erlanger, Ky., last week in New York.

The research paper is based on interviews with CEOs done in August and September and focused on accelerating growth while managing risk. Going forward, according to these CEOs, risk management will act as a filter for developing new products, attracting new business and strategically directing the enterprise. This is important, because according to the report which quoted one CEO, “Insurance leaders who think that turbulence is largely past may be in for a surprise.” The report suggests that any management team that is not re-thinking the business model has a problem.

The report suggests that some are re-evaluating their core competencies and taking on risk more judiciously. This shift includes reworking product offerings so that carriers and policyholders better share risk.

This reevaluation, the report continues, will also include serving the baby boomer population while also appealing to the Generation Y group. In order to serve the Y Generation, significant investments in technology may be needed as well as better use of social media outlets, the E&Y research suggested.

This past summer, many companies were undertaking a “rethink” looking at issues such as what is held on the balance sheet and what are the limits of that balance sheet, according to Doug French, E&Y principal-financial services. For instance, a decision may be made to reduce the amount of variable annuities that are written, he explained.

International accounting standards that are being developed will accelerate the examination described in the report, according to Henry Essert, E&Y’s executive director-financial services. French added that the new standards will create greater transparency.

Companies will also need to think of new ways to grow, he adds. French says that selling face-to-face in the middle market is too expensive and younger people don’t really want it. So, he continued, new ways of reaching consumers such as selling through social media must be developed.

Essert says that products offered will extend beyond term insurance. One needs to look at the definition of simplicity and realize that a lot of products are not as complicated as they seem and can be sold through social media outlets. It is a matter of explaining these products so that the consumer can understand them, he says.

During panel discussions experts offered some ideas to consider when they examine risk. Helen Galt, senior vice president, chief risk officer and company actuary with Prudential Financial, Newark, N.J., says that the recent financial crisis was to a large extent precipitated by fraud, so going forward that is one of the issues insurers will have to look at when assessing future risks.

Ellen Lamale, senior vice president and chief risk officer, Principal Financial Group, Des Moines, Iowa, expressed concern over cyber crime and said that she works with an internal company panel with the charge of looking at risks that are really “out of the box” and go beyond normal risks that insurers usually consider.

Mark Puccia, managing director with Standard & Poor’s Corp., New York, said that in general, companies have “adequate” risk management programs in place. He cautioned, however, that as the economy improves, companies will need to be careful not to reach too far for yield, particularly if an extended low interest rate environment materializes. Risk management programs do make a difference, he explained to attendees. Those companies that had programs in place and were performing well, did “less worse” than companies that did not have strong programs in place, he noted.

Monday, November 22, 2010

NCOIL Meeting Roundup

State insurance legislators adopted several model laws that will establish guidelines for retained asset accounts, life insurance disclosures, after-market crash parts and surplus lines surplus compact.

The actions were taken during the 2010 annual meeting of the National Conference of Insurance Legislators, Troy, N.Y. The meeting was held in Austin, Texas.

The following models were adopted:

Retained Asset Accounts (RAAs)

A Beneficiaries’ Bill of Rights Model Act creates guidelines for the RAAs including disclosures about when payment options other than a lump-sum are offered and the right of beneficiaries to access the entire proceeds by cashing a single check.

RAA marketing materials, disclosures and forms would have to be filed with insurance regulators prior to their use and report annually on the number and amount of their RAAs, on how long the accounts have existed, and details regarding RAAs transferred to state unclaimed property funds, among other things. It would also require insurers to return RAA balances to a beneficiaries if—during any continuous three-year period—they did not give affirmative directive to maintain the account.

The written disclosures would have to state that beneficiaries can access the entire proceeds by cashing a single check. Required disclosures would also include any interest rates, fees, limitations and delays tied to the account, and whether or not the benefits have available Federal Deposit Insurance Corporation (FDIC) coverage, among other items.

The bill was co-sponsored by state Rep. Robert Damron, (Ky.), outgoing NCOIL president.

Life Insurance Disclosure

A Life Insurance Consumer Disclosure Model Act was adopted which requires insurers to notify people who are over age 60 or terminally/chronically ill in easily understandable language of alternatives to giving up their policy. As well as listing the options, the model would advise policy owners to contact their financial advisor, insurance agent, broker, or attorney to obtain advice or assistance. It also explains that these alternatives may or may not be available to particular consumers depending on a number of circumstances, including age and health status and policy terms.

The model follows a series of similar measures recently enacted in Kentucky, Maine, Oregon, and Washington. The NCOIL model requires insurance departments to develop the notice at no cost to insurers or other licensees. The model was sponsored by Rep. Ron Crimm (Ky.) and based upon a 2010 Kentucky law.

Market Conduct Analysis

A Market Conduct Annual Statement Model Act will provide statutory authority for regulators to annually collect MCAS data and establish rules to govern collection and sharing of the information.

It would allow commissioners to confidentially share MCAS data with other entities—including with the National Association of Insurance Commissioners, Kansas City, Mo., and other state and federal regulators—and would base insurer participation on a $50,000 direct written premium threshold currently required by the NAIC. The model was sponsored by state Sen. James Seward (NY), NCOIL past president.

After Market Crash Parts

A decision was made to defer a vote on the After Market Crash Parts Model until the spring meeting in Washington on March 4-6, 2011. The proposed model law would require disclosure and consent before a crash part is repaired or replaced; set ground rules for insurers to specify aftermarket crash parts; require lasting, visible labels on crash parts; and promote accountability.

The decision to defer followed a 13 to 11 vote in which NCOIL’s Property-Casualty insurance committee overturned an amendment on one of the thorniest aspects of the issue: the degree to which certification means that parts are good-quality and safe. The proposal required insurers to confirm that an aftermarket crash part warranty at least equals that for an original equipment manufacturer (OEM) version. It also—in reintroducing language that has recurred throughout consideration of the model—deemed certified aftermarket parts to be equivalent to OEMs.

State Sen. Ruth Teichman (Ks.) explained, “Legislators felt that defeat of the equivalency amendment, in addition to a vote that had freed insurers from paying for needed modifications to non-OEM parts, would create a loophole in which consumers would be unprotected from poor quality materials. Vehicle owners cannot be left stranded.”

On November 22, the Property-Casualty Insurers Association of America, Des Plaines, Ill., reiterated its opposition to the model and the amendment citing “problems with a costly but virtually useless policy notice requirement and compliance issues with the warranty equivalence language. However, PCI expressed support for tabling of a model act regarding insurer auto-body steering.

Slimpact II

The slimmed-down Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT), dubbed SLIMPACT-Lite, was adopted. It would authorize a governing commission to establish allocation formulas, uniform payment methods and reporting requirements, foreign insurer eligibility requirements, and a single policyholder notice, among other things. To streamline taxation, it would require a state to create a single tax rate for surplus lines insurance, allow states to charge their own rates on multi-state risks, and set uniform payment dates.

Saturday, November 20, 2010

NAIC Releases New Version of Retained Asset Account Draft Bulletin

State insurance commissioners released the latest draft of a bulletin designed to provide ‘guardrails’ for retained asset accounts.

Retained asset accounts (RAAs) are accounts that are offered to beneficiaries upon the death of an insured. Often, they are one option a beneficiary has to draw upon the proceeds of an insurance policy. These accounts can be used as a default if no option is selected and in the case of insurance paid for by an employer, the employer may make the decision to use an RAA as the means to distribute death benefit proceeds.

Over the summer the issue drew a great deal of attention following an article by Bloomberg Markets. The concern focused on interest paid, whether beneficiaries understood the option, and whether the money is protected. Insurers said that the option has been helping bereaved beneficiaries for over 20 years and that state guaranty funds protect the death benefit. At least one consumer advocate says beneficiaries are better off taking the money immediately.

State regulators at the National Association of Insurance Commissioners, Kansas City, Mo., decided that the best approach is to develop a model bulletin. State insurance legislators led by the National Conference of Insurance Legislators, Troy, N.Y., which are meeting this weekend Austin, Texas, are developing a model law.

The NAIC’s draft states that the purpose of the bulletin is to “establish acceptable disclosure standards regarding the payment of life insurance benefits by means of a ‘retained asset account’.” It removes language stating that there is the potential for misunderstanding.

The proposed bulletin would require that a written explanation of settlement options be provided to beneficiaries and when appropriate, interest rates applicable to those options would be disclosed.

Among the disclosures required by the draft are:
--One draft or check may be written for the entire death benefit amount due the beneficiary;
-- Other settlement options are preserved until the entire balance is withdrawn or the balance drops below the insurer’s minimum balance requirements;
--Any fees charged must be described;
--The interest rate credited to the account;
--The interest earned on the account will be taxable; and,
--Retained Asset Account funds are guaranteed by either the Federal Deposit Insurance Corporation (FDIC) or State Guaranty Fund Associations.

Wednesday, November 17, 2010

Life Settlement Execs React to Kramer Decision

New York
A panel of life settlement experts offered their reaction to an important New York Court of Appeals decision in the Kramer case.

The Court came down with an opinion on November 17 in the case of Alice Kramer vs. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York. It specifically addressed the question of whether New York insurance law (3205(b) 1 and 2) prohibits an insured from procuring a policy on his own life and immediately transferring the policy to a person without an insurable interest in the insured’s life, if the insured did not ever intend to provide insurance protection in the insured’s life. The transactions are called beneficial interest contracts.

The Court responded that there was no such prohibition, even in the case where the policy was obtained for just such a purpose.

The question was raised during the annual Life Insurance Executive Conference sponsored by Ernst & Young, the National Underwriter Company and Summit Business Media.

During the discussion, the panel was asked about the impact of Kramer. Jule Rousseau, a partner with Arent Fox LLP, New York, said that now New York has a decision specific to its state that to which it can refer rather than referring to case decisions in other states such as Arizona. He said that other major states will probably refer to the Kramer decision if similar cases are addressed.

David Goldman, director of the longevity markets group at Credit Suisse, New York, said that “it is clear that the ruling had an impact, but what is not yet clear is just how big an impact it will be.” He said that $10 billion to $12 billion in the life insurance market which are beneficial interest transactions are not legitimate transactions. However, he noted that up to $4 billion of that total could be disqualified because of potential fraud issues. He added that Credit Suisse does not participate in beneficial interest transactions.

Alan Buerger, co-founder and CEO of Coventry, Fort Washington, Pa., agreed that there could be a huge impact. He also noted that his firm does not participate in the beneficial interest market.

The case arose when Arthur Kramer, a prominent New York attorney and brother of Larry Kramer, a renowned playwright, purchased several policies with the intent to assign the beneficial interests to investors who did not have an insurable interest in his life. Upon his death, his widow, Alice Kramer, representing her husband’s estate, filed a complaint in U.S. District Court for the Southern District of New York seeking to have the $56,200,000 in death benefits paid to her, alleging that New York’s insurable interest law was violated.

In the court opinion, it states that 3205 “clearly provides that, so long as the insured is ‘of lawful age’ and acts ‘on his own initiative,’ he can ‘procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation.” The decision continues that “It is equally plain that a contract ‘so procured or effectuated’ may be ‘immediate[ly] transfer[ed] or assigned[ed]. The provision does not require the assignee to have an insurable interest and, given the insured’s power to name any beneficiary, such restriction on assignment would serve no purpose.”

What Vexes Insurers: S&P Explains

Interest rates are like a tightrope with risks from both increases and decreases for insurers that are not sure footed, according to a new report issued by Standard & Poor’s Corp., New York.

Fortunately, according to the S&P report, “Interest Rate Risk: Why Both Decreases And Increases In Rates Can Vex Insurers,” most insurers have developed enterprise risk management programs to reduce this risk.

The long-term nature of several insurance products and their supporting assets make the insurance sector one of the most interest-rate-sensitive sectors that Standard & Poor's rates,” the rating agency says.

The products at greatest risk for disintermediation are fixed annuities and universal life, according to the report. But companies that sell these products have, for the most part, strong ERM programs, according to the report. However, according to the report, “the risk is still relatively modest in our view, in part because of companies' ability to offset the loss of interest with increased nonguaranteed elements, such as the cost of insurance charges on some products.”
“In a prolonged low interest rate environment, earnings spread compression is the most significant risk. Specifically, investment of premiums and deposits and reinvestment of interest income and returns of principal on maturing fixed-income securities into lower-yielding investments will pressure net investment income over time,” S&P cautions.

The report says that long-term care insurance and individual disability insurance face risks if there is a prolonged low interest rate scenario since these products have long-duration liabilities and a shortage of matching assets which creates significant reinvestment risk for issuers. And, the report explains, for life insurance and annuity product lines, investment income constitutes a significant portion of earnings.

Health insurance, according to S&P, is the least interest sensitive of insurance lines because of the short-term nature of the segment’s liabilities. And property/casualty insurers are not as impacted by interest rate risk, according to the report. “Property/casualty insurance products do not credit interest to the policyholder. In addition, their products do not have significant liquidity-sensitive features, and claimants usually cannot accelerate cash outflows.”

Monday, November 15, 2010

NAIC Exchange Model Advances

A model that creates a framework for the purchase and sale of qualified health plans in the individual market through health exchanges is moving toward full adoption by state insurance regulators.

A draft of the American Health Benefit Exchange Act was adopted by a subgroup of the Health Insurance and Managed Care “B” Committee chaired by Michael McRaith, Illinois insurance director.

The model provides for the establishment of a “Small Business Health Options Program (SHOP Exchange) to assist qualified small employers in facilitating the enrollment of their employees in qualified health plans offered in the small group market.” The model seeks to provide a transparent marketplace, consumer education and to assist individuals with access to programs, tax credits and subsidies.

The model was advanced on the condition that a drafting note in Section 10 would receive additional consideration. It now goes to the “B” Committee on Nov. 22 before proceeding to the full executive committee and plenary of the National Association of Insurance Commissioners, Kansas City, Mo. Comments are being received through Nov. 19.

The drafting note that was the focus of much of the discussion during the subcommittee review considered how states should treat benefits that exceed federal requirements for qualified health plans. States were also warned of the potential for adverse selection, when the sick stay with a plan and the healthy opt out, if there are inconsistent benefits inside and outside of an exchange. One drafting note option suggests that states should consider a “’mandated offer’ provision under which carriers must also offer the option to purchase coverage providing all benefits that would otherwise be required by State law.”

McRaith commented that the drafting note should not be too prescriptive. Later in the discussion, a representative for Autism Speaks, New York, cautioned states that the language was “far too prescriptive” and raised the concern that it would have a negative impact on Americans with significant disabilities because of the potential to loosen mandates.

Joan Gardiner of Blue Cross/Blue Shield, Chicago, said that BC/BS was supportive of exchanges and was concerned that language that was too prescriptive might impede them getting up and running.

Thursday, November 11, 2010

MetLife Bows Out of Long-term Care Business

There was big news today in the long-term care insurance (LTCI) market with MetLife’s announcement that it will bow out of the business.

What is more interesting is the juxtaposition with data that suggests that there is a greater need than ever (see yesterday’s posting.) The Genworth Financial survey comes in the midst of Long-term Care Awareness Month which seeks to highlight the value of the product.

MetLife cited “the financial challenges facing the LTCI industry…” At the time of this posting, a MetLife spokesperson had not responded to a request to explain if those challenges are referring to today’s economic climate or the difficulty of getting the public interested in LTCI.

It is unclear what is causing the product’s lack of traction with consumers. Is it simply cost? The product is not cheap and gets increasingly expensive as potential buyers age and near the time when they may need it. But, then again as the Genworth Financial study in yesterday’s posting pointed out, the cost of care for loved ones is even more cause for concern.

Is it simply that people don’t want to think about tomorrow especially if those thoughts are unpleasant? Well quite possibly except that the survey found that people are worried about being a burden on family members. So, in a concrete way, they are thinking about tomorrow. It also found that there is a gap between concern and the action needed to stop that concern. Or maybe it is concern that if the contract is not used, the contract owner will not get any money back.

What is clear is that the number of carriers in this segment of the market is shrinking. Whether it is a normal market consolidation or concern that the product is just not taking off or is too unpredictable is unclear. Those who buy it are keeping it, belying an assumption that people would lapse their contracts over time. The future cost of care is another unpredictable factor.

If there is concern among survey respondents about the future, there is also concern among insurers about how proposed international accounting could impact products with long-term obligations. The proposed standards, while not yet in place, could directly impact products like long-term care insurance creating volatility in financial statements and increased capital requirements. It could encourage insurers to leave the business, discourage companies from entering the business and create another hurdle for those wanting to do business in Europe. The potential issue for companies has been addressed in a number of venues: in an Ernst & Young webinar; in an interview with Laura Bazer and Wallace Enman, analysts with Moody’s Investors Service, New York; and during discussions at the National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Troy, N.Y.

MetLife had not responded to a question about whether this potential accounting change was part of its decision to exit the long-term care market.

MetLife says that its current policyholders need not be concerned about existing contracts. The New York-based insurer says it will continue to accept new applications for individual LTCI policies received on or before December 30, 2010. In addition, in 2011, MetLife will be discontinuing new enrollments into existing group and multi-life LTCI plans. The timing will vary based on existing contractual obligations.

The company also offered the following assurance: “MetLife’s decision to stop writing new LTCI business will have no impact on existing insureds’ coverage. As long as premiums are paid on time, coverage cannot be cancelled. All current insureds can continue to make coverage changes per the terms of their policy or certificate, including inflation protection offers and requests to increase or decrease coverage.”

And, MetLife says that while it is exiting the LTCI market, it is not giving up on differ ways to meet a growing need to take care of older Americans. “MetLife is committed to exploring potential solutions, including combining LTCI with other products, which the company believes can effectively address the long-term care financing needs of the public as well as its business goals.”

Recent changes in federal law allow companies to combine annuity and long-term care features in products, a combination that would fit in with MetLife’s sizeable annuity business.

Wednesday, November 10, 2010

Genworth LTC Study Measures Consumer Concerns about Care

With long-term care awareness month in full throttle, Genworth Financial, Richmond, Va., is getting a read on what most concerns consumers when they think of their possible long-term care needs.

The study, “Our Family, Our Future: The Heart of Long Term Care Planning,” conducted an online survey of 2,151 U.S. adults 18 and over.

Overwhelmingly, respondents said that their greatest fear about a long-term illness was being a burden on family members. A total of 53 percent offered this response, over double the number of the 26 percent of participants who expressed fear of ending up in a nursing home. Ten percent answered that depleting savings was their greatest concern and 11 percent responded that they feared death.

When examined further, the top fear of being a financial burden is driven by concern over uninsured medical expenses. This was the top financial worry among men and women age 55+. The top fear over disabling diseases was Alzheimer’s.

If the fear is present, action is not, according to the study’s findings. “While two-thirds of people will actually need some long term care, such as home care, assisted living, or nursing home care, after they reach age 65, only 35% of people believe they will need such care,” according to the study.

And, according to the Genworth study, families are not talking in depth about long-term care needs as evidenced by the fact that 91 percent of all Americans have not discussed all three key long term care topics with their spouses; 92% have not discussed all three key long term care topics with their adult children; and 94% have not discussed all three key long term care topics with their parents. Those topics are: what long-term care options are most preferred; the potential roles and responsibilities of different family members for managed care; and, how long-term care will be paid for if required.

Other questions reaffirm the disconnect between known need and action. Genworth found that 78 percent of men and women would find it helpful to talk to a financial professional about long-term care planning while only 16 percent have had this conversation with a financial professional.

So, why is there such a lack of action? The study suggests that discomfort may be the biggest barrier. It found that “Fifty-nine percent (59%) are uncomfortable raising the topic while 49% believe their families would be uncomfortable talking about it. People also cite not knowing how to start the conversation (46%) and believing they will never need long term care as other major reasons (43%).”

Saturday, November 6, 2010

LISA Names New Executive Director

Darwin Bayston has officially been named executive director of the Life Insurance Settlement Association effective Nov. 15, 2010. Bayston replaces Doug Head who has been executive director since 2001 and who was executive director of a predecessor to LISA.

Bayston has most recently been Director of Consulting for AVS Underwriting, LLC in Kennesaw, GA. Previous to that he was Managing Director of Life Settlement Consulting & Management, LLC. He also spent 13 years as a member of the staff of the CFA Institute, serving as President and CEO from 1990 to 1993.

Bayston will relocate to Orlando, Fla., headquarters of the Association.

Thursday, November 4, 2010

Safer products, a “Moderate Credit Positive,” Moody’s Says

Life insurers are playing it more cautious with the type of product liabilities that they are taking on, a shift that Moody’s Investors Service, New York, says is “a moderate credit positive.”

In its Weekly Credit Outlook Moody’s Neil Strauss, a vice president-senior credit officer, describes findings in both a survey conducted by Guardian Life Insurance Company of America, New York, and data gathered by the Life Insurance Market Research Association (LIMRA), Hartford, Conn.

The Guardian study conducted during third quarter 2010 found that sales of traditional whole life insurance surged compared with other types of insurance while the LIMRA data shows whole life sales up about 20 percent so far this year, a rate that is far exceeding other products. LIMRA found that whole life represents over 30 percent of life insurance sales, Strauss notes. The sales increase is a credit positive for insurers, he adds. Strauss goes on to say that mutuals stand to benefit the most from this trend and because of their higher ratings have enjoyed both a flight to quality during turbulent economic times and now are enjoying renewed growth in their “flagship product.”

The new sales patterns are “credit positive” because they reduce the liability of insurers since whole life displays less volatility and higher retention rates than other insurance options.

Moody’s also noted other trends toward safety including the “de-risking of variable annuity guarantee products” and lower sales of investor-originated life insurance (IOLI) to senior citizens, both of which it calls “positive developments.”

Strauss points out that the Guardian survey shows greater interest among younger buyers, a shift which he writes “should be credit positive as mortality, lapse, and reputational risk should be lessened and be more in line with traditional expectations.”

However, Strauss cautions that in spite of lower insurer product risks, “trends can change quickly” and a sustainable recovery could reverse the shift to less risky products.

Monday, November 1, 2010

Treasury Expects to Earn a Profit on AIG Investment

The U.S. Department of the Treasury anticipates that it expects to earn a profit on its loans to and investment in American International Group, New York.

The prediction is based on current market prices and the value of the assets supporting the loans to and preferred interests in AIG and Maiden Lane II and III, provided by the Federal Reserve Bank of New York as well as support from the Troubled Asset Relief Program (TARP) which will pay back the Federal Reserve Bank of New York’s holdings in AIG subs and assume those assets. The prediction assumes the restructuring announced on September 30 is completed which is subject to a number of conditions.

The U.S. government maintains that the IPO of AIA Group Limited and sale of American Life Insurance Co. reflect the substantial progress that AIG and the USG have made to date in restructuring the company.

The AIA IPO raised $20.5 billion of cash proceeds. The ALICO sale raised approximately $16.2 billion of total proceeds, approximately $7.2 billion of which is cash. This approximately $36.7 billion in aggregate proceeds will be used to fully repay the loan extended to AIG by the Federal Reserve Bank of New York (FRBNY) and a substantial amount of the FRBNY's preferred interests in certain AIG subsidiaries.

As part of the restructuring, AIG will draw up to $22 billion in remaining TARP funds from Treasury to purchase the FRBNY's preferred interests in the special purpose vehicles holding AIA and ALICO, and Treasury will receive those interests. The assets held by these special purpose vehicles, which include, among others, AIG's remaining shares in AIA and the non-cash proceeds received from MetLife for ALICO, significantly exceed the amount of the preferred interests and, as such, no losses are expected on those preferred interests.

After the restructuring, Treasury will own 92.1 percent of AIG, which equates to approximately 1.66 billion shares of common stock in the company. Based on the market closing price of AIG on October 29, 2010, these shares are worth approximately $69.5 billion. This amount significantly exceeds Treasury's current $47.5 billion cash investment in AIG. (This is in addition to the Treasury investment in the preferred interests described above.)

AIG has announced that it expects to complete the restructuring by the end of the first quarter of 2011. Based on current market prices and the value of the assets supporting the FRBNY's loans to and preferred interests in AIG and Maiden Lane II and III, the USG expects to earn a profit on its loans to and investments in AIG assuming the restructuring announced on September 30 is completed.

Thursday, October 28, 2010

LIMRA Panel Discusses Lessons Learned From the Great Financial Crisis

National Harbor, Md.
Representatives from two major life insurers discussed lessons learned on working with producers during the recent financial crisis during the LIMRA annual conference here.

During the first days of the economic crisis which hit with full force in mid-September 2008, very few consumers reached out to financial advisors and when they did, it was rarely initiated by advisors, according to Patrick Leary, assistant vice president-distribution research with LIMRA, Hartford, Conn. Leary moderated a panel titled ‘Top Producer Support: a Model for Tomorrow.’

The career agents at Principal Financial, numbering over 1,000 advisors, took it upon themselves to contact clients and provide them information, according to Nick Cecere, Principal’s vice president-individual distribution. As a result of the financial crisis, the company has learned to do a better job of communicating its financial situation to both agents and clients, he said.

Jim Thomsen, senior vice president-member services with Thrivent Financial for Lutherans, said that immediately after the crisis, there was a loss of confidence in the insurance industry both on the part of advisors and consumers. He recounted attending a social event the Saturday after the meltdown hit and having another guest, upon learning what business he was in, say “that used to be an honorable profession.” On Monday, Thrivent management decided that the insurer had to tell its story and its advisors also needed to talk about the company and how it is on good financial footing.

Cecere said that public perception is a very powerful force as evidenced by the fact that from October 2008 through March 2009, Principal’s stock price declined from $70 to $5 per share and began to rebound when the company announced that it would not take government TARP funding. In early 2009, Principal decided to launch its “America Rebuilds” campaign and is now following up with an “America Dreams” campaign.

Thrivent’s Thomsen told panel attendees that “We need to shore up advisors” because they need to feel like they are part of a community.

Monday, October 25, 2010

Dickens Was Right: It is the Best and Worst of Times. Here’s Why.

National Harbor, Md.
Challenging times call for a new way of looking at the insurance business, according to Robert Kerzner, president and CEO of LIMRA, LOMA and LL Global, Inc., who opened the organization’s annual meeting here.

During the opening session, Kerzner asked attendees to think of Coke, a company that successfully reinvented itself as being in the fluids business and not just the soda business. He rallied attendees by telling them that when they offer new products and distribution, there companies will see growth.

Recent studies, he stated, show that people want face-to-face interaction but with technology, face-to-face meetings can also take place on a computer, iphone or ipad. Underwriting and issuing a policy can be done in real time, he said.
Distribution is shrinking and new ways are needed to reach people who need life, annuity and savings products.

Increasing product sales is important because insurers “have more things facing us than ever before at one time,” according to Kerzner. The risk-reward balance has been upset, he added. Some products have slipped into single digit return on equity (ROE) rather than double digit, he continued. He cited a number of causes including unpredictable lapses due to investor-originated life insurance, higher operating costs, and riskier products, among other factors.

Indeed an afternoon panel featuring industry CEOs affirmed the challenges the industry faces but also left room for optimism if the insurers rise to the challenge. Edward Rust, Jr., chairman and CEO of State Farm Insurance Co., said that risks that must be addressed now include finance risk, understanding political forces and populism, and how the advent of new ways of reaching people such as social networking will fundamentally change the business.

David O’Malley, chairman, president and CEO with Ohio National Life Insurance Co., says he fears the regulatory environment in the near future, a climate he says goes beyond the National Association of Insurance Commissioners, Kansas City, Mo., and includes the new Federal Insurance Office, a federal office of consumer protection, an accounting industry pushing for mark-to-market standards and new, unfavorable international accounting standards that will disadvantage American insurers. “We are faced with more threats at one time that could have a very, very serious negative effect on our companies. It causes me a great deal of stress to see how this could unfold.”

What it does, according to O’Malley, it to create a level of uncertainty and predictability about how to manage our business. For instance Kerzner and the CEO panel discussed the current low interest rate environment and its impact on business. State Farm’s Rust said that insurers will have to get their minds around what looks like the longer term implications for embedded portfolio yields which have been coming down 100 basis points a year. It will have an impact on pension funding assumptions, discounts and liabilities as well as pricing assumptions, he continued.

Kerzner noted that the recent financial meltdown of 2008 brought a number of insurers to their knees in the downturn throwing risks out of balance with rewards. This lack of balance could make capital reluctant to invest in the market, he added. And with solvency and accounting initiatives in Europe, there could be “a negative disrupter of epic proportion.”

Consequently, small companies may be acquired, mid-sized companies merged, and non-core businesses sold, he said. Fewer companies will exist and the insurance industry will be transformed, he added.

Even with this daunting list of challenges, Gary Bhojwani, president and CEO with Alliance Life Insurance Company of North America, found cause for optimism and “the great opportunity we have” to provide guaranteed income to baby boomers. He cited a recent survey his company completed which found that 80 percent of 3,300 baby boomer participants would rather pick up 4 percent guaranteed income than have the opportunity to earn up to 8 percent.

Kerzner said that there are a “myriad of opportunities” to grow the life insurance business. For instance, LIMRA will offer virtual classes incorporating its research and plans to add more research in the retirement space. “The next decade really could be our best and indeed even our golden age. We are in the eye of storm. Much is behind us but it is not over.”

If the insurance industry wants to reach that Golden Age, then it needs to not only cut costs but empower that consumer, Terry Jones, founder and former CEO of asserted. Today, “choice happens instantly. Information has found its freedom.” The balance of power is shifting to the consumer and insurers who can provide consumers with information will be the successful ones, he said. Jones noted that 45 percent of US policyholders visited an insurance site last year. The first thing they did after a face-to-face meeting where they received a quote was to go online and look for competing quotes, he added.

Saturday, October 23, 2010

NAIC Adopts Final Medical Loss Ratio Regulations

During a joint session the Executive and Plenary committees of the National Association of Insurance Commissioners (NAIC) voted to adopt a model regulation containing the definitions and methodologies for calculating medical loss ratios as required by the Patient Protection and Affordable Care Act (PPACA). The model will be delivered to Health and Human Services (HHS) for certification by Secretary Kathleen Sebelius. The vote took place during the fall NAIC meeting in Orlando.

The PPACA signed into law on March 23, 2010, requires that beginning in 2011, insurance companies meet new medical loss ratio requirements designed to ensure premium dollars go to health care. The law requires that the NAIC provide recommendations for the definitions and calculations of these ratios to HHS by December 31, 2010.

"I commend the work of our regulators and staff as we considered a number of very challenging issues as it moved through the committee process. The committee model regulation on MLR passed with only technical amendments, which is a testament to our inclusive and transparent process," said Jane L. Cline, NAIC President and West Virginia Insurance Commissioner. "It is with a great deal of pride we present these recommendations to the Secretary."

The law also tasks the NAIC with a number of additional provisions to consider, including rate review and consumer information. The Health Insurance and Managed Care Exchanges subgroup has already begun work on their recommendations to HHS. They have been tasked with creating guidelines and recommendations to facilitate the implementation of health exchanges, due to be operational in the states by January 2014.

The work of staff continued prior to the vote during the October 17 meeting with the Life and Health Actuarial Task Force when it met to consider redefining the methodology to include contract reserves in the MLR rebate calculation.
The request was made to send the issue back from the “B” Committee to LHATF, to consider the issue and then report back to commissioners so that the decision could be included in the final joint vote.

Bill Weller, representing America’s Health Insurance Plans, Washington, said that in the individual major medical market, said that expected loss ratios are met over time and that there are factors such as how that market is used that needs to be considered. The individual market is used by those between jobs who terminate as soon as they find work and are insured under group coverage, according to Weller. So, the expectation is that premiums increase consistent but to costs, but not necessarily matching them, he added. That has to be considered in the rebate calculation, according to Weller. It is important for the purposes of a rebate calculation that a net level methodology consistent with pricing assumptions be used, according to Weller.

Minnesota regulator Julia Philips, who had worked on the development of the MLR guidance, said that regulators were concerned with gaming and the elimination of rebates. She said that she wanted a reference to the NAIC’s Accounting Practices and Procedures Manual so that this would not happen.

Frank Horn, a New York regulator said that there needs to be consistency with the way the regulation is calculated because there seems to be ways in which the MLR can be artificially raised.

The intent was to avoid any gaming or opportunity for gaming, according to Steve Ostlund, an Alabama regulator, who added that he believed that the regulation did say that statutory accounting should be used.

Tim Yost, an NAIC funded consumer, said that it was his understanding that reserves claimed for MLR purposes would be the same as those in the annual statement. He expressed concern over gaming. The annual statement requires certification under oath by an actuary and if a company decides to use different MLRs, there is concern over how they will be calculated, he said.

Yost also expressed concern that the packet of IRDs put together by the subgroup is sound and now changes are being proposed to the regulation. He noted proposals on national aggregation experience for large groups, proposed changes to credibility levels and now the proposal for contract reserves. “None of these proposals favor consumers,” Yost asserted. The goal here is just to reduce MLR rebates, he continued. It should be to increase efficiency and the amount spent on quality improvements and these proposals are undoing that, he added.

Rowen Bell, representing the American Academy of Actuaries, Washington, said that the Academy had sent a lengthy letter explaining why it was important to decouple contract reserves associated with the MLR from statutory reporting in order to avoid gaming. He noted the tremendous diversity among companies and even within entities. The Academy was offering a way to calculate MLR regardless of how statutory reporting is done so that all entities can be treated fairly.

Barbara Yondorf, an NAIC consumer representative and former Colorado insurance regulator, said that the issue of gaming is going to be a recurring theme and will surface again when exchanges are discussed. She expressed reservations about altering agreed upon language because when you have something that is delicately put together and you start pulling at threads, there is a real question of how it will fit together.

Lou Felice, a New York regulator, said that any decision on MLRs needed to include an accounting as well as an actuarial viewpoint and that no changes should be made unless both are considered.

Ostlund made a motion that LHATF support the subgroup’s proposal regarding contract reserves. Minnesota’s Philips said that contract reserves are really defined in a general sense and does not say that it needs to match the financial statement.
AHIP’s Weller said that he considers what is being voted up to executive/plenary as significantly different from what he considered it to be.
Ostlund’s motion carried 9-2.

During the NAIC meeting, it was also announced that Ostlund and Felice had been awarded the Robert Dineen award for advancing the work of state regulations for their work on PPACA.

Friday, October 22, 2010

NAIC Elects Officers for 2011

Insurance commissioners elected officers to lead the National Association of Insurance Commissioners, Kansas City, Mo., for 2011. The election took place during the organization's fall meeting in Orlando.

The leadership for next year is as follows:
• President: Iowa Insurance Commissioner Susan E. Voss
• President-Elect: Florida Insurance Commissioner Kevin M. McCarty
• Vice President: Oklahoma Insurance Commissioner Kim Holland
• Secretary-Treasurer: Louisiana Insurance Commissioner James J. Donelon
The newly elected officers will assume their duties on Jan. 1, 2011.

Wednesday, October 20, 2010

Rule 151A Issue Put to Rest; Annuity Disclosure Advances

A long disputed rule issued by the U.S. Securities and Exchange Commission, Rule 151A to regulated indexed annuities (IAs), was withdrawn this week, attendees were told during the fall meeting of the National Association of Insurance Commissioners, here.

The details were provided by Jim Mumford, Iowa’s first deputy commissioner of insurance, during the Life Insurance and Annuities “A” Committee. Iowa was one of the states that was leading the effort for states to retain the right to regulate IAs. He explained to members of “A” Committee that on July 21, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contains a Section 989J, known as the Harkin/Meeks amendment. That amendment voided 151A and its interpretation that IAs and potentially other insurance products were securities and thus under SEC purview.

Mumford then went on to explain the progress made on the Annuity Disclosure Model Regulation which provides standards for the disclosure of information about annuity contracts and includes guidelines for illustrating these products. Mumford detailed for Connecticut Commissioner Tom Sullivan, “A” Committee chair and members of the committee the progress that had been made since the summer meeting in August.

Sullivan had made it clear that the project needed to be completed and the Annuity Disclosure working group’s charge met. The working group has been working on the model since 2008.

Toward that end, the working group, the American Academy of Actuaries and the American Council of Life Insurers, both based in Washington, and consumer representatives including NAIC funded consumer rep Brenda Cude, a professor at the University of Georgia, met weekly. On October 17, the group met to put final technical touches on the draft before voting it up to “A” Committee. It was agreed to separate a Buyer’s Guide from the model so that it could be updated in the future without having to reopen the whole model.

Steve Ostlund, an Alabama regulator on the working group noted how fast the project had moved to advance it to “A” Committee and recommended that the model be exposed for 30 days. Mumford recommended that the exposure be limited to new items in order to prevent the same issues from being raised again. The “A” Committee agreed to the exposure and to charge the working group with the development of a Buyer’s Guide.

Following the meeting, ACLI representative Kelly Ireland said that any comments
submitted to the ACLI would be technical in nature. She noted that the ACLI supports illustrating annuities and actually advanced the idea. Kelly said that usually Buyer’s Guides are general information documents and not designed to be overly technical.

Lee Covington, representing the Insured Retirement Institute, Washington, noted how important it is to focus disclosure on features of the contract being purchased and not to have a document that includes broad disclosures on all features in an annuity contract. He maintained that with the advent of summary prospectuses from the SEC, that there was not really a need to duplicate the effort with a Buyer’s Guide.

During the weeks of conference calls, industry had raised this point and regulators had pointed out that the prospectuses had not yet been developed and that it did not seem to be a priority for the SEC. Regulators said that there was a need to have information in place at least until a summary prospectus was developed.

Tuesday, October 19, 2010

Disclosure Focus of NAIC, NCOIL RAA Solutions

State insurance regulators and legislators say they are going to focus on disclosure as a way to avoid possible misconceptions over retained asset accounts, according to discussions during the fall meeting of the National Association of Insurance Commissioners here.

Toward that end, state insurance commissioners will work on a bulletin that they say can be adopted uniformly by states. State insurance legislators are developing a model law titled ‘A Beneficiary’s Bill of Rights’ which they plan to adopt next month during the National Conference of Insurance Legislators, Troy, N.Y.

RAAs, which are accounts that offer one option to distribute death benefit proceeds to beneficiaries that are similar to checking accounts, have come under intense scrutiny in recent months over whether they are protected like bank accounts, whether they pay interest and whether consumers have ready access to the funds deposited in accounts.

A working group under the direction of Connecticut Insurance Commissioner Tom Sullivan, charged with looking at the issue, sent out a survey to insurers to learn more about how RAAs are handled. As of Oct. 15, 2010, 30 companies had responded to the call. Thirteen do not offer RAAs. Those which do provided information that was incorporated into the following preliminary findings:

--companies generally portray RAAs as checkbooks against which the death benefit proceeds can be drawn down rather than draft accounts which add another step to the equation because the institution listed on the draft withdraws funds provided by the insurer. The difference in the type of account can lead to confusion, according to the RAA working group findings.
--companies do not always tell the beneficiary where the funds are kept—either with the insurer or with the bank listed on the draft statement.
--while companies indicate interest will be earned, they do not generally provide the interest rate to be earned in the initial disclosure form.
--companies do not always clarify whether funds are insured by the Federal Deposit Insurance Corp. (FDIC).
--companies do not reference the fact that contracts are protected by guaranty fund coverage.

Other findings indicate that most companies use RAAs as a default option if the beneficiary does not say how they want to be paid. Some say that they only use RAAs if the death benefit exceeds $5,000. And, most companies accrue interest daily but only post monthly, thereby reducing the amounts payable to consumers on full liquidation.

New Jersey Insurance Commissioner Tom Considine introduced a motion to develop a bulletin on RAAs, a form of disclosure which Connecticut’s Sullivan has argued is a quicker, more effective way to put guidance in place quickly. The bulletin will require that information be provided about guaranty funds and FDIC coverage. It will address areas that the survey found could be improved. It will also require a filing of disclosure documents with the company’s insurance department.

During the discussion, legislators testified that a provision that was in the original NCOIL model was removed. The deleted provision would have required beneficiaries to opt in to an RAA and would have prevented an insurer to put a beneficiary’s money in an RAA by default if the beneficiary to not select an option.

Indeed, during a consumer liaison meeting which followed the RAA session, NAIC funded consumer Daniel Schwarcz said that he was disturbed by NCOIL’s decision to drop the provision. He expressed concern that both the NAIC and NCOIL were relying solely on disclosure. Empirical evidence shows that default options that are made available to consumers do make a difference. And, he added, personally, he would recommend that any beneficiary take the lump sum death benefit and put it into a bank account.

Insurers have argued throughout the debate that they pay competitive and sometimes more than competitive interest rates on monies in RAAs.

After the RAA session, state Rep. Brian Kennedy, D-R.I., said that the default provisions were removed from the model after receiving input from a wide range of stakeholders who had indicated that a focus on disclosure was preferable.

Monday, October 18, 2010

Are Separate Accounts Being Used to Skirt Nonforfeiture Requirements?

The question a number of regulators raised is whether product standards are being used to help life insurers skirt nonforfeiture requirements, which guarantee contract holders some value if their contracts lapse or are surrendered.

The discussion during the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., focused on the Interstate Insurance Product Regulation Commission, Washington, and some standards that are up for consideration by the entity which provides a single source of filing for life insurance products.

The issue, raised by Blaine Shepherd, a Minnesota regulator and life actuary, involves index linked features for individual deferred variable and non-variable annuities. The benefits are offered through a separate account and are not subject to the strictures of nonforfeiture requirements, according to Shepherd. These are fixed annuity products offered through a separate account, he explained. Fixed products are usually backed by an insurer’s general account. Consequently, there needs to be a discussion of the real purpose of the use of a separate account, Shepherd continued. “It seems that separate accounts are being used to accomplish ends that could not be accomplished if they were not funded through a separate account,” he continued.

Utah regulator Tomasz Serbinowski agreed that the “real question is what is the proper use of a separate account?”

The issue ties into another issue of whether separate accounts are insulated from the general account and an insurer’s creditors in the event of an insolvency, added Richard Marcks, a Connecticut regulator and life actuary.

Serbinowski asked why companies should have the option to file these products as either a variable or fixed annuity product depending on what suits them best. “There is an issue here. There is no objective standard.”

Sunday, October 17, 2010

New Group Annuity on Regulators' Radar

A new product that is described as looking like a typical group annuity but is actually a wrap product has recently surfaced in the market and regulators say that they need to watch it to make sure that there are no problems that may occur in the future.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., regulators of the Life & Health Actuarial Task Force were careful to say that the product needs to be discussed among regulators and might actually be useful to consumers.

However, they did discuss some of their potential concerns. The product issues was raised by Blaine Shepherd, a Minnesota regulator and actuary who said that the product is a form of wrap where certificate holders can exercise a form of living benefit if the assets in the product are depleted. The product, referred to as a contingent annuity, offers a living benefit guarantee to certificate holders if mutual funds which are part of the product lose their value. The insurer then steps in and pays benefits for the life of the contract holder. So, if there is no depletion of assets, then an insurer may never have to provide a benefit, according to the discussion.

Utah regulator Tomasz Serbinowski noted that the product seems to be marketed to pension plans. A number of pension plans are prohibited from investing in variable annuities and this product is pitched as an alternative, he explained. One interesting point about the product, he added, is that you don’t get a certificate when you start paying for the product, but only when the fund value goes to zero.

Larry Bruning, a Kansas regulator and LHATF chair, said that it sounds similar to a derivative product. Among the issues he said need to be examined is whether the product is properly reserved and risks are being properly managed. “I’m sure AIG [American International Group] thought it had gold in its hand when it wrote credit derivative swaps.”

Regulators plan to discuss the issue in a closed conference call.

LTC ‘Moderately Adverse’ Rate Recommendation Advanced By Regulators

Orlando, Fla.
A motion to advance rate guidance for long-term care business that is deemed ‘moderately adverse’ was advanced so that regulators at the National Association of Insurance Commissioners, Kansas City, Mo., could consider whether changes need to be made to existing LTC regulation.

The motion which passed unanimously after considerable discussion among states defines 'moderately adverse' as being 20 percent of the experience of both the present value of lifetime claims experience and the present value of future lifetime claimes experience.

The vote took place during the October 17 meeting of the Accident & Health working group at the NAIC fall meeting here. It will be considered later today by the Long-Term Care (EX) Task Force.

The discussion among regulators and actuaries underscored the delicate balance of establishing rates that are neither too low nor too high.

Minnesota regulator Julia Philips said that a number of companies she has worked with came up with their own definition of ‘moderately adverse’ experience in the 10 percent range so that the 20 percent rate in the motion would be much higher. She noted that if consumers pay a higher rate and there are fewer increases later that would be a good thing but that if claims experience improves, then they would be paying too much.

Alabama regulator Steve Ostlund, chair of the A&H working group, said that by setting the rate at 20 percent, companies are receiving profit if the moderately adverse claims experience does not materialize.

Florida regulator Dan Keating said that while he did not know if 20 percent was the right rate, he did know that 5-10 percent increases for most companies is too low. Everyone who bought these policies is paying more than 20 percent of what they paid initially were charged for them, he noted.

The motion and the discussion in general reflect the struggle regulators have had with defining ‘moderately adverse’ and putting a number to it, said John Rink, a Nebraska regulator. “Is 20 percent correct? I don’t know but it mirrors the struggle we have had in trying to determine what it is. My feeling is that it may continue to be a struggle.”

California regulator Perry Kupferman said that companies are breaking through the 10 percent rate very quickly.

Bill Weller, representing America’s Health Insurance Plans, Washington, said that while initially a company’s future morbidity claims experience compared with current morbidity may not be 20 percent, if a company waits four to five years until it reaches 20 percent, rate increases will actually be higher. But, he continued, if the increase is allowed sooner, rate increases are likely to be lower.

Bonnie Burns, an NAIC funded consumer representative, said that regulators need to consider “real world effects to consumers.” She offered an example in which a person aged 60 buying a $100 a day tax qualified long-term care insurance contract with a 30-day waiting period could pay a range of premium ranging from $1,123 to $5,548 a year. “That’s an astonishing range for similar benefits,” she said. If that same person was looking for a lifetime policy with the same benefits, the rates range from $962 to $9,725 a year, she added. A lifetime policy is less than the three-year policy of $1,123, she added. The NAIC needs to look at this issue and find out why rates are so diverse, Burns asserted.

California’s Kupferman suggested that Burns read policies for differences, check underwriting standards and check for any differences in contract administration. Burns said that even so, there is still a huge disparity and added that consumers buy long-term care insurance based on price and are not going to look at claims administration or what policy says. She asked what administering a claim means to a consumer.

“The NAIC needs pay attention to fact that there may be companies building in rate increases at the front end through this moderately adverse standard,” Burns cautioned.

LHATF Actuaries Want To Weigh In on IASB Proposal

Actuaries are discussing how to weigh in on international accounting standards that some insurers say will have a significant impact on the way business in the United States is done.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., actuaries were cautioned that changes proposed by the International Accounting Standards Board, London, could limit products available to consumers.

South Carolina regulator Leslie Jones asked why regulators need to be concerned about this proposed standard and what effect it will have effect it will have on the United States market.

By using a risk-free rate in discounting, valuation conditions will be created that could limit insurers’ desire to offer long-term products in the United States, according to Ed Stephenson of Barnert Global, representing the Group of North American Insurance Enterprises, New York. Stephenson warned that the same thing has happened in other jurisdictions.

Stephenson said that there is still a lot of work that needs to be done in this area before the IASB advances this concept. He noted that creating one model doesn’t adequately capture the nuances of both the life insurance and property-casualty industries. He also noted that reinsurance in general is not well understood in project. Rather, he continued, it creates potential arbitrage by which reinsurers would recognize upfront profits but ceding companies would not.

Another concern Stephenson cited was the potential to require unbundling of insurance contracts for accounting purposes, a proposed standard which he says is unclear. It is not certain how it will affect universal life products, he added. In fact, Stephenson continued, many of the ideas are new and untested and need far more study to determine the potential effects on insurance industry.

South Carolina’s Jones and Larry Bruning, a Kansas regulator and LHATF chair, said that it is important to weigh in on these issues and that regulators need to have a group of regulators to follow what is going on and to get up to speed so that they can comment on the proposal before the December deadline. Donna Claire, representing the American Academy of Actuaries, Washington, said that the Academy has been following these issues and could provide assistance to any group that is formed.

Other regulators including Tomasz Serbinowski of Utah and Richard Marcks of Connecticut said that it would be difficult to provide insight on the issue because the issue is complex and would require a significant commitment of time to understand. Other LHATF members said that is exactly why a small group of two to three LHATF regulators is needed to track the issue.

Thursday, October 14, 2010

Commissioners Ready Response to HHS on Medical Loss Ratios

State regulators are about to forward recommendations to the U.S. Department of Health and Human Services about how to treat medical loss ratios (MLRs).

MLRs are the minimum amount of premium per dollar that must be paid out in claims by health carriers. Under the new Patient Protection and Affordable Care Act (PPACA), the minimum MLR is 80 percent or 80 cents on the dollar. If carriers do not meet this minimum, they must rebate premium to those enrolled in their plans.

How medical loss ratios are constructed is important, a number of insurance commissioners say, because without at least a phase-in in 2011, 2012 and 2013, carriers may decide to withdraw from their states. A number of carriers are already raising the issue with their insurance departments, according to comments from NAIC leadership made a few weeks ago after a meeting with President Barack Obama and HHS Secretary Kathleen Sebelius.

State insurance commissioners put final touches on proposed recommendations that will be put to a final vote at the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., when it meets in Orlando this coming week.

The Health Insurance and Managed Care “B” Committee discussed and adopted work developed by the NAIC’s Life & Health Actuarial Task Force that would allow for rebates to be calculated into the medical loss ratio during the transition period.

The discussion then turned to the issue of credibility and how a 50 percent requirement could have a negative impact on small groups. Addressing credibility could offer smaller health groups relief and remove some of the urgency to consider national aggregation, Kansas Insurance Commissinoner Sandy Praeger and "B" Committee chair commented. One way to reduce the strain on small groups would be to start with an 80 percent credibility requirement and phase it back to 50 percent, she said. Another option would be to leave it at 80 percent.

A decision was made to hold the issue and discuss it at the NAIC executive committee/plenary session in Orlando when the committee is supposed to have data provided by Milliman, actuarial consultants, to make a more informed decision.

Oklahoma Insurance Commissioner Kim Holland, NAIC Secretary-Treasurer, said that it is imperative that some relief be provided to carriers so that they remain solvent and remain in the states. New York regulator Lou Felice remarked that while he understands that concern, it is important that regulators “keep their eye on the ball,” namely to retain access to health insurers for states’ residents. If carriers are given too much latitude on MLRs, there will be less aggressive pricing and less access to insurance, he explained. Felice added that there will be a big transformation in 2014 when new requirements become effective and wondered whether the outcome will just be delayed: states will lose carriers in 2014 rather than in 2011 if they are given latitude now.

Connecticut Insurance Commissioner Tom Sullivan asked Felice whether the large group market is broken. Felice responded that “pricing is more aggressive in New York large groups which are in the 80s already. They can meet [MLRs] on a state and national basis.”

Kansas’ Praeger said that she fully understood that rebates should be an occasional and not a regular occurrence. In response to a question from Illinois Insurance Director Michael McRaith, Praeger said that there could be a reconsideration of decisions recommended by the NAIC at a later point if needed. She emphasized that regulators need to do everything that they can to minimize market disruptions.

On the issue of credibility, the adjustment to account for random statistical fluctuations in claims experience for smaller plans, there was discussion on an 80 percent permanent rate or phase back to 50 percent. It was noted that the American Academy of Actuaries, Washington, illustrated a 90 percent permanent rate to minimize market disruption.

However, it is not endorsing it, according to Academy spokesperson Andrew Simonelli. In fact, the Academy's Medical Loss Ratio Regulation work group has recently focused on an 80 percent level. It has identified flaws in the 50 percent rate, he continued. And, he added, the work group has said that, “Increasing the magnitude of the credibility adjustments may help keep insurance markets attractive to smaller competitors, which would enhance consumer choice.”

Tim Yost, a consumer advocate, agreed that the goal is not to pay rebates and suggested that the 80 percent credibility requirement could be used for the smallest groups which are most likely to face challenges.

Barbara Yondorf, another consumer advocate and a former Colorado insurance regulator, said that health plans in her state were very concerned with aggregation and believed that health care should be addressed as a local issue.

Wednesday, October 13, 2010

Is It Soup Yet? Opinion Divided Over Annuity Disclosure Work

Proposed annuity disclosure requirements are about to be advanced by state insurance regulators after over two years of work. But insurers and actuaries are raising concerns over whether the work is ready.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., next week, a draft of the annuity disclosure model regulation will be moved from the working group to its parent “A” committee as required by the group’s charge.

But the project, which has been under discussion for over two years and has had numerous drafts exposed for public comment, is receiving kick back from the American Council of Life Insurers, the American Academy of Actuaries, and the Insured Retirement Institute, all based in Washington.

At the end of the most recent discussion today, Kelly Ireland, an ACLI representative, asked whether broad support to hold the draft for a short time period might be given consideration. Jim Mumford, chair of the working group and Iowa’s first deputy insurance commissioner, said that a draft needed to be advanced. He suggested that interested parties who want to hold the draft for more discussion should take it up with the NAIC’s “A” Committee. He said that if the “A” Committee does decide to hold up the model, it should look at take a few specific points of concern and examine them rather then re-exposing the whole model since it had been through a number of exposures already. However, Alabama regulator Steve Ostlund said that the draft should be re-exposed because the latest draft with a number of changes is expected to be released on October 14 less than a week before a vote.

The differences in approach in crafting the model were illustrated during a discussion on use of a current rate to illustrate fixed indexed annuities. For instance, Utah insurance regulator Tomasz Serbinowski maintained that seven to 10 years would be a good time period to illustrate favorable and unfavorable performance in an indexed product so that the product could be understood by consumers. The discussion continued about whether there was value in illustrating for up to 30 years and whether that extended illustration better identifies how the index works over time.

Lee Covington, representing the IRI, said that showing the guaranteed rate for a prolonged period of time puts the product in a better light. But Iowa’s Mumford pointed out that the 30-year time period was taken from life insurance illustrations and that consumers keep life insurance products longer than they keep annuity products. Covington responded that most financial planners are creating retirement plans that span to age 90-95 for clients and that more long-term planning is now more important with new fiduciary standards. He argued that a shorter illustration would put insurers at a competitive disadvantage with other sectors of the financial services market.

Barbara Lautzenheiser of Lautzenheiser Associates, Hartford, Conn., said that using both current and long-term guarantees as well as high and low scenarios in an illustration provides the consumer with a better understanding of where she is and where she needs to go.

Mumford asked if a reasonable cap of 8 percent for current interest rates in illustrations could be established. The ACLI’s Ireland responded that the ACLI had offered a solution which would feature a high and low scenario and a cap of 6 percent for fixed annuities. Mumford said that he would take a look at it.

Kim O’Brien, representing the National Association for Fixed Annuities, Milwaukee, said that financial planning organizations such as the Financial Planning Association, Denver, did not have specific standards for the number of years a financial plan should encompass. IRI’s Covington followed up by saying that a limit of 15 years could conceivably prevent a company from illustrating annuitization values, the cash streams created by turning a lump sum value in the annuity to regular income. He said, for example, that if the annuity was purchased at age 50, then the consumer could not see the annuitization value at age 70.