Monday, March 29, 2010

NAIC Adopts Suitability Model

A long debated model to ensure annuities are suitable for consumers was fully adopted after over a year of discussion by the National Association of Insurance Commissioners, Kansas City, Mo. The NAIC announced the adoption at its spring meeting in Denver.

The Suitability in Annuity Transactions Model Regulation is a modification of a model that was adopted about 7 years ago by the NAIC.

"After working with consumers, regulators and industry representatives, we have developed stronger standards to better protect American consumers," said Thomas R. Sullivan, Connecticut Insurance Commissioner and Chair of the NAIC Life Insurance and Annuities Committee. "We look forward to working with our legislative colleagues to implement these protections."

Changes adopted to the Model Regulation include:
• Clarifying that the insurer is responsible for compliance with the model’s requirements, even if the insurer contracts with a third party;
• Requiring the review of all annuity transactions; and
• Establishing both general and product-specific training requirements for producers.

The American Council of Life Insurers, Washington, issued a statement following the vote stating that is supports the goal of strong, uniform annuity suitability standards. But it cautioned that state interpretation and implementation must be consistent.

Team Work!

What do regulators, insurers and consumer advocates all concur on? The new health care law, the Patient Protection and Affordable Care Act, signed into law on March 23, will require a lot of work right away that is accomplished as a coordinated effort of a lot of different interests.

The leadership of the National Association of Insurance Commissioners, Kansas City, Mo., detailed what those efforts would be during a press conference at the organization’s spring meeting here. The issue was then discussed in detail in a packed session of the Health Insurance and Managed Care ‘B’ Committee. The ‘B’ Committee’s huge room was filled with several hundred attendees who heard a table of over 25 commissioners speak about the Herculean effort that lay ahead. Also listening was Jay Angoff, a former Missouri insurance commissioner now representing the U.S. Department of Health and Human Services.

Jane Cline, NAIC president and West Virginia insurance commissioner, said that commissioners recognize that there are mixed thoughts among the states about benefits and concerns of the law but noted that there are certain requirements that the NAIC by law have to implement and that implementation will have to begin now. There are 12-14 places in the where the NAIC is specifically referenced as the entity that will have to provide guidance, Kevin McCarty, NAIC vice president and Florida insurance commissioner added.

State insurance regulators need to assert that they are the experts and to the degree possible states must maintain sovereign authority where they can, said Kim Holland, secretary-treasurer of the NAIC and Oklahoma insurance commissioner. There is diversity to how different states approach health care and to some extent there is flexibility in the law that will allow states to exercise those differences, she added.

Sandy Praeger, former NAIC president, chair of the “B” Committee and Kansas insurance commissioner, said that state insurance regulators will “establish ourselves as the go to experts” on implementing the new law. This will play an important role because any legislation is affected by the ‘law of unintended consequences’ that will require a fleshing out of rules and regulations.

Praeger said that insurance regulators will focus on implementing the requirements that the law makes them responsible for and not focus on any challenges to the law by states attorneys general. “This is the law of the land now and we will focus on the best possible implementation.”

Regulators are faced with two huge projects that to some degree overlap, according to Susan Voss, president-elect of the NAIC and Iowa insurance commissioner. “We are addressing regulatory modernization as well. So, we have two major heavy lifting projects we’re working on,” Voss said. The one commonality to both projects is the solvency issue, she added.

Voss also addressed the flexibility in the law, noting that while there are a lot of requirements for states to adhere to, many of them are floors and not ceilings, allowing for flexibility.

Among the immediate issues that regulators need to focus their attention on are the establishment of exchanges as required by the new law and the establishment of high risk pools, according to Praeger. She said that 35 states already have high risk pools and there are a variety of ways to establish these pools. There are ways in which the existing high risk pools can be used to meet requirements so that states “don’t have to reinvent the wheel,” she said.

The NAIC intends to use the existing committee structure to start work on the law’s implementation, according to Cline. Cline also says that the NAIC will reach out to groups including the National Governors Association, Washington, and the National Conference of State Legislatures, Denver.

Other groups including the American Academy of Actuaries, Washington, are planning a huge effort to be a resource to state regulators and legislators during this transitional time.

The intent to use the existing structure will save time and effort and make it easier to begin necessary work, testified Randi Reichel, speaking for America’s Health Insurance Plans, Washington, during the hearing that followed the press conference.

Joel Ario, vice chair of the ‘B’ Committee and Pennsylvania insurance commissioner, noted that using the existing NAIC committee structure will help facilitate regulators’ work.

And Mila Kofman, director of the Maine Bureau of Insurance and a former NAIC funded representative specializing in healthcare, said that the use of the NAIC Website to detail the work of the NAIC and how that work is being parsed out would be helpful not only to consumers but also to state regulators.

Chris Petersen, representing Delta Dental, noted that work will have to be done to ensure a pediatric dental benefit and suggested cataloguing all of the NAIC models that will be impacted by the new law. Mary Beth Senciewicz, deputy commissioner in Florida responded that the NAIC had already started that work but added that any such information from industry would also be welcome.

Joan Gardiner, representing Blue Cross/Blue Shield, said that “we can’t underestimate what needs to be done very, very quickly.” As an example, Gardiner cited development of a definition for medical loss ratios.

Consumer advocates also offered suggestions for getting the work started. Bonnie Burns, an NAIC funded consumer representative with California Health Advocates, said that the Medicare Advantage law is an example of “what not to do” as work on the law’s implementation starts. The regulations developed offered a “multitude of different plans and complexity of information. Benefits and plans must be clearly stated in simple language because too much choice is worse than no choice at all.” The reason, she explained, is because “it is an open choice for abusive behavior.” Consumers who are unable to make a choice turn to others for help which leaves them exposed to those who would take advantage of them.

Burns said that if implementation of the new regulations are done right, it is a tremendous opportunity for state regulators to show that the state insurance system works well.

Lynn Quincy of Consumers Union also expressed concern that points such as medical loss ratios be adequately defined so that it is clear what they will do and what they won’t do. She noted that medical loss ratios will not be a “silver bullet.”

And, Sabrina Corlette, of the National Partnership for Women & Families, said the immediate focus will need to be on development of the risk pool requirement, work that should incorporate the existing risk pool structure.

Sunday, March 28, 2010

NAIC Agrees to Look at Issue of Stranger Originated/Owned Annuities

A charge to explore stranger originated/owned annuities was approved by state insurance regulators during the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo., here.

The vote took place during the NAIC’s Life Insurance and Annuities ‘A’ Committee on March 27. The charge reads: “…explore the issue of stranger originated/owned annuities, how these transactions may interact with insurable interest laws and the impact of this activity on consumers with respect to any appropriate regulatory action in the form of revisions to the Viatical Settlements Model Act (#697), a new model or other appropriate regulatory response. Important.”

Brenda Cude, an NAIC funded consumer advocate and professor of the University of Georgia, recommended to the ‘A’ Committee that NAIC buyers’ guides and literature be reviewed to reflect new issues that the market now faces. And, Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., also recommended that the NAIC compendium of laws on viatical settlements be examined to reflect changes both to life settlement models and laws.

A decision was made not to change the charge but to separately examine changes to the buyers’ guides, Tom Sullivan, Connecticut insurance commissioner and ‘A’ Committee chairman, said. Sullivan said that a public hearing to address the issue of stranger originated/owned annuities will be held in Washington on May 20. Sullivan said that he and other members on the ‘A’ Committee look forward to hearing from consumers, insurers, the life settlement industry and anyone else who wants to speak on the issue. “But the real people I want to hear from are consumers who were victimized,” he added. Once regulators have the hearing, “we will tease out the issue and see what the next step should be.”

Friday, March 26, 2010

LHATF Hears VA report; Debates Interest Rate Generator

A team from the actuarial firm of Oliver Wyman presented a report titled “Observations on Emerging Variable Annuity Statutory Accounting Results” during the March 25 afternoon session of the Life & Health Actuarial Task Force. LHATF met during the spring meeting of the National Association of Insurance Commissioners in Denver.

The presentation is a prelude to a position paper Oliver Wyman will present next month. The firm’s team started the presentation by looking at issues including potential disincentives to hedge risks particularly interest rates and volatility as well as the standard scenario floor dominating more than might have originally been intended.

Among the results, according to the team, is the possible demand for greater hedging solutions and the need to explain why a company is deploying this program and why the actions are important.

The Wyman research looked at 12 of the largest 20 variable annuity writers, according to the team. It looked at the potential “unintuitive consequences” of hedging strategies, suggesting that further study is needed. For instance, the intuitive impact of the hedging, according to page 7 of the slide presentation, was decreased capital requirements and increased stability of capital requirements. But the unintuitive impact of hedging would be increased total asset requirements and greater instability of capital requirements.

Of 12 companies that were examined by Wyman, a third did not see a hedging benefit. Four of those companies experienced stagnant or increased TAR; two saw an increase in required capital; and six had no capital required. And the team referred to slide 12 of the presentation which indicated that if unhedged, under AG 43 12 of 14 companies would have been driven by the Standard Scenario.

The team told regulators that “one dirty secret [of hedging] is regulatory capital arbitrage,” which provides greater regulatory capital but not necessarily greater protection.

Following this presentation, LHATF held a debate of an interest rate generator developed by the American Academy of Actuaries, Washington, used to produce interest rate and Treasury rate scenarios led to a discussion on whether the generator should rely on more recent rates rather than on a 50-year historical Treasury rate.

New York regulator Fred Andersen argued that it is a big issue for products such as UL with secondary guarantees because even a 25 basis point difference in the interest rate can have a substantial impact on the product. So, if the rate used in stochastic modeling is 5.5% and the actual rate is lower, that can really affect the result.

But John Bruins, a life actuary with the American Council of Life Insurers, Washington, pointed out that the real risk is using a rate that will create volatility. Larry Bruning, Kansas chief actuary and LHATF chair, said that volatility in scenarios was the very thing that would help regulators understand the impact of different economic scenarios on a company.

Nancy Bennett, representing the Academy, was asked whether the generator was looked at for a “whole host of products.” She responded that the Academy wanted to have a method for predicting the future for any product, so avoided looking at specific products which could create “product bias.”

Tomas Serbinowski, a Utah regulator responded that the issue highlights the uncertainty about really relying on actuarial judgment but at the same time questioning the work of a professional actuarial body. But New York’s Andersen, disagreed, saying, “should we just let the academy ….what are we doing analyzing this stuff if not carefully analyzing what is put in front of us.”

Thursday, March 25, 2010

Treasury Department Issues Guidance on Actuarial Guideline 43

The U.S. Treasury Department has released guidance on Actuarial Guideline 43 which addresses reserving for variable annuities.

The guidance, Notice 2010-29, will offer interim guidance until it is determined whether a new principles-based approach to reserving is finalized and put in place in the states and, if so, what that final product will look like.

Among the provisions in the guidance is a point stating that the standard scenario amount determined under AG 43 will be treated as a life insurance reserve for federal income tax purposes if the requirements of the guideline, including the account value return assumptions are met.

The American Council of Life Insurers and the American Academy of Actuaries, both in Washington, are still reviewing the just released guidance.

Guardrails or Fences

Regulators say they need “guardrails” to ensure conservatism as the final piece of a principles-based approach to reserving advances toward completion, but actuaries are expressing frustration that it seems more like fence building, boxing companies into prescribed requirements.

During the spring meeting of the National Association of Insurance Commissioners here, actuaries openly expressed disappointment that with a targeted August time frame of advancing a valuation manual, the final piece of the six-year effort to create a principles-based approach to reserving, the whole point of the project is being lost in a list of prescribed requirements designed to create more conservatism. The frank discussion took place during the opening session of the Life & Health Actuarial Task Force.

“In an effort to cover every contingency, we may be drifting away from the focus of true principles-based reserving,” cautioned Donna Claire of Claire Thinking, who is spearheading the massive actuarial effort by the American Academy of Actuaries, Washington. Claire referred to recent decisions by regulators such as not permitting aggregation of business lines for reserving purposes as preference for conservatism that is “actually defeating the purpose of a principles-based approach to reflect a company’s structure and the risk that it is actually taking on. Eliminating aggregation changes how a company manages its business to report for principles-based reserving, Claire explained. Eliminating aggregation eliminates the effect of hedging offsets. For example, she said, a block of deferred annuities and payout annuities are natural offsets.

“We are concerned that PBR changed over last couple of years and just becoming another regulatory requirement. If that happens, it will marginalize its use to look at risk and be expensive for companies. If it becomes just a regulatory tool with little or no gain to regulators or industry, with just prescribed margins, it will not reflect actual risk levels of companies. But rather, it will create just more complex reserving requirements.”

South Carolina regulator Leslie Jones asked for specific examples of where regulators had gone too far in prescribing formulas. David Sandberg, speaking for the Academy, said that the concept of risk offsets is a “key foundation” of the PBR approach. Not allowing risk offsets is a violation of a major principle of PBR. He cited what he called prescriptive requirements such as the elimination of a company using its own stochastic generator, now replaced by what he called a “prescribed set of scenarios that may not capture specific risks of a particular company.” He also cited a risk transfer rule for reinsurance which he called “a black and white arbitrary in or out transfer rule” rather than letting a model capture real risk.

Tomas Serbinowski, a Utah regulator, said that a “few fundamental problems” are the source of disagreement on the issue. It is one thing to have a system that uses data and company experience, he said. But, he continued, there is very little chance for a regulator to verify data and the concern is that regulators will end up relying too much on actuarial judgment. “A system where you don’t have anywhere to anchor assumption is completely meaningless to me. It is just a guess. You can call guess or actuarial judgement but you don’t have much to go on to decide that it is what it actually is.”

Sandberg countered that the whole foundation of PBA is based on company mortality experience and some lapse experience but “fundamentally based on not just a guess but experience.”

Later in the session, Alaska regulator Katie Campbell proposed an amendment that makes it easier for small companies to participate in PBR by using a certification process that these companies perform anyway in asset adequacy analysis to simplify their participation in PBR. Companies who used the certification could avoid stochastic scenario testing and possibly deterministic testing and a proposed net premium reserving test being developed by the American Council of Life Insurers, Washington. The motion was adopted by LHATF.

Following the full-day session, Claire said that such efforts by LHATF made her more optimistic that the project would be put back on track.

The full-day session also included a description of the net premium approach presented by John Bruins and Paul Graham, life actuaries with the ACLI. Bruins argued that regulators should consider a net premium floor rather than creating new tables for a net premium reserve. The reason, he explained, is that new tables could be problematic from a tax viewpoint because it conceivably could create a perception that companies are trying to manipulate reserves by referencing the tables instead of the current CRVM tables.

Regulators and companies are still considering the net premium reserve piece of PBA.

Monday, March 22, 2010

The Health of Our Country

The acrimonious healthcare debate that came to a head with passage of historic healthcare legislation, The Patient Protection and Affordable Care Act, H.R. 3590, by Congress late yesterday, points to two ways to look at health in our country. Both are critical to the long term prosperity and existence of our government as we know it.

The first perspective has more to do with tone. For months, I have been filled with dismay over the twisting and omission of facts on the healthcare issue, misinformation calculated to work up average Americans into an angry frenzy. That frenzy came to a full lather when Americans’ wrath was turned on Congress this past weekend. My dismay turned to outrage when individual Congressmen were subjected to verbal and physical harassment. The act of spitting on Congressman Emanuel Cleaver II, D-Mo., just about summed up the contempt for true statesmanship and lack of respect for different viewpoints that has come to grip our country and that must be addressed if the United States wants the legislative process to remain healthy going forward.

In a sense, the American people have taken a cue from federal lawmakers who choose to incite rather than educate with words like ‘Armageddon’ and ‘baby killer.’ Or to focus on what they say is the back breaking cost of this new law, rather than tempering those estimates with other estimates such as the one cited in President Barack Obama’s address after the vote: the law will reduce the U.S. deficit by more than $100 billion over the next decade and by more than $1 trillion in the decade after that. Or if those Congressional Budget Office figures seem too partisan, by noting a July 21, 2009 article by Dan Eggen of The Washington Post listing the millions of dollars in lobbying efforts that had been effortlessly poured into swaying the debate.

In fairness, there are more level headed lawmakers in both parties who tried to keep the rhetoric to a bearable level and hopefully those voices will be heard more clearly going forward.

What gave me some hope for the 45 million uninsured Americans and more generally for Americans, was listening to a discussion by state insurance regulators earlier today. In a very rational way, three insurance commissioners explained how they would proceed now that health care reform is a reality.

Jane Cline, president of the National Association of Insurance Commissioners, Kansas City, Mo., and West Virginia insurance commissioner; Kim Holland, NAIC secretary-treasurer and Oklahoma insurance commissioner; and, Sandy Praeger, former NAIC president and Kansas insurance commissioner, tried to address the enormous amount of work that awaits state regulators as well as state legislators. Holland is a Democrat, Praeger a Republican.

Both Holland and Praeger agreed that in their respective legislatures there might be pushback over federal preemption or on other issues tied to the new law. They both described their roles as providing information to their legislatures to help those bodies make necessary decisions.

That emphasis on education is what Americans need to develop a clear view of how changes in healthcare will benefit Americans.

During the discussion, reporters noted that there would be efforts to reverse the new law and asked if work would be put on hold as a result of this possibility. Cline, Holland and Praeger said that work would proceed apace because some of the requirements take effect right away.

For instance, state regulators will continue work on standards for medical loss provisions which need to be in place by the end of the year. And, according to Praeger, it looks as if most of the enforcement of new regulations associated with the law will be left to states which will require the NAIC to work with the Department of Health and Human Services and HHS Secretary Kathleen Sebelius, a former NAIC president.

If carriers sell insurance across state lines, according to the commissioners, state compacts will have to be developed to create standards acceptable to states in the region of cross-selling.

And, according to Praeger, while the rate increase issue is not fully clear, it appears that states will continue to play a role in the process. There is the potential for some process of reporting rate increases to the federal government but approval of rates remains with state regulators, she adds. Praeger continues, “I think going forward some states with little oversight will have to meet some minimum federal requirements for rate approval. The bottom line is rates have to be linked to the company's financial condition so an arbitrary rate cap could be a problem.”

Wednesday, March 17, 2010

NAIC Rating Agency Report Advances

A report which addresses what regulators maintain is a need for new ratings for regulatory purposes was adopted today by the Rating Agency “E” working group of the National Association of Insurance Commissioners, Kansas City, Mo. The report will be reviewed by the working group’s parent “E” Committee during the spring NAIC meeting next week in Denver. The working group was chaired by Illinois Insurance Director Michael McRaith.

The NAIC as well as some insurers have criticized how vigilant rating agencies were in watching residential mortgage-backed securities and have cited this treatment of ratings as one possible reason for underestimating expected losses. It hired Pacific Investment Management Company to evaluate these securities using methods that regulators developed.

During the spring meeting, the Life & Annuities “A” Committee will consider a new charge concerning the stranger-owned/originated annuity issue, the NAIC announced. The “A” Committee is chaired by Connecticut Insurance Commissioner Tom Sullivan who along with vice-chair, North Dakota Insurance Commissioner Adam Hamm, will examine the issue along with others such as annuity disclosure. A public hearing will be held in New York on May 4.

A Sign Worth Watching

If you didn’t have your morning coffee the other day, the recent report from Moody’s Investors Service, New York, examining the sustainability of ‘Aaa’ sovereign ratings was enough to give you your morning jolt.

The report examines the challenges facing the four largest ‘Aaa’-rated governments - France, Germany, the United Kingdom and the United States - as well as those of Spain and of the much less fiscally-challenged Nordic European countries.

While not dire at the moment, it is cause for pause and concern over the long term. According to the March 2010 Sovereign Monitor Report, four largest Aaa-rated governments - France, Germany, the United Kingdom and the United States – are facing challenges. The report also mentions Spain and even the “much less fiscally challenged Nordic European countries.”

The main factor that can push a country from ‘Aaa’ to ‘Aa’ status in the current crisis is a deterioration of its balance sheet, according to Moody’s.

The outlook for the U.S. is sobering. According to the report, “The ten-year outlook included in the budget for the federal government shows a continuous rise in the ratios of debt to GDP and interest to revenue (despite some decline in the ratio of debt to revenue). By the end of the period, debt affordability would deteriorate to approximately the peak level seen during the 1980s, i.e., a ratio of interest to revenue of about 18%. The difference this time, however, is that the ratio would reach that level due to the size of the debt, whereas during the 1980s it was monetary policy that caused interest rates to be high. As monetary policy was eased, affordability improved.”

When asked if companies in the U.S. would have a ratings ceiling imposed if there was a sovereign downgrade, a Moody’s spokesperson responded that “Under certain circumstances, a company’s debt can “pierce the sovereign ceiling.” But, Moody’s did not explain how this could be done or how common the piercing is.

Although the rating threat is not imminent and if action is taken, may never occur, one can’t help but wonder what impact it would have on insurers, either in the U.S. or in the other countries cited.

The report follows another released by Moody’s last week. The report, titled “Moody’s Global Liquidity Stress Test for Life Insurance Operating Companies,” details a global stress test for operating companies and examines the results of that test’s application.

As detailed by Moody’s, “the global liquidity stress test model uses a simple classification scheme to rank and classify operating companies’ assets and liabilities into discrete “buckets”, comprised of assets (or liabilities) with similar liquidity characteristics. Stress liquidity haircuts are ascribed to market values for each asset type (for both market volatility and liquidity premia) and stress surrender rates are ascribed to book-value liabilities, over a one-year timeframe.“

The results indicate that there are significant variations by region, Moody’s says. For instance, “life insurance groups in the US exhibited the lowest Liquid Assets/Liquid Liabilities (LA/LL) median ratio at 208%, while Asia ex-Japan displayed the highest median ratio at 331%, with the UK a close second at 310%.”

The U.S. also was the biggest negative outlier when measured by realized gains (losses) and realized gains (losses) to equity by region. However, according to Moody’s the reason may be, at least in part, that the U.S. companies report different amounts for book and market values while other regions or the world report book value as market value.

But for the U.S. personal lines industry, the good news is that the outlook is stable despite a very competitive underwriting environment and a weak U.S. economy, Moody's notes in a recent credit outlook for the sector.

Tuesday, March 9, 2010

Sullivan, Hamm Release Annuity Guidance

Connecticut Insurance Commissioner Thomas Sullivan released draft regulatory guidance for adopted amendments to the Suitability in Annuity Transactions Model Regulation approved by the Life Insurance and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo.

The amendments will be considered during the spring NAIC meeting in Denver on March 25-28.

The guidance was drafted by insurance regulators in several states. Sullivan, the chair of the “A” Committee, released the document in conjunction with North Dakota Insurance Commissioner Adam Hamm, “A” Committee vice chair. He noted that both he and Hamm had originally intended for the document to be shared only by regulators but “in the spirit of transparency, we are sharing it with interested parties prior to the Denver meeting.”

The document states that the model was adopted to:
--Establish a regulatory framework that holds insurers responsible for ensuring that that annuity transactions are suitable (based on the criteria in Sec. 5I), whether or not the insurer contracts with a third party to supervise or monitor the recommendations made in the marketing and sale of annuities;
--Require that producers be trained on the provisions of annuities in general, and the specific products they are selling; and,
--Where feasible and rational, to make these suitability standards consistent with the suitability standards imposed by the Financial Industry Regulatory Authority (FINRA).

It describes some of the changes made during the NAIC winter meeting and states that “Insurers are responsible for any unsuitable annuity transactions – regardless of whether it is due to the action or inaction of the insurer or the producer and regardless of whether the insurer contracts with a third party to supervise or monitor the recommendations made.”

And, according to the released document, “an insurer will also be expected – and may be ordered -- to take reasonably appropriate corrective action for any consumer harmed by the insurer’s violation of the regulation, or its producer’s violation.”

Producers will also be held accountable, according to the document which says that “General agencies, independent agencies and insurance producers will be expected – and may be ordered -- to take reasonably appropriate corrective action for any consumer harmed by a producer’s violation of the regulation.”

Monday, March 8, 2010

Phoenix Details Impact of Secondary Market on Cost of Insurance

Deviations in pricing assumptions from actual experience in its life insurance products have adversely affected profitability and will result in an increase in the cost of insurance rates for certain universal life policies effective April 1, 2010, Phoenix Cos., Hartford, Conn., states in a March 2, 2010 10K filing with the Securities and Exchange Commission, Washington.

The filing states that these deviations could continue in the future. The company says that the adjustment on April 1 and any other permitted adjustments “may not be sufficient to maintain profitability.”

Phoenix also notes that “In addition, increasing charges on in-force policies or contracts may adversely affect our relationships with distributors, future sales and surrenders and may result in claims against us by policyholders. Furthermore, some of our in-force business consists of products that do not permit us to adjust the charges and credited rates of in force policies or contracts.

Phoenix explained that among the assumptions factored into pricing is persistency and that “recent trends in the life insurance industry” include “the evolution of the financial needs of policyholders and the emergence of a secondary market for life insurance” as well as increased availability of premium financing. In short, according to the 10K, “the reasons for purchasing our products are changing.” The company also notes an increase in sales of policies to older individuals.

Consequently, according to the Phoenix 10K, in spite of controls it says it instituted, “We believe that our sales of universal life products include sales of policies to third party investors who, at the time of policy origination, had no insurable interest in the insured. The effect that these changes may have on our actual experience and profitability will emerge over time.”

In addition to changes in cost of insurance rates, according to Phoenix, deviations in actual experience from pricing assumptions may result in an increase in the amortization of deferred policy acquisition costs, which would negatively impact results of operations.

Recently, Phoenix has received the attention of rating agencies. On Feb. 12, Standard & Poor’s Ratings Services, New York, lowered the company’s counterparty credit rating to ‘CCC+’ from ‘B-‘ and lowered the counterparty credit and financial strength ratings of the companies operating subsidiaries including Phoenix Life Insurance Co. to ‘BB-‘ from ‘BB.’

"The downgrade follows Phoenix's release of its fourth-quarter 2009 results, which showed that its statutory surplus and asset valuation reserve decreased by $26.2 million in the quarter, or a 4% decline, and $279.1 million for the full year, or a 33% drop," said Standard & Poor's credit analyst Adrian Pask. "The company also reported a GAAP operating loss of $34.2 million."

"The decline in surplus stemmed from increases in reserves for discontinued group accident and health business and credit losses."

In September 2009, Moody’s Investors Service, New York, rated the carrier’s financial strength ratings a ‘Ba1.’

In its rating explanation, Moody’s stated that “The life insurance company investment portfolio has incurred substantial realized and unrealized losses, and contains a significant unrealized loss position relative to the company's statutory surplus. Capital of the life insurance business has declined materially in 2008 and again in 2009, despite efforts to stabilize the company's capital position, including transactions designed to specifically improve Phoenix Life's risk-based capital (RBC) ratio. Operating earnings of the insurance operations have been depressed--impacted by the difficult market impacting the rest of the life industry--and the company's financial flexibility is constrained.”

Moody’s added that “Major distributors that had previously marketed Phoenix's products through their affiliated producers have indefinitely suspended sales of Phoenix's products since 2009Q1 because of their credit concerns with Phoenix. As a result, Phoenix's 2009 product sales will be substantially lower than those in 2008, and Moody's believes there is little likelihood that they will return to meaningful levels in the near to intermediate term.”

However, Moody’s did note strengths including “a lLarge existing block of permanent life insurance to affluent individuals and businesses, very long term maturity of its debt obligations and modest cash needs at the holding company.”

On January 13, 2010, A.M. Best Company, Inc., Oldwick, N.J., downgraded the company’s financial strength rating from to ‘B+’ from ‘B++’ and downgraded our senior debt rating to ‘bb-‘ from ‘bb+.’ Best maintains a negative outlook on the company’s ratings.

Saturday, March 6, 2010

NCOIL Legislators Tackle Tough Annuity, Settlement and After-market Parts Issues

State insurance legislators tackled emerging issues including annuity sales to investors, the possible re-opening of a life settlement model and property-casualty issues including steering and after-market crash parts.

The issues were addressed during the spring meeting of the National Conference of Insurance Legislators, Troy, N.Y. in Charleston, S.C. The meeting drew 255 attendees and runs from March 5-7.

State Rep. Robert Damron, D-Nicholasville, Ky., NCOIL’s president, says that there was discussion about separating the after-market parts issue from the issue of steering policyholders to insurer favored body repair shops. Those issues were deferred until the July summer meeting in Boston on July 8-11.

On the life insurance side, he added, the right to sell annuity guarantees on the secondary market was discussed as well as the possibility of re-opening the Life Settlements Model Act to reflect the possible need for an update given the laws that are being put in place in many states.

Whether the annuity issue will be incorporated into any changes to the life settlement model or will be treated as a separate model will be determined during the July meeting, he adds.

Damron noted that producers are the ones who are selling annuities and insurers have not been performing underwriting on those annuities. So, companies which are seeing annuities and their riders re-sold to investors are being impacted not only by the resale but also by the commissions they are paying producers on annuities sold.

The Life and Financial Planning session this morning included a presentation from Larry Kosciulek, director of the Financial Industry Regulatory Authority (FINRA), in Baltimore, Md., discussed life settlement activity as it relates to variable life and annuities policies as well as how FINRA has treated life settlements since 2006.

Following Kosciulek’s presentation, state Rep. Brian Kennedy, D-Hopkinton, R.I., detailed the purchase of variable annuity products on terminally ill individuals so investors could profit once the individual died. It was agreed that more information is needed. Oklahoma Insurance Commissioner Kim Holland, secretary-treasurer of the National Association of Insurance Commissioners, Kansas City, Mo., detailed a planned hearing on the issue in New York on May 4 (see story on interview with Connecticut Insurance Commissioner Tom Sullivan below posted on March 4.)

Georgia state Senator Ralph Hudgens, R-Hull, Ga., discussed his concerns over insurance producers who are prevented by insurers from discussing the life settlement option. The issue will receive more discussion at NCOIL’s July meeting.

Friday, March 5, 2010

NCOIL Meeting Kicks Off Today

Annuities will be one of the key topics that state legislators are looking at as they convene today in Charleston, South Carolina.

The National Conference of Insurance Legislators, Troy, N.Y., will consider a resolution to protect the rights of consumers who purchase annuities with guarantees.

The resolution follows the announcement by the National Association of Insurance Commissioners, Kansas City, Mo., that it will hold a public hearing, probably in May, to examine the issue.

The resolution states that NCOIL believes that the rights of insurance consumers purchasing annuities should be protected.

It also states that the issue of the right to assign and sell in-force annuities should potentially be incorporated into the NCOIL Life Settlements Model Act or addressed in a separate model act “to protect the rights and interests of annuity consumers and prevent the illegal sale
of annuities prior to their issuance.”

The resolution also opposes “the Additional Standards for Guaranteed Living Benefits for Individual Deferred Non-Variable Annuities, Additional Standards for Guaranteed Living Benefits for Individual Deferred Variable Annuities and Additional Standards for Guaranteed Minimum Death Benefits for Individual Deferred Variable Annuities as adopted by the Interstate Insurance Product Regulation Commission (IIPRC) as being unjustified and anti-consumer because they take away the contractual rights of owners of annuities without justification.”

And it resolves that “NCOIL members of the Interstate Insurance Product Regulation Commission (IIPRC) should elect to opt out of these standards and include in such opt-out language, a statutory provision which states that these rider benefits are assignable and shall not be terminated if the contract is sold, transferred, or assigned;.”

The resolution would also be sent to “state legislative leaders, Governors, the Interstate Insurance Product Regulation Commission (IIPRC), the National Association of Insurance Commissioners (NAIC), and the state chief insurance regulatory officials.”

Other resolutions that will be considered oppose an Office of National Insurance and a resolution urging the Senate Banking, Housing and Urban Affairs Committee To exclude insurers from systemic risk regulation and assessments for the resolution of systemically risky companies.

Thursday, March 4, 2010

Connecticut’s Sullivan Discusses Concern Over Stranger-Originated Annuities

By Jim Connolly
The growing concern that annuities might now be subject to the same stranger-originated abuses that life insurance face led to a decision to hold a public hearing to air the issue, says Connecticut Insurance Commissioner Thomas Sullivan.

The National Association of Insurance Commissioners, Kansas City, Mo., made an announcement on March 3 that it intends to hold a public hearing on the emergence of stranger originated/owned annuities. Details of the hearing are still being worked out but it will not be held during the spring NAIC meeting in Colorado which runs from March 25-28. It could be held in New York in May, he added.

Sullivan says that the announcement was made after he received approval yesterday from NAIC commissioners to proceed with the effort. His primary concern, according to Sullivan, is to “preserve the tenet of insurable interest and to determine whether consumers are being ripped off.”

The decision was made to gather more information on the issue based on a number of factors including the recent debate over a termination provision in variable annuity guarantees as well as a Wall Street Journal article last month which reported on the case of a Rhode Island attorney who the article says solicited the elderly to buy annuities as a front for investors.

Sullivan says that holding a hearing was also prompted by the growing concern among regulators that there could be a stranger originated issue with annuities. When asked if there were any other investigations other than one in Rhode Island that were being undertaken, Sullivan said that as a regulator he wouldn’t comment on any potential investigations but that it was a more general awareness that the topic is one that needs to be investigated.

When asked whether concern was over the suitable sale of annuities in general or specifically related to STOLI, he responded that regulator concern was specifically related to STOLI. He added that the discussion would include both stranger originated and stranger owned annuities because “the purpose is to learn and not to limit the discussion.”

Wednesday, March 3, 2010

NAIC Plans Public Hearing on Stranger Originated Annuities

The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., announced that it will hold a public hearing on the emergence of Stranger Originated/Owned Annuities.

“The hearing will focus on the suspect practice of targeting seniors and terminally ill patients by inducing them to purchase an annuity largely for the benefit of investors or intermediaries,” the NAIC said in a press release.

“State regulators need to closely examine the conditions of this evolving marketplace,” said Thomas R. Sullivan, Chair of the NAIC Life Insurance and Annuities Committee and Connecticut Insurance Commissioner. “We are determined to address how individuals are being affected by these new transactions and whether new or modified current laws or regulations are necessary to protect consumers. We have an intense curiosity for which we intend to examine the existence and extent of these practices.”

The hearing will include industry representatives, state regulators and consumers. The date and location of the hearing will be announced as soon as details are confirmed.

Tuesday, March 2, 2010

Where the Roads Meet

After two serious stabs at solving the health care puzzle in the last two decades, Americans are like weary travelers looking for a place where the roads meet and they can put down roots and stop wandering aimlessly.

The roads to that desired spot are labeled cost control, rate regulation, common sense and self-restraint.

In order to examine this issue, the National Association of Insurance Commissioners, Kansas City, Mo., held a press conference on February 26. During the conference, NAIC President and West Virginia Insurance Commissioner Jane Cline, NAIC Secretary-Treasurer and Oklahoma Insurance Commissioner Kim Holland, and NAIC Health Insurance and Managed Care Committee Chair and Kansas Insurance Commissioner Sandy Praeger discussed the federal health reform proposals.

Cline started the discussion by noting that compromise is not easy and state regulators want to find a middle ground. But in order to find that ground, according to the discussion, there are a number of points that need to be examined more carefully.

Oklahoma’s Holland said that the backlash over the Public Option proposal raised as part of the recent health care plan advocated by President Barack Obama highlights the vast differences of health care markets among states. “We are a very diverse country where a one-size fits all approach is very difficult to implement.”

Common Threads

But according to the dialogue, while each state has its own particular way of handling health care and very particular needs, there are some threads that are common to all states.

For instance, Kansas’ Praeger warned that if companies were able to operate regionally rather than file with the state of domicile, they would gravitate to the states with the least protections. There would also be cherry picking of healthy consumers and adverse selection where the sick would end up in state plans.

And, while states might be amenable to allowing certain standards to be established for rate setting, they must be able to retain that authority, she added. When it was noted that only 29 states have that oversight, Praeger responded that while file and use states such as Kansas don’t formally have oversight, they work with companies on rates and can deny or negotiate rates that they maintain are excessive.

Common Sense and Restraint

The comments of both reflected the need for common sense and restraint. Kansas’ Praeger said that while health insurers can be hammered and there is a lot of room for improvement, health care costs can also be hammered and more personal responsibility is needed.

And Holland explained that in Oklahoma any mandate must be analyzed from both a clinical and cost perspective to keep down political hyperbole and focus on the high rates of the uninsured.

Common sense and restraint can bring us so far, but it won’t get Americans to that point on the map where they need to be. Cost control will move us a little further along as they indicated.

Chicken or Egg

But the question then becomes which costs are we controlling: the rising cost of premiums or the rising cost of the actual care? An ancillary question is whether those costs are justified or can be pared to reasonable levels: something approximating the inflation rate plus a reasonable level of profit.

America’s Health Insurance Plans, Washington, recently addressed the issue in response to an uproar over California Anthem Blue Cross’ request for a 39% premium hike. The company was called out by Kathleen Sebelius, Health and Human Services Secretary and a former NAIC commissioner from Kansas. It was also challenged by California Insurance Commissioner Steve Poizner who got the carrier to delay the increase until an independent actuary can review the rates proposals.

Anthem responded that the request is actuarially sound and in full compliance with the law.

And, in responding to the issue, AHIP’s President and CEO Karen Ignagni, called for a stop to “the politics of vilification” and a focus on “real health care reform.” She says that the real culprit is the underlying costs and that carrier requests reflect the true problem.

Her statement refers to Fortune 500 which AHIP cites as saying puts the health plan industry profits at 2.2%, 35th on its list of profits by industry sector.
I think she is correct in saying that big progress can be made in tamping down the actual costs. But one also wonders what is the range of the average on that statistic and whether some companies are making large profits while others are sustaining big losses.

And one can’t help but wonder how Anthem Blue Cross would react if one of its employees said that the cost of living had risen and that employee wanted a 39% pay hike.

The Other Piece

Cost is just one part of the issue of health care coverage in the United States. The other piece of the discussion is keeping promises. A premium is paid and services can be reasonably expected to be rendered.

California’s Poizner is alleging over 700 violations of state law by Anthem Blue Cross including 277 violations of failure to pay claims in 30 days and 66 violations of misrepresenting facts or policy provisions to insureds.

The rate hike problem is not limited to California but is nationwide. In Maine, for instance, a hearing is scheduled Insurance Superintendent Mila Kofman to hear comment on proposed rate increases for MEGA Life and Health and Anthem Blue Cross Blue Shield products.

Whatever the reason for our injured health care system, cost, unreasonable utilization by insureds or rates from carriers, unless we find common ground, Americans will continue to wonder aimlessly looking for health care coverage that we can settle down with.

The Result of Inaction

In Pennsylvania, Insurance Commissioner Joel Ario sounded a warning when he said that states alone can’t solve the problem and federal intervention is needed. Citing his own state’s adultBasic insurance program, he said that “If we didn’t adjust the adultBasic premium and benefit package, a portion of individuals enrolled in the program would have lost coverage.

“People who come to adultBasic have been without coverage and so are generally in need of costly care. With our limited funding, we either had to increase costs or drastically cut benefits, as opposed to the modest changes we chose to make for enrollees. The cuts we’re instituting are only sufficient to allow the available funds to cover costs for the current enrollees.”