Sunday, February 6, 2011

Issues to Watch

Several interesting items this past week point to two issues that will be worth following throughout the year: whether the new federal health care law is whittled away bit by bit; and just how much traction U.S. insurers will have in making their voices heard before insurance contract accounting changes are put in place later this year.

On the first point, this past week Senate leaders passed a repeal of the 1099 provision of the Patient Protection and Affordable Care Act. Insurers including the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill., contend that a repeal of the 1099 tax-reporting provision will remove a “crushing provision” for insurers.

Additionally, press reports describe how Sen. Ben Nelson, D-Neb., talked about how a requirement that individuals have health insurance needs to be changed. The remarks were made during a “Day on the Hill” event by the National Association of Insurance and Financial Advisors, Falls Church, Va., according to press reports.

On the latter issue, U.S. insurers are waiting to see whether the International Accounting Standards Board, London, and the Financial Accounting Standards Board, Norwalk, Conn., will listen to their concerns when they discuss the insurance contracts paper during the mid-February joint IASB/FASB meeting and beyond. The discussions are a prelude to finalizing the IASB’s exposure draft and the FASB’s discussion paper.

Saturday, February 5, 2011

AACII, Gen Re Releases Results from Critical Illness Survey

Men are more likely to purchase critical illness policies before the age of 45 than women, according to the 2011 Critical Illness Insurance Buyer Study conducted by the American Association for Critical Illness Insurance (AACII), Los Angeles, and Gen Re, Stamford, Conn.

Fifty-four percent of men purchasing critical illness policies last year were younger than 45 compared with 49 percent of women who bought policies in 2010. Researchers analyzed data for over 20,500 purchasers of individual critical illness insurance policies made between January 1 and December 31, 2010.

According to the survey, 21 percent of male buyers and 19 percent of female buyers were between the ages of 25 and 34. Women tended to buy this protection at slightly older ages. The age band 55-or older had the widest spread, with some 18 percent of male and 22 percent of female buyers.

Critical illness insurance pays a tax-free, lump-sum cash benefit generally upon diagnosis of a covered critical illness such as cancer, heart attack or stroke. The first policies became available in the United States in 1996 and today some 900,000 individuals have such protection, according to the AACII and Gen Re.

Monday, January 31, 2011

AALTCI Releases Claim Benefit Data

The nation's 10 leading long-term care insurance companies paid over $10.8 million in daily claim benefits in 2010 according to a new study conducted by the American Association for Long-Term Care Insurance (AALTCI), Los Angeles.

This represents a 53 percent increase over the daily value of claims paid by the same entities in 2007 according to study findings.

"Every single day, long-term care insurers pay benefits for home care, assisted living and nursing home care," explains Jesse Slome, executive director of the national trade organization. "Benefits paid by just these leading insurers totaled nearly $4 billion for the year, an amount that will keep growing as more aging policyholders qualify for benefits from their coverage." The total for the industry is estimated at $6 billion, according to AALTCI.

The study examined claims-paying data for leading insurers that provide coverage to some 5.76 million individuals. Industry wide, insurers have paid claims to 8.05 million individuals in 2010, according to AALTCI.

"During a typical 30-day timeframe, these insurers paid benefits to nearly 135,000 individuals," Slome notes. According to the Association's 2010 LTC Insurance Sourcebook, some 31.0 percent of new individual claims are for home care services, 30.5 percent for assisted living and 38.5 percent for skilled nursing home care.

Thursday, January 27, 2011

S&P Parses Implications of Proposed Global Insurance Accounting Standards

A just released report from Standard & Poor’s Corp., New York, parses the credit implications of the recently proposed global accounting standards for insurance contracts.

The International Accounting Standards Board (IASB), London, and Financial Accounting Standards Board (FASB), Norwalk, Conn., published their proposed changes to insurance contract accounting on July 30, 2010, and Sept. 17, 2010, respectively. The boards intend to complete major joint projects by June 2011. The insurance contracts project is expected to be completed along with other components of the project and become effective in 2013 or 2014.

The proposed projects will have measurable consequences for insurers, according to S&P. These include:

--Volatility in financial results caused by changes in interest rates which could cause potentially significant swings in earnings and capital. The degree of volatility would depend on how well companies deployed asset-liability matching. If there is a mismatch, according to S&P, “we believe understanding the underlying accounting assumptions applied and sensitivities of those assumptions to changing credit and market conditions will be important to analyzing the financial condition.”
-- Earlier recognition of losses likely will occur because the proposed accounting would use an expected approach for recognizing losses, which results in recognition of a potential loss when it is probable to occur.
--Inconsistency between the decisions the IASB and FASB reach might occur if the two boards cannot achieve convergence on some key proposals. Lack of convergence would impede consistency in globally reported information and the ability to perform peer comparisons across jurisdictions.

S&P says that it believes:

--Overall, the IASB model is an improvement to the current accounting for insurance contracts because “the depiction of a risk adjustment can provide users with insight into management's perception of the risk in its business, and, in conjunction with robust disclosure, should allow users to perform peer comparisons across insurers on their approach to managing and mitigating insurance risk.”
--“Increased disclosures and a more detailed presentation of information may change how users of financial statements view the risk profiles of insurance companies where new information is provided. Users should find the breakdown of the underwriting margin, gains and losses at inception, changes in experience, and changes in estimates (similar to a source of earnings approach) helpful in understanding changes in the proposed measurement of an insurance contract.”
--“A discount rate that is equal to the risk-free rate plus an adjustment for illiquidity because it may result in many long-term contracts having a day-one loss. We do support a discount rate that reflects the contract's duration and currency and is not specific to a portfolio of assets.”
--A simplified approach for short-duration contracts (i.e., an approach that allows for the premium received to represent the measurement of the contract--similar to unearned premium under a short-duration model) is an approach that S&P supports. However, the rating agency expressed concerns about limiting the contracts eligible for the simplified approach to one-year contracts.

Saturday, January 22, 2011

SEC Charges Offshore Life Settlement Guarantee Bond Issuer with Fraud

A Costa Rican guarantee bond issuer has been charged with a “massive” life settlement bond fraud, according to the U.S. Securities and Exchange Commission, Washington.

On January 19, Provident Capital Indemnity Ltd. (PCI); its president Minor Vargas Calvo; and its purported outside auditor, Jorge L. Castillo, were charged with fraud.

The SEC complaint, filed in U.S. District Court for the Eastern District of Virginia, states that PCI offers financial guarantee bonds on life settlements that promise to pay the death benefit if the insured lives beyond his or her estimated life expectancy. From at least 2004 through March 2010, PCI issued approximately 197 bonds “backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $679 million.

The complaint alleges that PCI misrepresented its ability to satisfy its obligations under its bonds. Alleged misrepresentations, according to the SEC, included the assets that backed PCI’s bonds, PCI’s credit rating, the availability of reinsurance to cover claims on PCI’s bonds, and whether PCI’s financial statements had been audited.

In conjunction with this complaint, the Fraud section of the U.S. Department of Justice’s Criminal division announced a parallel criminal action against the defendants and the arrests of Vargas and Castillo.

The liquidity of a life settlement depends on several factors including the lifespan of the insured; the accuracy of life expectancy reports (LEs); and how closely the insured’s life tracks those LEs. PCI’s bonds offered a fixed maturity date for the investments because PCI’s bond obligated PCI to pay investors (directly or indirectly through the life settlement issuer) the face value of the underlying insurance policy by a date certain if the insured lived past his life expectancy date.

The SEC alleges that PCI’s financial statements were presented as audited statements in accordance with generally accepted accounting principles when, in fact, they were never audited. The company’s statements reflect a “fictitious” long-term asset that has comprised some 70 percent to 80 percent of PCI’s total assets from at least 2003 to present, according to the SEC.

The complaint also alleges that the financial statements were provided to Dun & Bradstreet, which in turn issued PCI a favorable rating of “5 A/S” based exclusively on PCI’s reported net worth. The SEC says that PCI then misleadingly represented in its marketing materials that D&B’s rating is a reflection of “successful customer satisfaction” and “the ability to maintain one of the insurance industry’s lowest loss ratios.” According to the SEC’s complaint, PCI and Vargas also have represented that PCI was backed by a “bouquet” of reputable reinsurers that would backstop PCI’s obligations under its life settlement bonds. PCI did not have that bouquet of reinsurance.

The complaint tells the story of how Castillo and Vargas allegedly tried to cover up when they suspected that regulators were turning up the heat. It reads that “In February 2010, fearful that regulators would learn of his misconduct, Castillo urged Vargas to destroy his emails and other documents, telling Vargas in an email that their “best option is to prepare for the worst.” Castillo then attempted to create backdated audit work papers that would evidence his purported audits of PCI’s financial statements, in one instance asking Vargas, “DO YOU HAVE ANY REAL ACCOUNTING?” After working with Vargas to review some of PCI’s business records – years after his purported audits – Castillo described the exercise as the “first time we’ve had the opportunity to analyze everything . . . better late than never.”

The SEC complaint states that the 197 bond offerings were “sold in the United States, the Netherlands, Belgium, and in other countries, and include life settlement offerings issued by A&O Resources Management, Ltd. (“A&O”) and American Settlement Associates LLC (“ASA”).”

The complaint adds that “PCI has also bonded life insurance policies underlying life settlements sold by the following U.S.- and Canada-based issuers, among others: Acclivity Financial, LLC; American Pegasus LDG, LLC; Assured Benefits Corporation; Bonded Life Fund, LLC; Consolidated Wealth Holdings, Inc.; Granite Financial, Inc.; Fox Life, Inc.; Hill Country Funding, LLC; Ceres Life Cycle AG & Co.; Standard Clearing Inc.; Libertas American Inc.; and Universal Settlements International, Inc. It has also bonded life settlements issued outside of the United States, including a Netherlands-based life settlements issuer.

Wednesday, January 19, 2011

FSOC Approves Risk Measures

Among the issues taken up by the Financial Stability Oversight Council during its third meeting at the U.S. Department of the Treasury on January 18 was the approval of concentration limit studies.

Among the Council recommendations that were approved are:

--a modification of the concentration limits so that liabilities of any financial company that is not subject to consolidated risk-based capital rules that are substantially similar to those applicable to bank holding companies shall be calculated for purposes of the concentration limit pursuant to GAAP or other appropriate accounting standards applicable to such company, until such time that these companies may be subject to risk-based capital rules or are required to report risk weighted assets and regulatory capital.

--The concentration limit should be modified to provide that a transaction covered by section 622 shall be considered to have violated the concentration limit if the total consolidated liabilities of the acquiring financial company upon consummation of the transaction would exceed 10 percent of the average amount of aggregate consolidated liabilities of all financial companies for the two most recent calendar years.

--The concentration limit under section 622 should be modified to provide that, with the prior written consent of the Board, the concentration limit shall not apply to an acquisition of any type of insured depository institution in default or in danger of default.

The Council also approved two other matters: the Volcker Rule and a proposed rule on which nonbank financial institutions should be designated for heightened supervision. The Volcker Rule, more formally known as Section 619 of the Dodd-Frank Act, prohibits proprietary trading activities and certain private fund investments.

Saturday, January 15, 2011

This Week’s Happenings

Accounting Changes

Two major accounting bodies intend to publish a proposed joint approach on credit impairments of loans and other financial assets managed in an open portfolio, according to an announcement by the International Accounting Standards Board (IASB), London, and the US Financial Accounting Standards Board (FASB), Norwalk, Conn.

Accounting for credit losses determines how non-performing loans that are measured under amortized cost should be impaired, according to FASB and IASB. Both International Financial Reporting Standards and U.S, Generally Accepted Accounting Principles currently apply an ‘incurred loss’ approach to loan loss provisions, whereby specific evidence of a loss is required before a loan can be impaired, according to the two organizations. This approach was criticized during the recent financial crisis for preventing entities from accounting for expected losses early enough.

Although both boards proposed moving to a more forward-looking approach to accounting for impairment, they proposed different models. Following intensive joint discussion of the responses each board received on its original proposals the boards will shortly seek views on a common approach that incorporates elements of each of their original models. The Boards will also conduct extensive outreach with constituents about the operationality of the proposal and usefulness of the resulting information, they say.

The boards will propose an impairment model based on accounting for expected losses. This approach provides a more forward looking approach to accounting for credit losses, they say.

American International Group

American International Group, New York, says that it has fully repaid the roughly $21billion outstanding credit facility of Federal Reserve Bank of New York , and exchanging various forms of government support into common shares, resulting in the U.S. Treasury Department owning approximately 92 percent of AIG's common shares. AIG expects that over time the Treasury Department will sell its stake in AIG subject to market conditions

Standard & Poor's Ratings Services reacted to the announcement by stating that its ratings on AIG (AIG; A-/Negative/A-1) and AIG's insurance subsidiaries are not affected by the company's announcement to proceed with its recapitalization plan on Jan. 14, 2011. We view the successful execution of the planned asset sales and the accelerated repayment of the U.S. government as a positive credit development and consistent with our expectations at the current rating level. Previously, AIG was expected to complete its repayment to the U.S. government toward the end of 2013.

Leadership

Robert A. DiMuccio, chairman, president and chief executive officer of Amica Mutual Insurance Company in Lincoln, was elected as the new chair of the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill. During its annual meeting in Colorado Springs, Co. and Sandra Parrillo, president and CEO of Providence Mutual Fire Insurance Company in Providence, was sworn in as the newest chair of the board of directors of the National Association of Mutual Insurers (NAMIC), Indianapolis, at its annual convention in San Diego.

Saturday, January 8, 2011

New York's Cuomo Calls for Merger of Banking, Insurance Department

In his first state of the state address, New York’s new Governor, Andrew Cuomo criticized federal and state agencies for not better protecting consumers and called for a merger of the state’s banking and insurance department.

During his January 5 address, in which he detailed the serious economic peril the state is experiencing, he said that consumers had been “victimized” by Wall Street.
Cuomo said: “I spent four years fighting Wall Street corruption and I saw thousands and thousands of consumers victimized by the Wall Street corruption. And the question was where was Washington, where was Washington, where was Washington. Where were all the federal regulators? Where was the SEC and OFHEO that whole alphabet soup of federal regulators? Where are they?

“It was a good question. There was another question. Where was Albany? Where was our banking department? Where was our Insurance Department? Where was our Consumer Protection Agency? And yes, I believe Washington was primarily responsible but I also believe New York could have done a better job, frankly. I believe our organization, I believe our current organization is not effective because it is not organized the way Wall Street works any more.

“These divisions of insurance and banking and consumer protection don’t exist in the marketplace and much of the activity is falling between the cracks of our regulatory entities. We can have a win win. We can consolidate them into a department of financial regulation that better protects the consumer and the consolation will save the taxpayer money by reducing the cost of three separate organizations.“

Jones Enters, Hudson Exits

In addition to Cuomo’s announcement, several changes were announced in other states this week. In California, Dave Jones was sworn in as insurance commissioner replacing outgoing Steve Poizner.

In his inaugural address, Jones cited three priorities:

--implementation of federal health care reform;
--consumer protection; and,
--a competitive insurance market focused on solvency and new product choices such as “green property insurance.”

In an effort to advance these priorities, Jones announced a new senior leadership position, Deputy Commissioner for Health Care Policy and Reform within the department. The new deputy commissioner will help implement federal health care reform.

He also vowed to give the position of insurance commissioner and department of managed health care the legal authority to reject excessive health insurance and managed care premium increases. Currently, no authority exists, Jones explained.
Jones also promised to make sure there was legal authority to enforce the new federal health care reform law and at the end of his address signed an emergency regulation to enforce an 80 percent medical loss ratio established under the new Patient Protection and Affordable Care Act. And, Jones promised to work with the legislature to obtain the legal authority to enforce the 85 percent medical loss ratio for the group health insurance market established under PPACA.

After four years as Ohio insurance commissioner, Mary Jo Hudson resigned this week as did her Chief Policy Officer Doug Anderson.

The resignations come as Ohio Governor Ted Strickland leaves office to make way for his successor, John Kasich.

Tuesday, January 4, 2011

Eleanor Barrett, Insurance Journalist, Dies

This is a sad one to write. I learned earlier today from a colleague that Eleanor Barrett, an insurance journalist died. Her death was reported on her Facebook page and in the obituary column of The Newark Star-Ledger. Barrett died of a heart attack at the age of 46, according to the Star-Ledger. She is survived by her daughter Kristy and her mother, Cathy Barrett.

Barrett worked for Deloitte LLP in New York. Previously, she worked as a reporter for A.M. Best Co. in Oldwick, N.J. Barrett’s journalism career also included a stint with the Star-Ledger. She was a regular attendee at meetings including the National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Troy, N.Y.

I had come to know Eleanor through these meetings. She was a great journalist with a curious mind. But, when we caught up at meetings, what struck me most was how she loved her family. When she spoke about her daughter, she absolutely beamed. And, when she talked about caring for her dogs, she also just opened up. It didn’t surprise me that she would like animals because she had a kind heart. She will be missed on many levels. Rest in peace, Eleanor.

Monday, January 3, 2011

Year Starts Off With New Insurers in Maine

Maine has approved the purchase of a Maine insurer and has licensed two new companies to be headquartered and do business in Maine, according to Bureau of Insurance Superintendent Mila Kofman.

Casco Indemnity Co., Saco, Me., has been purchased by Ohio Mutual Insurance Co. The company currently sells their products through 170 New England insurance agents. The Bureau says that the purchase will allow the company to offer new products.

As the New Year starts, the company will also see its first new company, First Maine Captive, Inc., a captive insurance company, that is an initiative of three Maine workers’ compensation group self insurers. The Bureau says that “First Maine Captive will help increase the capacity of its participating groups without incurring the cost of commercial reinsurance.”

The second new insurance company, Great Falls, Auburn, Me., will offer workers’ compensation starting this month.