Thank you for your interest in The Insurance Bellwether this year. Hopefully, it will continue to bring you items of interest throughout 2010.
Warmest wishes for a wonderful New Year.
Jim Connolly
Thursday, December 31, 2009
Wednesday, December 23, 2009
Sullivan Says New Suitability Model Is Important To Consumers
A much debated change to an annuity suitability model regulation was unanimously adopted by the Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., on December 21.
The revised model will now be presented to the NAIC’s executive committee and plenary for full adoption. The “A” Committee had received the work of the Annuity Suitability working group during the NAIC’s winter meeting Dec. 5-10 in San Francisco. During that meeting, Connecticut Insurance Commissioner Tom Sullivan deferred a vote for two weeks so that the revised draft could be read and limited technical comments submitted.
In an interview with The Insurance Bellwether, Sullivan explained that he wanted to strike a balance. “I didn’t want to accept the draft in too hasty a fashion,” he said. But, Sullivan added, “I also did not want to unearth or undo all the hard work of the working group.” In November, the working group voted 13-2 to advance the revised draft model to the “A” Committee. California and Vermont voted against moving the model, citing the need for further work, maintaining that the changes did not go far enough to protect consumers.
Sullivan said that “it is the role of regulators to protect consumers. This is all about providing a stronger consumer-friendly model.”
The model tried to parallel whenever possible, requirements developed by FINRA, New York. One of the important features in the revised model, he continued, is the requirement that the recommendation be reviewed at the company level so that a second set of eyes studies the producer’s recommendation.
The American Council of Life Insurers, Washington, had expressed support for the concept of suitability protections for consumers, but said that it could not support the revisions because of factors that included placing too much strict liability on companies to make sure that a transaction is suitable.
Sullivan said that while he appreciated those concerns, the model also reflects the reality that because of human nature, “there cannot be a cop on every corner.” But he said that points in the model including holding an insurer responsible for suitability even if oversight is being handled by a third party, is important for consumer protection.
The revised model will now be presented to the NAIC’s executive committee and plenary for full adoption. The “A” Committee had received the work of the Annuity Suitability working group during the NAIC’s winter meeting Dec. 5-10 in San Francisco. During that meeting, Connecticut Insurance Commissioner Tom Sullivan deferred a vote for two weeks so that the revised draft could be read and limited technical comments submitted.
In an interview with The Insurance Bellwether, Sullivan explained that he wanted to strike a balance. “I didn’t want to accept the draft in too hasty a fashion,” he said. But, Sullivan added, “I also did not want to unearth or undo all the hard work of the working group.” In November, the working group voted 13-2 to advance the revised draft model to the “A” Committee. California and Vermont voted against moving the model, citing the need for further work, maintaining that the changes did not go far enough to protect consumers.
Sullivan said that “it is the role of regulators to protect consumers. This is all about providing a stronger consumer-friendly model.”
The model tried to parallel whenever possible, requirements developed by FINRA, New York. One of the important features in the revised model, he continued, is the requirement that the recommendation be reviewed at the company level so that a second set of eyes studies the producer’s recommendation.
The American Council of Life Insurers, Washington, had expressed support for the concept of suitability protections for consumers, but said that it could not support the revisions because of factors that included placing too much strict liability on companies to make sure that a transaction is suitable.
Sullivan said that while he appreciated those concerns, the model also reflects the reality that because of human nature, “there cannot be a cop on every corner.” But he said that points in the model including holding an insurer responsible for suitability even if oversight is being handled by a third party, is important for consumer protection.
Saturday, December 19, 2009
Moody’s: Life Insurers Can Handle Any Commercial Mortgage Losses
A new report issued by Moody’s Investors Service, New York, offers some comfort to insurers, policyholders and investors who fear that commercial mortgages will hurt companies’ ratings.
The agency starts its report by noting that “Insurers’ commercial mortgage losses will grow, but will not result in many rating downgrades unless commercial property values fall much further than expected.”
The concern is that despite the recent rebound of credit and equity markets, commercial real estate is a lagging indicator, and thus, loss rates on both commercial mortgage loans and commercial mortgage-backed securities held as investments by U.S. life insurers will continue to grow.
The saving grace for many insurers, according to the report titled, “U.S. Life Insurers’ Commercial Mortgage Exposure & Losses Are Manageable,” is the high quality of their investment holdings. Investments in CMBS are “primarily originally rated Aaa-rated tranches (mostly super-senior and mezzanine Aaa) with modest exposure to recent problematic vintages of 2006-2008.”
While life insurers could face losses of $9-11 billion over the next 2-3 years that “will dampen earnings,” it will not result in many ratings downgrades, he added.
But the remote scenario run in stress testing that results in $40-45 billion would have a major capital impact that would result in “many downgrades-some being multi-notch.”
Approximately 16% of invested assets of U.S. life insurers are in CMLs and CMBS, Moody’s says. This amounts to 150% of regulatory capital. And, roughly $28-$36 billion, or 10-12% of CML portfolios annually will be maturing over the next two years, good news for insurers, according to the report. And, life insurers have the capacity to work with borrowers to extend or refinance loans, the Moody’s report notes.
“Commercial mortgages loans, while the second largest asset class after bonds, have been maintained at a moderate-sized 9% of invested assets for many years during the CRE boom over the past decade. In addition, we estimate that the industry held around $200 billion of CMBS as of year-end 2008 representing about 7% of invested assets,” Moody’s estimates. Additionally, “life insurers hold less than 1% of invested assets in real estate equity,” the rating agency continued. And, Moody’s notes the diversification of commercial loan portfolios by type and geography.
However, Moody’s says that the one area that bears watching is how CML portfolios are evaluated. The report explains that there are differences among companies in their use of external and internal property appraisals, the frequency of those appraisals and the discount rate used in evaluating properties.
The agency starts its report by noting that “Insurers’ commercial mortgage losses will grow, but will not result in many rating downgrades unless commercial property values fall much further than expected.”
The concern is that despite the recent rebound of credit and equity markets, commercial real estate is a lagging indicator, and thus, loss rates on both commercial mortgage loans and commercial mortgage-backed securities held as investments by U.S. life insurers will continue to grow.
The saving grace for many insurers, according to the report titled, “U.S. Life Insurers’ Commercial Mortgage Exposure & Losses Are Manageable,” is the high quality of their investment holdings. Investments in CMBS are “primarily originally rated Aaa-rated tranches (mostly super-senior and mezzanine Aaa) with modest exposure to recent problematic vintages of 2006-2008.”
While life insurers could face losses of $9-11 billion over the next 2-3 years that “will dampen earnings,” it will not result in many ratings downgrades, he added.
But the remote scenario run in stress testing that results in $40-45 billion would have a major capital impact that would result in “many downgrades-some being multi-notch.”
Approximately 16% of invested assets of U.S. life insurers are in CMLs and CMBS, Moody’s says. This amounts to 150% of regulatory capital. And, roughly $28-$36 billion, or 10-12% of CML portfolios annually will be maturing over the next two years, good news for insurers, according to the report. And, life insurers have the capacity to work with borrowers to extend or refinance loans, the Moody’s report notes.
“Commercial mortgages loans, while the second largest asset class after bonds, have been maintained at a moderate-sized 9% of invested assets for many years during the CRE boom over the past decade. In addition, we estimate that the industry held around $200 billion of CMBS as of year-end 2008 representing about 7% of invested assets,” Moody’s estimates. Additionally, “life insurers hold less than 1% of invested assets in real estate equity,” the rating agency continued. And, Moody’s notes the diversification of commercial loan portfolios by type and geography.
However, Moody’s says that the one area that bears watching is how CML portfolios are evaluated. The report explains that there are differences among companies in their use of external and internal property appraisals, the frequency of those appraisals and the discount rate used in evaluating properties.
Friday, December 18, 2009
Goldman Sachs To Discontinue Life Settlement Index
Goldman Sachs, New York has discontinued its life settlement index (QXX), according to company spokesman Michael DuVally. The index which began in 2007 was discontinued because “there was not sufficient commercial activity associated with the index.”
Interviews with life settlement industry executives note that this has been a difficult year both for the life settlement industry as well as global financial markets.
This news item was initially posted at www.lifesettlementreview.com.
Interviews with life settlement industry executives note that this has been a difficult year both for the life settlement industry as well as global financial markets.
This news item was initially posted at www.lifesettlementreview.com.
Thursday, December 17, 2009
Academy Says PBA Is Close But Much Work Remains in 2010
If 2009 was a turning point for a principles-based approach to reserving and capital requirements, 2010, will be the year to finalize the project, according to speakers during this week’s quarterly call sponsored by the American Academy of Actuaries, Washington.
Donna Claire, who is spearheading the massive four year effort involving regulators, actuaries and the American Council of Life Insurers, Washington, introduced speakers who detailed some of the work that was done and the work that still needed to be accomplished.
Alaska regulator Katie Campbell spoke of a number of major issues to resolve before a piece of the Valuation Manual, VM-20, dealing with life insurance, is finalized. The Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., has given the project until August 2010 to be completed.
The Valuation Manual is the roadmap that is needed to implement changes to the revised Standard Valuation Law, passed in September 2009 by the NAIC. The law and manual are scheduled to go to state legislatures as a package starting in 2011.
Among the issues that need to be resolved on this important piece of the Manual, according to Campbell, are:
ACLI’s net premium reserve (NPR) floor – formulaic minimum reserve floor
Asset default assumption and reinvestment spread methodology
Appropriate level of aggregation
Appropriate level of and guidance on margins
Prescribed assumptions in the absence of credible relevant data
Reporting requirements
Experience reporting, and,
Economic scenarios
Dave Neve, chair of the Academy’s Life Reserves working group, and a life actuary with Aviva USA, noted that VM 20 is “the most significant remaining outstanding issue.” He said that as part of the remaining work, the ACLI expects to have net premium reserve language ready by the start of January. The NPR, based on prescribed assumptions, would only differ between companies because of differences in policy structure.
By the spring 2010 NAIC meeting, VM-20 language should be ready that will reflect asset default costs including treatment of “all major general account asset types and a fail-safe for “all other” type of assets.
Philip Barlow, a regulator with the insurance department in the District of Columbia, and chair of the NAIC’s Life Risk-based Capital working group, said that there are a number of projects underway that are connected to the PBA initiative. The working group, according to Barlow, has exposed a C3 Phase III report that has received feedback from industry. C3 Phase III examines the interest rate and market risk component of the Life Risk Based Capital framework.
Among the comments received were concerns related to the double counting of a diversification benefit, an altered definition of C3 risk and scope concerns that the focus should be on UL with secondary guarantees and not on group insurance. Other suggestions included simplified documentation and better coordination with asset adequacy analysis.
As a result of the comments, according to Barlow, the working group will consider a materiality test and initially limit the scope provided that there is a clear definition of all products with significant tail risk, risk that is outside the norm. The ACLI agreed to submit specific proposals for both items by Jan. 4, 2010.
Barlow explained that the working group is hoping to finalize C3 Phase III at the spring NAIC meeting at which time it will decide whether a 2010 implementation date is appropriate. If the project is not finalized at the spring 2010 meeting, there will not be a 2010 implementation date, he said.
Barlow also said that the C3 Phase IV project which will roll up annuity business from C3 Phase I and II will begin once the C3 Phase III project is finished. However, he said that it will not be a long project life Phases I and II were.
Todd Erkis of Towers Perrin described a practice note for the C3 Phase III project which is a guideline that can be used to help conform to the new requirements once they are finalized. The practice note is available at: http://www.actuary.org/pdf/life/lifePBAPracticeNotefinal.pdf
Donna Claire, who is spearheading the massive four year effort involving regulators, actuaries and the American Council of Life Insurers, Washington, introduced speakers who detailed some of the work that was done and the work that still needed to be accomplished.
Alaska regulator Katie Campbell spoke of a number of major issues to resolve before a piece of the Valuation Manual, VM-20, dealing with life insurance, is finalized. The Life and Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., has given the project until August 2010 to be completed.
The Valuation Manual is the roadmap that is needed to implement changes to the revised Standard Valuation Law, passed in September 2009 by the NAIC. The law and manual are scheduled to go to state legislatures as a package starting in 2011.
Among the issues that need to be resolved on this important piece of the Manual, according to Campbell, are:
ACLI’s net premium reserve (NPR) floor – formulaic minimum reserve floor
Asset default assumption and reinvestment spread methodology
Appropriate level of aggregation
Appropriate level of and guidance on margins
Prescribed assumptions in the absence of credible relevant data
Reporting requirements
Experience reporting, and,
Economic scenarios
Dave Neve, chair of the Academy’s Life Reserves working group, and a life actuary with Aviva USA, noted that VM 20 is “the most significant remaining outstanding issue.” He said that as part of the remaining work, the ACLI expects to have net premium reserve language ready by the start of January. The NPR, based on prescribed assumptions, would only differ between companies because of differences in policy structure.
By the spring 2010 NAIC meeting, VM-20 language should be ready that will reflect asset default costs including treatment of “all major general account asset types and a fail-safe for “all other” type of assets.
Philip Barlow, a regulator with the insurance department in the District of Columbia, and chair of the NAIC’s Life Risk-based Capital working group, said that there are a number of projects underway that are connected to the PBA initiative. The working group, according to Barlow, has exposed a C3 Phase III report that has received feedback from industry. C3 Phase III examines the interest rate and market risk component of the Life Risk Based Capital framework.
Among the comments received were concerns related to the double counting of a diversification benefit, an altered definition of C3 risk and scope concerns that the focus should be on UL with secondary guarantees and not on group insurance. Other suggestions included simplified documentation and better coordination with asset adequacy analysis.
As a result of the comments, according to Barlow, the working group will consider a materiality test and initially limit the scope provided that there is a clear definition of all products with significant tail risk, risk that is outside the norm. The ACLI agreed to submit specific proposals for both items by Jan. 4, 2010.
Barlow explained that the working group is hoping to finalize C3 Phase III at the spring NAIC meeting at which time it will decide whether a 2010 implementation date is appropriate. If the project is not finalized at the spring 2010 meeting, there will not be a 2010 implementation date, he said.
Barlow also said that the C3 Phase IV project which will roll up annuity business from C3 Phase I and II will begin once the C3 Phase III project is finished. However, he said that it will not be a long project life Phases I and II were.
Todd Erkis of Towers Perrin described a practice note for the C3 Phase III project which is a guideline that can be used to help conform to the new requirements once they are finalized. The practice note is available at: http://www.actuary.org/pdf/life/lifePBAPracticeNotefinal.pdf
Monday, December 14, 2009
NCSL Drafts Resolution Opposing NAIC’s NISC Proposal
Following a contentious challenge to a blueprint to create a national insurance body titled the National Insurance Supervisory Commission, state legislators developed a draft resolution opposing the effort by the National Association of Insurance Commissioners, Kansas City, Mo.
The resolution was drafted during the meeting of the Communications, Financial Services and Interstate Commerce Committee on December 11 during the annual meeting of the National Conference of State Legislatures, Washington.
Rep. Brian Kennedy, chairman of the NCSL CFI Committee, and state rep. D-Hopkinton, R.I., emphasized that this is a working draft and additional time will be spent on the issue. The resolution is expected to be finalized during the NSCL’s Spring Forum in Washington. The committee voted to unanimously proceed on moving forward with the resolution.
Kennedy said that Ohio Director Mary Jo Hudson, spoke about the proposal while the committee was debating the issue.
During the NAIC meeting in San Francisco last week, Jane Cline, the new NAIC president and West Virginia insurance commissioner said that this is strictly a working draft and that no decision to pursue this plan has been finalized. The remark was a response a contentious exchange between state insurance legislators and regulators during the NAIC meeting.
The draft resolution resolves that:
--the NISC proposal to be a premature and misguided effort that will not appease those who only desire full federal control of the business of insurance;
--the NISC proposal is an unwarranted preemption of sovereign rights of states and in particular, the constitutional authority of state legislatures to decide state insurance policy;
--the NCSL is opposed to the establishment of NISC;
--that NCSL calls upon the National Association of Insurance Commissioners to cease from any further consideration and advocacy of the NISC proposal;
--The NCSL will ask our colleagues on state legislative committees that have jurisdiction for insurance to begin inquiries into the NISC proposal and to determine the position of each state’s insurance department’s participation in the development of such a proposal; and,
--The NCSL calls upon the NAIC to work with state legislators and governors on mutual efforts to modernize and streamline insurance regulation that is not predicated on a preemption of state legislative authority to make state policy.
The resolution was drafted during the meeting of the Communications, Financial Services and Interstate Commerce Committee on December 11 during the annual meeting of the National Conference of State Legislatures, Washington.
Rep. Brian Kennedy, chairman of the NCSL CFI Committee, and state rep. D-Hopkinton, R.I., emphasized that this is a working draft and additional time will be spent on the issue. The resolution is expected to be finalized during the NSCL’s Spring Forum in Washington. The committee voted to unanimously proceed on moving forward with the resolution.
Kennedy said that Ohio Director Mary Jo Hudson, spoke about the proposal while the committee was debating the issue.
During the NAIC meeting in San Francisco last week, Jane Cline, the new NAIC president and West Virginia insurance commissioner said that this is strictly a working draft and that no decision to pursue this plan has been finalized. The remark was a response a contentious exchange between state insurance legislators and regulators during the NAIC meeting.
The draft resolution resolves that:
--the NISC proposal to be a premature and misguided effort that will not appease those who only desire full federal control of the business of insurance;
--the NISC proposal is an unwarranted preemption of sovereign rights of states and in particular, the constitutional authority of state legislatures to decide state insurance policy;
--the NCSL is opposed to the establishment of NISC;
--that NCSL calls upon the National Association of Insurance Commissioners to cease from any further consideration and advocacy of the NISC proposal;
--The NCSL will ask our colleagues on state legislative committees that have jurisdiction for insurance to begin inquiries into the NISC proposal and to determine the position of each state’s insurance department’s participation in the development of such a proposal; and,
--The NCSL calls upon the NAIC to work with state legislators and governors on mutual efforts to modernize and streamline insurance regulation that is not predicated on a preemption of state legislative authority to make state policy.
Saturday, December 12, 2009
Birny, We Salute You
San Francisco
An era truly came to an end during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo. this past week. During the consumer liaison meeting, NAIC funded representative Birny Birnbaum announced that he would no longer be attending NAIC meetings after a dozen years of weighing in on everything from market conduct analysis (right from the start) to credit scoring (a project that he says has gotten some cursory review but no meaningful change from regulators.) He will continue his work with the Center for Economic Justice in Austin, Texas and will continue to weigh in on issues as they come up.
I can tell you that after attending the NAIC for many years, when Birny got up to speak, you came to attention and you poised your pen to take notes. Many of my journalist colleagues did the same. As did industry reps sitting in on meetings and hearings. As one put it, “he was a tough adversary.”
Joel Ario, Pennsylvania insurance commissioner, noted during consumer liaison, how Birnbaum had spurred on everyone by raising issues that were often not popular and how he had made the NAIC better because of it.
During the meeting, I had a chance to catch up with Birnbaum and ask him about his time spent as a funded consumer rep.
Birnbaum was very definite in his “sense that all regulators here believe that one of their jobs is to protect consumers, although there are different views on how best to do that. There is not a lack of will.” However, he restated what he had said earlier in consumer liaison that there is “an institutional bias in the regulatory structure.”
The reason, he continued, is that the industry has enormous resources that are generated by policyholder supplied funds that are used to present industry viewpoints.
And, he said he believes that for many commissioners who are looking for the next step, the fact that industry jobs may be the main alternative many have for the next career move, adds to that institutional bias.
Birnbaum reiterated three suggestions he offered in parting remarks:
--use a Texas model that would create a government agency funded rep by charging 10-15 cents per policy;
--Create a Consumer Insurance Board; or
--Include a flyer with every policy mailing which would require insurers to ask consumers if it was acceptable that a portion of premium was used to lobby for industry positions.
Birnbaum also said that the NAIC would benefit from restructuring its consumer program and to separate consumer reps that actually work with consumer organizations from academics. Both are valuable to the process, he noted. However, they bring different things to the table, according to Birnbaum.
Another parting recommendation Birnbaum offered was to both increase the current budgeted $120,000 for consumer reps and to increase flexibility so that, depending on the issue, some or all of the reps could attend each meeting. Any money saved could be used for different consumer rep initiatives, Birnbaum added.
While Birnbaum says that insurance commissioners have not given enough analysis and attention to issues of unfair discrimination such as redlining, he did praise them for taking a leadership role on issues including climate change.
He urged the NAIC to be less “reactive” to headlines and more proactive to addressing real consumer concerns. Birnbaum added, it has been “reactive in the last few years to how it can protect its turf.” But he said that he still believes they can take the lead in protecting consumers.
An era truly came to an end during the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo. this past week. During the consumer liaison meeting, NAIC funded representative Birny Birnbaum announced that he would no longer be attending NAIC meetings after a dozen years of weighing in on everything from market conduct analysis (right from the start) to credit scoring (a project that he says has gotten some cursory review but no meaningful change from regulators.) He will continue his work with the Center for Economic Justice in Austin, Texas and will continue to weigh in on issues as they come up.
I can tell you that after attending the NAIC for many years, when Birny got up to speak, you came to attention and you poised your pen to take notes. Many of my journalist colleagues did the same. As did industry reps sitting in on meetings and hearings. As one put it, “he was a tough adversary.”
Joel Ario, Pennsylvania insurance commissioner, noted during consumer liaison, how Birnbaum had spurred on everyone by raising issues that were often not popular and how he had made the NAIC better because of it.
During the meeting, I had a chance to catch up with Birnbaum and ask him about his time spent as a funded consumer rep.
Birnbaum was very definite in his “sense that all regulators here believe that one of their jobs is to protect consumers, although there are different views on how best to do that. There is not a lack of will.” However, he restated what he had said earlier in consumer liaison that there is “an institutional bias in the regulatory structure.”
The reason, he continued, is that the industry has enormous resources that are generated by policyholder supplied funds that are used to present industry viewpoints.
And, he said he believes that for many commissioners who are looking for the next step, the fact that industry jobs may be the main alternative many have for the next career move, adds to that institutional bias.
Birnbaum reiterated three suggestions he offered in parting remarks:
--use a Texas model that would create a government agency funded rep by charging 10-15 cents per policy;
--Create a Consumer Insurance Board; or
--Include a flyer with every policy mailing which would require insurers to ask consumers if it was acceptable that a portion of premium was used to lobby for industry positions.
Birnbaum also said that the NAIC would benefit from restructuring its consumer program and to separate consumer reps that actually work with consumer organizations from academics. Both are valuable to the process, he noted. However, they bring different things to the table, according to Birnbaum.
Another parting recommendation Birnbaum offered was to both increase the current budgeted $120,000 for consumer reps and to increase flexibility so that, depending on the issue, some or all of the reps could attend each meeting. Any money saved could be used for different consumer rep initiatives, Birnbaum added.
While Birnbaum says that insurance commissioners have not given enough analysis and attention to issues of unfair discrimination such as redlining, he did praise them for taking a leadership role on issues including climate change.
He urged the NAIC to be less “reactive” to headlines and more proactive to addressing real consumer concerns. Birnbaum added, it has been “reactive in the last few years to how it can protect its turf.” But he said that he still believes they can take the lead in protecting consumers.
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