Insurance Industry Fast-Track Proposal to reduce Reserves

[chinaco]

Can you believe it. Not surprising... they want to use the money. This is probably the work of the big companies that sold CDOs... and others insurer wanting to do M&A with the money. Not to mention that many insurers are now having reduce ratings because they were caught holding too many MBS. Going from AA to A or A to B is tough to swallow... but that means the system is working like it should.

We buy insurance to get rid of life risk not take on business and market risk.

Groups Oppose Easing Insurer-Reserve Rules - WSJ.com

If you own insurance... write your state insurance commission and complain. Better do it quick. You might find your premiums are going to pay bonuses instead of making sure you are paid if you have a life event.

You would think insurance commissioners would realize that singular events like the recent market meltdown is the type of thing that puts the entire insurance industry at risk of not being able to pay up on claims.

[brewer12345]

Don't squeal and bleat about things you know less than nothing about.

[Nords]

Quote:

Originally Posted by brewer12345 Don't squeal and bleat about things you know less than nothing about.

How 'bout a link to an educational counterpoint? Gotta start somewhere.

As always, it'd be interesting to know Ace Greenberg's & Buffett's perspective. We could avoid one like the plague and endorse the other.

[brewer12345]

I haven't seen a discussion of this stuff since pretty much no layman cares or understands what it is about. There are a slew of proposed changes, many of which probably will not be OK'd by the NAIC. However, what likely will get approved is reserving relief from the idiotic requirements imposed by regulations XXX and AXXX. These rules went into effect about 5 years ago. What they did was require onerous reserves to be put up against life insurance policies, with the burden increasing over time. These reserve requirements are way, way beyond what is actuarially justifiable or economic and I have no idea why anyone thought this was a good idea. In an effort to avoid the huge distortions that XXX and AXXX would have imposed on the life insurance market, underwriters used a variety of creative strategies to finance these reserves. Now that credit extension and securitization are broken, many of these strategies suddenly are no longer viable. In very short order, continued imposition of XXX/AXXX will result in life insurance becoming much more expensive, generally less available, and potentially could cause perfectly healthy companies to get into trouble.

You'll rarely hear me saying much favorable about this industry, but they have a quite legitimate beef with the NAIC over XXX/AXXX, and the reserving requirements should have been revised long before this came to a head.

[SteveL]

I think it would also be helpful to remember that the Insurance Industry is not just life insurance companies. There are many property and casualty insurance companies who for the most part are less impacted by the mortgage mess.

[brewer12345]

Quote:

Originally Posted by SteveL I think it would also be helpful to remember that the Insurance Industry is not just life insurance companies. There are many property and casualty insurance companies who for the most part are less impacted by the mortgage mess.

Definately true. The impact on most P&C companies is pretty much limited to what is hitting their investment portfolios and any oddball liability coverages they extended. The bigger issue this year was that many got hit pretty solidly by the big, freakin' hurricanes of '08.

[DAYDREAMER]

Quote:

Originally Posted by brewer12345 Don't squeal and bleat about things you know less than nothing about.

Did you work in the industry?

[saluki9]

Quote:

Originally Posted by DAYDREAMER Did you work in the industry?

He stayed at a Holiday Inn Express last night.

[IBWino]

Quote:

He stayed at a Holiday Inn Express last night.

[brewer12345]

Quote:

Originally Posted by DAYDREAMER Did you work in the industry?

Nope. Call me an interested observer.

[chinaco]

Quote:

Originally Posted by brewer12345 Don't squeal and bleat about things you know less than nothing about.

Kind of a shrill response!

IMO - I buy insurance to sell off risk. I think the industry should be managed in a conservative way. I fail to see how reducing reserves is going to benefit the consumer. It would seem to me that it might increase the chances of the company not being able to pay claims.

Enlighten me. How does that benefit the contract holder.

[saluki9]

Quote:

Originally Posted by chinaco Kind of a shrill response! IMO - I buy insurance to sell off risk. I think the industry should be managed in a conservative way. I fail to see how reducing reserves is going to benefit the consumer. It would seem to me that it might increase the chances of the company not being able to pay claims. Enlighten me. How does that benefit the contract holder.

If you read Brewer's post above you will see that the XXX regs are a fairly new item, not breaking some 100 year old foundation of the insurance industry. In that post you will also learn that like most businesses, the companies involved figured out complex methods of getting around them which no longer work.

Insurance is a business whether you like it or not. Compared to the investment business the insurance biz does a pretty decent job of regulating themselves. This doesn't sound like it will do anything to impact policyholders other than ensure there are more companies who will still be able to offer life policies.

[ronin]

The WSJ article really wasn't specific about any of the issues it was supposedly reporting on. If anyone cares to wade through the actual report, click on the exposure draft in this link and have at it. Then maybe a thoughtful discussion could ensue.

Capital and Surplus Relief (EX) Working Group

[chinaco]

Quote:

Originally Posted by saluki9 If you read Brewer's post above you will see that the XXX regs are a fairly new item, not breaking some 100 year old foundation of the insurance industry. In that post you will also learn that like most businesses, the companies involved figured out complex methods of getting around them which no longer work. Insurance is a business whether you like it or not. Compared to the investment business the insurance biz does a pretty decent job of regulating themselves. This doesn't sound like it will do anything to impact policyholders other than ensure there are more companies who will still be able to offer life policies.

Yes... and many of the products and riders attached are new.

There are several companies that took on risk they did not understand and/or thought certain scenarios might not occur.

Quote:

The move is expected to give insurers greater flexibility at a time when the industry is being buffeted by the financial crisis. Many publicly traded insurers' share prices have taken a beating recently. That's partly because of investor concerns that insurers would have to raise additional capital on unfavorable terms in order to make good on minimum-return guarantees on variable annuities and other retirement-income products...

Consumer groups protest life insurers' plan to lower reserves - Los Angeles Times

IMO - If they have to toss a lifeline to some insurers that wound up on the wrong side of a poorly designed product... then perhaps they might do it. But I would prefer it to be selective (specific companies) and and not for the whole industry. If it is done for the industry... then is should sunset in a couple of years. Reserves are there for a reason... the NAIC probably was conservative to protect contract holders on these evolving products. That sounds like a good thing to me.

Insurance companies often write bad business and/or have poor product design that costs them. Apparently those guarantees were a poor design that had more risk than they anticipated.

Those that wrote alot of that cr@p deserve to be acquired by a healthy & wiser organization.

I suspect that the companies that are in trouble might have a run on 1035 transfers if they are individually exposed.

[chinaco]

Here is a quote from a former regulator that is now working for consumer group.

Quote:

"The major investment banks Bear Stearns and Lehman Brothers failed because of weak capital standards," said J. Robert Hunter, Director of Insurance for CFA and former Texas Insurance Commissioner. "When insurance giant AIG failed, the NAIC and individual state insurance regulators were quick to point out that, because of stronger capital and reserve requirements, AIG's insurance units were financially sound. Instead, AIG was brought down by unregulated holding company activity," he said. "It is simply incomprehensible that state regulators now want to weaken the very standards they trumpeted just a few short weeks ago. State regulators should be ashamed of themselves for putting industry interests so far ahead of the interests of consumers," said Hunter.

Groups Warn Against Life Insurance Rule Change

If I held a variable annuity and my insurer's rating dropped or they were under stress due to recent events... I would definitely be mulling over a 1035 transfer.

However, that guarantee is probably going to cost more on new annuity contracts now that insurers are realizing that the perfect storm that put them at risk is possible (even today). Consumers of VAs with those guarantees may have gotten a decent deal (in relative terms) that they will not be able to replace it they do a transfer... but if the company is weakened they face a very real risk.

It is interesting... the S&P 500 suffered about the safe drop as when the tech bubble burst. The decline was slower the last time, but in recent history we all saw 1987 drop. It happened very quickly. One would think that insurers would have factored in the possibility of a sharp drop. It is not inconceivable. To me this means the companies in trouble sold too many of those products (for the mix of agreement they entered into with consumers) and did not mitigate the risk properly. It is my understanding that a few insurers bet the farm on VAs with guarantees... those products were a hot seller to certain people who got burned by the tech bubble.

[Independent]

Quote:

Originally Posted by ronin The WSJ article really wasn't specific about any of the issues it was supposedly reporting on. If anyone cares to wade through the actual report, click on the exposure draft in this link and have at it. Then maybe a thoughtful discussion could ensue. Capital and Surplus Relief (EX) Working Group

Thanks for the link. I see that the working group supports some of the proposed changes and opposes others.

Maybe Chinaco can specify which changes bother him the most.