Safety: Annuities and Life Insurance

[imoldernu]

This long article in the New York Times may be of value to those who incorporate annuities or life insurance into retirement planning.

"Risky Moves in the Game of Life Insurance"

Suggest using Google to link to the article, as it may fall under the NYT paywall.

While it is a very long read, understanding the risk factors for longer term insurance and annuities, could have an effect on long term planning. The gist of the article rests on questioning this:

"For every liability, there has to be an asset."

While it's not an easy read... (took me twice around to understand the details), the discussion gets to the matter of state and federal laws, designed to protect the most revered safety nets in our economy. By extrapolating the kind of approaches being questioned, methinks this could also be a look into the equity financing of pensions.

 

[Options]

Thanks for this. Just who or what in the financial industry can you trust? So what can we expect? More AIG's? Annuitants who thought they were building a secure future placed at risk (at least for anything beyond their state's guarantees)?

These to me are the 3 most disturbing paragraphs in the entire article:

Over the years, life insurance has gone global and created products of dazzling complexity; many companies have gone public, too, creating shareholders who think they should have priority over all those pesky policyholders whose money built the business.

With these changes, a belief has taken hold in some quarters: Wright’s principles may still guide us, but they are too old-fashioned. They force life insurers to hold more money than they need to — the way Athene Life Insurance was expected to sit on its millions when there were needy casinos to help.

You hear a lot about “redundant reserves” in the industry these days. Many companies would prefer to hold fewer of the stable, low-yielding assets required by law and use the extra money to pay shareholder dividends. Some also want to build more risk into their investment portfolios, in hopes of receiving the higher returns that Wall Street expects.

Policyholders may not perceive any of this.

 

[mathjak107]

aig's failure had nothing to do with their annuity and life division. those remained fully funded and just fine,


the capital requirements and rules are seperate for different buisiness's an insurer might own.

quite frankly there is a whole lot less of a chance you may end up with a little less of an annuity deal you signed on for than any market risk you take on your own.

in the end worrying about failure of an insurer may be the smallest worry you have. after all if 2008 didn't cause policy failures what would.

most states require insurers just to absorb the customer base of a failed insurer. it happens so rarely getting hit by lightening can be a bigger deal.

 

[pb4uski]

mathjak is correct that AIG's problems had nothing to do with its insurance businesses. In fact, the insurance businesses were its ultimate salvation in that the cash flows and sale of some of those businesses allowed AIG to pay back the taxpayers along with a handsome return.

A lot of the reinsurance gymnastics described in the NYT article are an unintended consequence of reserving regulations that require insurers to hold much more in reserves for certain life insurance policies than would ever reasonably be needed, also referred to a XXX reserves.

So what some insurers do is reinsure the business to a jurisdiction where reserves are more sensible. If the NAIC would just get real on XXX, then this "problem" would probably go away since there would not be such an incentive to move business to more friendly jurisdiction.

That said, I'm not a big fan of Athene.

S&P | The Changing Landscape Of XXX/AXXX Reserve Requirements Will Challenge U.S. Insurers | Americas

 

[nun]

I don't worry much about my annuity because it's been successfully paying out for almost 100 years.

TIAA-CREF - TIAA-CREF - TIAA Traditional

 

[athena53]

I worked in property-casualty insurance for 38 years and found this article interesting, but with one huge misstatement. If an insurer reinsures its business, it is still liable for claims if the reinsurer fails. Trust me on this- I've worked for companies that have written off millions in uncollectible reinsurance. That acts as an incentive for the insurer to buy solid reinsurance instead of buying it at the lowest price from Joe's Reinsurance Company in the Turks & Caicos. State regulators and external auditors, when evaluating a company's solvency, look closely at the collectibility of reinsurance and the adequacy of ceded reserves (i.e. liabilities the insurer has subtracted from its balance sheet because the reinsurer will pay them).

Bringing up the AIG failure is silly; as others have said, AIG's life insurance operations are just fine. The only major insolvency I saw in my career was Mutual Benefit Life. I'm not sure how the policyholders did on that one.

 

[brewer12345]

mathjak is correct that AIG's problems had nothing to do with its insurance businesses. In fact, the insurance businesses were its ultimate salvation in that the cash flows and sale of some of those businesses allowed AIG to pay back the taxpayers along with a handsome return.

A lot of the reinsurance gymnastics described in the NYT article are an unintended consequence of reserving regulations that require insurers to hold much more in reserves for certain life insurance policies than would ever reasonably be needed, also referred to a XXX reserves.

So what some insurers do is reinsure the business to a jurisdiction where reserves are more sensible. If the NAIC would just get real on XXX, then this "problem" would probably go away since there would not be such an incentive to move business to more friendly jurisdiction.

That said, I'm not a big fan of Athene.

S&P | The Changing Landscape Of XXX/AXXX Reserve Requirements Will Challenge U.S. Insurers | Americas

The insurance regulators created this monster via XXX and AXXX requirements and then fed it steroids by allowing the use of captive reinsurance. Extremely foolish, imo.

Stick with a large, well-rated mutual and you will have no issues with insurer credit quality.

 

[photoguy]

aig's failure had nothing to do with their annuity and life division. those remained fully funded and just fine,


the capital requirements and rules are seperate for different buisiness's an insurer might own.

mathjak is correct that AIG's problems had nothing to do with its insurance businesses. In fact, the insurance businesses were its ultimate salvation in that the cash flows and sale of some of those businesses allowed AIG to pay back the taxpayers along with a handsome return.

I have a naive question -- even if the insurance division is healthy could not a failure in a different part of the company put one's annuity at risk if the whole company fails?

 

[pb4uski]

I have a naive question -- even if the insurance division is healthy could not a failure in a different part of the company put one's annuity at risk if the whole company fails?

There were regulatory reforms of transactions between insurers and parent holding companies after the Monarch Life insolvency in the early 1990s that reduced the risk of a troubled parent dragging down a solvent insurer.

There are now restrictions on the amount that an insurer can dividend or otherwise transfer to a troubled parent entity and regulatory and rating agency implications will also encourage a prudent amount of capital to be retained by the insurer to cover its risks.

 

[pb4uski]

I noticed that mistatement as well... as you note in most reinsurance transactions the original writing company is still on the hook for the policy obligations if their reinsurer goes belly up so they are careful about assessing and monitoring the financial health of their reinsurers.

On the life side, there are exceptions for certain assumption reinsurance transactions, but it is very difficult to achieve a true legal novation as each state has different statutory requirements.

When I was in industry our company was one of the bailout reinsurers for MBL and I had a little tangential involvement in that deal but I left the company before things were finalized. The policyholders came out ok... as I recall they got their principal back and some interest but not the handsome rates that were in their contracts.

I worked in property-casualty insurance for 38 years and found this article interesting, but with one huge misstatement. If an insurer reinsures its business, it is still liable for claims if the reinsurer fails. Trust me on this- I've worked for companies that have written off millions in uncollectible reinsurance. That acts as an incentive for the insurer to buy solid reinsurance instead of buying it at the lowest price from Joe's Reinsurance Company in the Turks & Caicos. State regulators and external auditors, when evaluating a company's solvency, look closely at the collectibility of reinsurance and the adequacy of ceded reserves (i.e. liabilities the insurer has subtracted from its balance sheet because the reinsurer will pay them).

Bringing up the AIG failure is silly; as others have said, AIG's life insurance operations are just fine. The only major insolvency I saw in my career was Mutual Benefit Life. I'm not sure how the policyholders did on that one.

 

[photoguy]

There were regulatory reforms of transactions between insurers and parent holding companies after the Monarch Life insolvency in the early 1990s that reduced the risk of a troubled parent dragging down a solvent insurer.

Thanks for the explanation. I figured I was missing something important.

 

[clifp]

I thought the article was interesting, my most profitable angel investment involves captive insurance, and I've never really had a good picture of why it was beneficial.

It is always good to get the perspective of forum members with experience.

Still if you had talked to retail bankers, mortgage brokers, and brokerage and asked them about the risk associated with mortgage loans in 2003,they would have describe the various oversights, regulations, safeguards etc. associated with mortgages.

My view is there is just too much money involved in insurance and too many creative finance types employed at companies like Goldman&Sachs to be completely comfortable.

 

[athena53]

My view is there is just too much money involved in insurance and too many creative finance types employed at companies like Goldman&Sachs to be completely comfortable.

Yeah, the "Other People's Money" aspect has made the business a tempting target for crooks and others who play fast and loose with money. You take in lots of money up front (premiums) in return for promising to pay money (claims, annuity payments, life insurance proceeds) maybe 20 or 30 years from now. Calculating reserves for these claims involves a ton of judgment and there's generally a wide range of reasonable values. The difference between the low end and the high end of the range can be the difference between a profitable year and ending up on the brink of insolvency. The CEO of Geico once compared booking inadequate reserves to "burying Dad in a rented suit". Eventually you have to pay the piper. That's why it's so highly regulated in respectable jurisdictions.

 

[pb4uski]

....Stick with a large, well-rated mutual and you will have no issues with insurer credit quality.

.....My view is there is just too much money involved in insurance and too many creative finance types employed at companies like Goldman&Sachs to be completely comfortable.

I agree with brewer's suggestion and share your concerns clifp.

I'm quite concerned about the recent entry of private equity and investment banks into insurance as from what I have seen they do not appreciate the fiduciary aspects that I grew up with in an old line mutual in the 80s and 90s. They just view it as a source of investment funds. This isn't new as Berkshire has played the float for years on the non-life side but I have more trust that Berkshire is more cognizant of their fiduciary obligations to insureds than the private equity and investment bankers.

Those guys are a bit too slippery for my taste.

 

[imoldernu]

OP here...
Forgive an old curmudgeon, but the original post was just a part of my own concern about the forward looking safety nets as a whole. Not just life insurance, but annuities, long term care insurance and indeed, pension plans. In short, wherever long term pay outs are based in the pivate sector.... (as opposed to federal government unfunded liabilities which are approaching one quadrillion dollars... [$1,000,000,000,000,000.00] "backed by the full faith and trust of the US.).

Without going into details, we have had the personal experience of seeing our own accounts change hands.
A life insurance account with Mid Continent Life changed hands five times.
A small annuity with a company I don't remember has changed hands four times, and is now with some Californa financial management account, with no public presence that I could find. .
Out LTC insurance , begun in Travellers Insurence, went to Conseco, and is now in the hands of a trust... SHIP of Pennsylvania.
In addition, a little off subject, our IRA banking which was with MetLife Bank, was transferred to GE Capital, and now to GE's Synchrony Bank.

The next part of my concern is the funding of pensions... not for myself, but for my children. Over the past two years, I have read about pension funds which were going downhill rapidly... suddenly recovering... according to the news, because they had shifted their inventments into companies that were invested in derivatives. Looking at the US derivatives market, I see an increase from 90 Trillion dollars in 2000, to 690 Trillion dollars today.

Ignorance... per se, is no excuse, but at best, this is unsettling. Two years ago, one of my sons told me his pension was only 70% funded, but today is 100% funded. No changes in the program... just in the management of the funds.

So... mixing apples and oranges, but in the end, it seems to me that the rules and regulations that were supposed to protect us in our later years have been bent and twisted.

How much of all this is "real money"?

On a personal basis, not much of a concern, as the odds are we won't be here in 10 years and have food stashed in the crawl space until then... On the other hand, children and grand children... who at this point have so much on their plates that they just "trust"... but can't verify.

 

[Big_Hitter]

insurance companies back fixed income (i.e. annuity) promises with fixed income investments - that's why pension plans who settle obligations with insurers get "discounts" when they can transfer assets "in kind" as part of the settlement


by law, they have to be 100% funded - IMO, an annuity (or for that matter a LI benefit) payable from a reputable insurer is about as solid as you can get