Revisiting Reserve Requirements

I wrote to highlight a blog post redwaterlily wrote over at her blog discussing the current rule change by KWS to reduce the reserve requirements by life insurers — reserves intended to try to ensure that these companies are adequately funded to pay policyholder claims.

The conversation continued over at that post on a number of different fronts, but I want to go back to the reserve requirements, as KWS’s Chief of Staff has added to a comment in that thread.

While I don’t see a ton of news releases, I was struck by how this one was written. It goes through the history of a review of these reserving requirements via analysis groups at an industry trade association (NAIC) and how this association rejected the Life Insurance Industry group’s request for a broad recommendation for reserve “relief”. You can see the summary of that meeting here — this is the NAIC’s own Press Release. This is how Elliot Jacobson characterizes the current position of the NAIC:

On January 29, 2009, the Executive Committee of the NAIC decided to withhold their support of this relief on a national, uniform basis for the 2008 year-end preliminary annual statement filings that are due March 1st due to the inadequate time to perform the necessary evaluation.

The NAIC actually voted against these life insurance industry proposals, saying:

“Today’s vote reflects our belief that it is not appropriate to make emergency, permanent industry-wide changes for which the need has not been demonstrated.”

You should read the whole thing yourself, but even the NAIC decided that there was not enough information to demonstrate that the industry had any real need of relief at this time. Further, they caution against rushing to provide help where the need is not yet proven. This ruling, of course, doe not restrict these companies from appealing directly to the states, which is exactly what has been happening. Elliot Jacobson says that the list of states granting such relief is up on the NAIC website, which I can’t find. (And it may be there, this is a tough to navigate website, I think.) A Google search turns up Ohio as an approver of some reserve relief and Virginia and NH as against.

Elliot’s press release also refers us to the NAIC website for the insurers who got this relief. Why wouldn’t the ICs office just say who they are? It is only three companies and in a release this long, it wouldn’t take up much room. And why wouldn’t these just be listed on the Delaware IC’s website? In any event, I can’t find these on the NAIC website.

Next, I don’t really know what this means:

On February 17, 2009, in order to allow a permitted practice for each individual life insurance company, I signed two (2) emergency orders amending Delaware Regulations 1212 and 1215 relating to reporting reserves for life insurance companies. These amendments provided changes to minimum reserving standards where there were redundant reserves confirmed by the NAIC Working Group. The change to Regulation 1215 allows a life insurer to use a mortality table, which has already been approved for use with policies issued for 2007, to be used for policies issued on or after January 1, 2004, with prior Department approval. The Department permitted this change for one (1) life reinsurance company for the 2008 year-end. (There are no direct policyholders.) The change to Regulation 1212 makes an adjustment to a deficiency reserve calculation. The required actuarial certifications, experience reporting requirements, asset adequacy testing will ensure that reserves are adequate. Both of these changes will protect the interests of consumers and the general public by enabling the industry to retain capacity to write insurance products needed by consumers and to reduce life insurance costs that impact pricing. These Emergency Orders will be effective until September 1, 2009 or until the amendments are adopted pursuant to the Delaware Administrative Procedures Act, whichever shall occur first.

This looks (as much as I can decipher it) that there are some changes to accounting rules that may help these companies look a little financially stronger on paper. But you can’t write this kind of opaque description of what is going on and then claim that this somehow protects the interests of consumers. The public has been invited to comment on this activity, and I would think that an IC that is looking to protect consumers would communicate “Emergency Orders” with alot more clarity than this. On top of this, the order has what I would consider a conditional sunset — one that allows for this Emergency Order to become the new rules if the usual procedures are satisfied. Perhaps that is typical language, but if so, that doesn’t count as a real sunset on something that is billed as an “emergency”.

Insurance companies have certainly taken a hit during this financial crash. They are looking for TARP funds to make their balance sheets look better, but in the meantime they are asking ICs via their industry group and individually to let them run their operations with reduced reserve requirements as well as with accounting changes that let them make their balance sheets look better. Given that the economic crisis isn’t close to over, I don’t see any consumer interest in letting these companies make their balance sheets look any better, putting customers at risk. Risk is a thing that we want to get out of the business of right now, not encourage it.

I do hope that all of you with concerns writes in about this. And keep your comments. It will be very interesting to see how this gets addressed and how transparent the process is.