In Study, Fears That Life Insurers Are Courting Reserve Risk

WASHINGTON — After more than a year studying a surge of intricate financial deals in the life insurance industry, regulators said Thursday that they had found transactions that could “give the industry a black eye,” but could not agree on what to do about them.

“There are some transactions out there that we’re not comfortable with, and we’re not sure you’d be comfortable with,” Douglas Slape, chairman of the research panel, told a ballroom full of industry representatives at a conference in suburban Washington. “We can’t go into the details because it’s confidential.”

Differences among the panelists soon became apparent as the group laid out its findings. Some expressed concern that insurers were “betting the policyholders’ money,” while others argued that the transactions were carefully vetted and safe.

The National Association of Insurance Commissioners convened the research project, in part, in response to an article in The New York Times on the growing practice among life insurers of offloading huge numbers of policies into opaque, off-balance-sheet subsidiaries. The transactions, often valued in the hundreds of millions or even billions of dollars, can improve the appearance of the insurers’ balance sheets and free up money for other projects, or to pay shareholder dividends.

The Times article questioned whether the use of the special-purpose vehicles meant a shadow insurance industry was being created, outside the usual reach of state insurance regulators.

Diverging views among Thursday’s panel of state regulators pose a problem because the transactions often involve an insurer in one state, a subsidiary in another, and policies sold to customers in any number of other states. States, rather than the federal government, are the primary regulators of the nation’s insurance companies.

“Our entire financial solvency system falls apart if there is not uniformity” among state regulators, said Joseph Torti, a panelist from Rhode Island. “We need to be able to understand what our sister states are doing.”

Separately, New York State is conducting its own investigation of the off-balance-sheet insurance deals. This year it called on the insurers under its jurisdiction to provide detailed information about their special-purpose subsidiaries, why they had created them, and whether the subsidiaries were counting assets that the insurer itself would not be allowed to include on its balance sheet.

In recent years, some states passed laws allowing insurance companies to set up the subsidiaries, because they were perceived as creating good jobs.

Conventional state insurance regulation protects policyholders by requiring companies to set aside enough of the premium money they take in to build reserves to pay all future claims. Companies are also required to maintain a healthy surplus, and regulators can make them stop selling new policies if they fall too far short.

When the life insurers secure their policies through special-purpose vehicles, however, they can do so without building up a body of liquid, cashlike reserves, as prescribed by regulators.

Instead, they offer some form of collateral, like a letter of credit, to stand behind the policies. Some regulators said there were cases in which the collateral was inadequate and would not have been admitted under the usual regulatory standards.

Data compiled by SNL Financial, a data and news company, shows that the practice of securing life policies through a wholly owned subsidiary has grown sharply in the last five years. In 2006, the companies SNL surveyed used such subsidiaries for 31 percent of the policies they reinsured; by 2011, it was up to 45 percent.

SNL also found that while the practice was very popular at some companies, others did not use it at all. The American International Group used subsidiaries for nearly 80 percent of the life policies that it reinsured in 2011, for instance, while Northwestern Mutual used only unaffiliated reinsurers, where the terms would be set in an arms’ length transaction. Still others, like State Farm, were not reinsuring their life policies as of 2011.

Article source: http://www.nytimes.com/2012/11/30/business/in-study-fears-that-life-insurers-are-courting-reserve-risk.html?partner=rss&emc=rss