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Life Insurance Shift Worries New York Regulator

Source: WSJ

Posted on 27 Nov 2012 by Neilson

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Benjamin LawskyNew York's financial-industry watchdog warned other state regulators that a plan to revise rules on how life insurers set up claims reserves may hurt consumers and lead to insolvencies.

Benjamin Lawsky, superintendent of New York's Department of Financial Services, Monday dispatched a five-page letter to state insurance commissioners nationwide urging those who support the adoption of "principles-based reserving" to reconsider. He cautioned that the shift could lead to "under-reserving," adding: "The risk of insurer insolvency will increase."

Under the proposed new approach, insurers would scrap a system that is heavy on formulas for determining the size of reserves that back up insurers' promises to their customers. They would begin to use computer modeling that would allow them more leeway.

The National Association of Insurance Commissioners, an organization of state officials that adopts solvency standards for adoption by states, is poised to vote on aspects of the new approach at a meeting that begins later this week.

The conversion to principles-based reserving has been in the works for years and has been pushed by many of the nation's biggest life-insurance carriers. They contend that the existing system relies on a one-size-fits-all methodology that leads to overly conservative reserves for two of the industry's most commonly sold products: basic term-life insurance and a popular version of universal-life insurance.

Mr. Lawsky wrote in his letter that the new methodology could give managers at publicly traded companies tools to help them deal with the constant scrutiny they face from stockholders and analysts. That is, they could reduce their reserves "at the expense of long-term solvency."

"Since the effects of under-reserving may not materialize for years-long after a company's current management may have departed the scene-there is little institutional check on pursuing short-term gains," he wrote.

Susan Voss, Iowa's insurance commissioner and a proponent of the new approach, said in an email: "This issue has been vetted extensively for many years." She said she is "confident that the changes made will enhance rather than dilute regulatory oversight."

Mr. Lawsky cautioned that the new system would "create significant challenges" for many insurance departments. States will have to evaluate the insurers' models, and it "will demand a far greater commitment of resources than is needed under the current rules-based approach, which has the benefit of clarify and simplicity."

The letter urges fellow regulators to consider alternatives, such as more narrowly addressing the complaint about term-life reserves.

The NAIC voted in 2009 to proceed with principles-based reserving once a manual for applying the approach is developed.

Mr. Lawsky was named to his post in 2011.

Ms. Voss, the NAIC's past president, said that the NAIC has "worked closely with New York over the past year in particular to address their concerns.

"Many changes have been made to reach a greater comfort level for all involved and we have made great progress," she said.

She said the NAIC is considering ways to help states monitor insurers' use of the computer models for setting reserves. Insurance departments also could hire consultants, at insurers' expense, to review modeling techniques.

The NAIC has taken pride that very few insurers became insolvent during the financial crisis, even as large numbers of banks collapsed.

In his letter, Mr. Lawsky noted that many of the troubled banks had reduced reserves after that industry underwent its own move toward principles-based reserving. While banking and insurance are different businesses, he said he worried that a similar shift in the insurance industry could have "disastrous" results. He wrote that the timing seems unusually bad, as insurers' investment returns have been crimped by ultralow interest rates.