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California Official Warns on Life Insurance Rules

Source: WSJ - Leslie Scism

Posted on 29 Nov 2012 by Neilson

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Life insurance rulesCalifornia's insurance commissioner has warned other state regulators that he won't vote for a plan to overhaul rules for how life insurers set up claims reserves until he is sure regulators have a firmer grasp of the resources they will need to implement the new approach.

Under the proposed change, insurers would scrap a system in which they use industry-wide formulas to determine how much money to set aside to support their promises to customers. Instead, companies would be able to develop their own internal models, which would be specific to their own experience with products, risks and other factors.

The new methodology has been under consideration by the National Association of Insurance Commissioners, an organization of state officials that sets solvency standards for adoption by states, for much of the past decade. The association is poised to vote on the change at a meeting that is underway this week outside Washington, D.C.

California Commissioner Dave Jones wrote in his four-page letter to fellow officials that "little, if any, action has been taken to either identify or quantify" what additional resources state insurance departments would need to review the models, even though they are expected to be highly complex.

"If we should have learned anything from the last financial crisis, trusting a financial industry to monitor itself can only be effective [if] that trust can be verified," he wrote, referring to the global market meltdown of 2008-09.

California's letter comes as New York's top financial-services watchdog also has been raising red flags about the possible change. The concerns are important because the two states represent nearly a fifth of the U.S. insurance market, as measured by premium volume.

California is No. 1, with $14.3 billion in written life-insurance premiums in 2011, according to data from SNL Financial. New York is second at $10.8 billion, out of total U.S. life-insurance premium of $133.9 billion.

In a letter dispatched to fellow regulators earlier this week, Benjamin Lawsky, superintendent of New York's Department of Financial Services, cautioned that the switch could lead to "under-reserving" that could hurt consumers and even lead to insolvencies. He maintained that the timing for a change also is bad, because insurers' results are being pressured by ultralow interest rates, which hurt their investment returns.

The conversion to so-called 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 approach 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.

Iowa's insurance commissioner Susan Voss, the NAIC's past president and a major proponent of the new approach, said Wednesday that the issues raised by California would be discussed in sessions this week, and she didn't see approval for the new methodology being stalled.

"I respectfully disagree" with some of the opinions expressed in the two letters, she said. "We've worked hard and are confident this is a good outcome. It's not perfect. What is?"

A spokesman for the American Council of Life Insurers said the trade group supports measures to help state regulators such as standards of practice for independent reviewers, centralized resources provided through the NAIC and "a feedback loop for constant evaluation" of practices.