Life Insurers Seek Lower Cash Cushions

Consumer Groups Skeptical of Proposal

To the list of industries seeking government relief, add another: life insurance.

Battered by the financial crisis, life insurers are urging regulators to let them operate with thinner financial cushions -- the capital they must hold to absorb financial shocks and cover their obligations to policyholders.

The American Council of Life Insurers, an industry group, has been pleading with regulators to adopt a variety of changes in capital and reserve requirements before companies must file their annual reports for 2008. The ACLI fears that the reports could otherwise spook policyholders into dropping coverage and liquidating policies -- steps that an ACLI official said would be unwarranted and contrary to consumers' interests.

The changes the industry group seeks would make companies appear healthier.

If the life insurance industry were to experience the equivalent of a bank run, companies could be forced to sell investments at depressed prices, exacerbating the industry's woes.

"When the insurance industry's financial statements begin to be released . . . there will be an awful lot of publicity on . . . what's happened in the industry. And there is a risk that policyholders in this economic environment can misinterpret some of the headlines," ACLI's chief actuary, Paul Graham, said.

Graham said that the proposals could put insurers at slightly greater risk by leaving them with less capital, but he said "there's more risk in not doing it than there is in doing it."

Like banks and other financial institutions, life insurance companies are required to maintain prescribed levels of capital. If they fall below those levels, state regulators are required to intervene. When a company's capital sinks to 35 percent of the required level, regulators are required to take it over.

The meltdown in the financial markets has reduced the value of insurance companies' investments, leaving them with thinner cushions.

The insurance industry ended 2007 with about four times the amount of capital that state regulators require. The ACLI expects that the ratio may have dropped to 3 or 3.25 times the required level by the end of 2008, Graham said. As recently as 2002, the level was 3.25.

Graham said he doesn't expect any major insurers to fall short of their capital requirements when the year-end results are reported in the coming months.

"If asset values go down 30 percent again this year, there's no denying that would put severe stress on lots of insurers," Graham said. "If we have another year like we just had, there will be companies that will start getting into trouble."