Life Insurers' Request for Relief Challenged
Tuesday, January 27, 2009
A life insurance industry request for regulatory relief would place consumers "at undue risk," Virginia's insurance commissioner said.
Weakened by the financial crisis, life insurers have been seeking freedom to operate with thinner financial cushions, and state regulators from across the country are convening in Washington today to hear testimony on the proposals.
Virginia Insurance Commissioner Alfred W. Gross weighed in with a letter to fellow officials Friday, saying one of the key proposals could make it harder for regulators to step in as needed "when dealing with truly troubled companies."
Gross's was one of several statements challenging the proposals.
"Lowering solvency standards on an emergency basis during a time of financial crisis is contrary to their very purpose," Louisiana Insurance Commissioner James J. Donelon said in a letter dated Friday. "In addition, no study or analysis has been performed to show any sound reasoning or justification for these changes."
The American Council of Life Insurers, an industry group, has argued that the proposals could help avert an erosion of consumer confidence in member companies -- the insurance equivalent of a run on a bank. The group has urged regulators to adopt the proposals before companies submit their 2008 year-end reports.
Some insurers have promised to pay annuities that are no longer supported by the investments underlying them. Such guarantees give consumers an incentive to keep money parked with the insurers. "But if they don't believe that the guarantee is worth the paper it's written on, then that incentive to leave it there may be diminished greatly," ACLI chief actuary Paul Graham said in a recent interview.
The ACLI also has argued that current regulatory requirements are too conservative.
The industry proposals would allow companies to hold less money in reserve and would make it appear that they hold more capital to absorb future losses.
The proposal that the Virginia commissioner criticized would increase the extent to which companies can count tax credits toward their capital requirements. The credits have only hypothetical value until companies can use them to offset taxes. To incur tax bills large enough to soak up the credits, companies must generate big enough profits.
Under current rules, so-called deferred tax assets can make up as much as 10 percent of an insurer's required financial cushion, and insurers can count them in full if they have at least a 50 percent chance of using them within a year.
The ACLI proposed that the limits be increased to 25 percent of the cushion and five years; a committee of the National Association of Insurance Commissioners has recommended a compromise of 15 percent and three years.