Regulators Endorse Plan to Lower Insurers' Cash Cushions

Proposal to Help Firms Endure Recession Set for Final Vote

Life insurance companies moved a step closer yesterday to being allowed to operate with thinner financial cushions as they try to weather the economic crisis.

A committee of state regulators endorsed proposals that would make it appear that insurers have more capital to withstand financial setbacks and meet their promises to policyholders. The action paved the way for a final vote tomorrow by the leadership of the National Association of Insurance Commissioners, an assembly of state regulators.

The D.C. insurance commissioner, Thomas E. Hampton, who heads the committee, said he was trying to spare insurers the need to raise capital through the crippled financial markets, and he suggested that would help consumers by keeping companies viable.

"Consumer protection for me is about making sure companies are around to pay their obligations," Hampton said after the meeting.

At a hearing preceding yesterday's vote, critics argued that the action could weaken insurers and undermine consumer interests.

"We are tired of industry-backed deregulation followed by taxpayer bailouts," said Caitlin Prendiville of Unite Here, which represents union members. "We need you to move in the other direction entirely -- toward tighter, not looser, capital requirements."

She cited financial problems at Prudential, one of the nation's largest insurers, and asked why the rules should accommodate its "less than prudent judgments."

Hours of testimony by industry representatives and others left a muddled picture of how seriously insurance companies need the relief. One regulator said it was unclear whether the industry was itself in crisis or just trying to take advantage of the broader crisis to advance a longstanding deregulatory agenda.

New York's insurance superintendent, Eric Dinallo, expressed frustration that no company would step forward to say, "Yeah, it's me, I need the penicillin." Dinallo said all insurers should "go to a nudist colony" and reveal their true condition.

"We all here came down to Washington to confront the possibility of, you know, apocalypse," and "I'm not feeling that right now from what you're saying," Dinallo said.

Industry representatives tried to convey a sense of urgency without raising alarm about individual companies.

The chairman of the American Council of Life Insurers, which spearheaded the proposals, said some companies may need the relief immediately to stay in compliance with regulatory requirements and others may need it later.

"There are some that may be troubled now," said Patrick S. Baird, chairman of ACLI and president of insurer Aegon USA, which is the parent of Transamerica.

Baird's comment contrasted with a recent statement by the group's chief actuary that he didn't expect any major insurer to fall short of regulatory requirements when they file their year-end reports for 2008.

Baird said it is "prohibitively expensive" for insurers to raise capital from investors under current conditions and forcing them to do so would be "overly punitive" if it's purely to meet requirements he called excessive. Baird also expressed concern about what would happen if an insurer failed, saying he wasn't sure such an event could be resolved with "a peaceful brokering."

Baird said that some companies believe the relief will help them avert downgrades by credit rating agencies, but he said he doubted the rating agencies would be influenced by the changes. Downgrades can make it costlier for companies to borrow and can shake consumer confidence, causing a loss of business.

A consultant to the insurance industry, Bradley M. Smith, chairman of Milliman Inc., an actuarial firm, said overly conservative regulatory requirements could push companies into "artificial insolvencies," causing real economic harm.

Asked the probability of that happening, Smith replied: "I believe it's non-zero, but I'm not going to quantify it beyond that."

One of the proposals would allow insurers to include a larger amount of potentially worthless tax credits in their reported financial cushions. In teeing up the package for a final vote tomorrow, the NAIC committee altered that proposal. Hampton said the alteration would ensure that companies don't escape regulatory intervention on the basis of such credits.

J. Robert Hunter, a former regulator who focuses on insurance issues for the Consumer Federation of America, accused regulators of rushing to do the industry's bidding.

A close working relationship between the NAIC and ACLI was apparent at yesterday's meeting. An ACLI executive participated not only in the hearing portion but also in the later session at which regulators debated and voted on the proposals.

Maureen Emmet Adolf, Prudential vice president for external affairs, told regulators the initiative "would be very helpful to a number of companies," and she said it would be helpful to Prudential. She rejected Unite Here's description of Prudential as an example of a precarious insurer, and in Prudential's defense she borrowed a line from a politician accused of trying to sell a U.S. Senate seat.

"In the words of Illinois Governor [Rod] Blagojevich, much of what was said by Unite Here was taken out of context."