Aug 18

Life Insurers Are Courting Reserve

Life Insurers - Senor LeadsIn a conference packed with representatives from the insurance industry in the suburbs of Washington, analysts agreed that they were not entirely comfortable about those transactions and believed that customers wouldn’t be comfortable about those transactions either. They also admitted that they wouldn’t be able to get into the details of these transactions, because these transactions were confidential. As the group of analysts put forth their findings, it became apparent that there existed differences between the panelists. Some of the panelists expressed concerns over the fact that insurance providers were actually betting the money of individual insurance policy holders. Other panelists argued that in fact, there was no risk to the money as transactions were completely safe and vetted.

In response to a New York Times article which talked about the expanding practice among life insurance providers who offloaded large numbers of insurance policies into off-balance-sheet businesses, the National Association of Insurance Commissioners, or the NAIC, finally convened the research and analysis project.These critical transactions which have been valued at over hundreds of millions, sometimes even valued at more than a billion dollars can help improve the looks of the balance sheets of the insurance providers. It can thus also help free up money that can be in turn, invested in several other financial projects. The freed up money can also be used to pay dividends to shareholders. The article published in the New York Times questioned the use of these specially crafted vehicles, as to whether their purpose was to create a shadow insurance industry which would be outside the reach of state regulators from the insurance industry. The fact that state insurance regulators and research panelists are split over these critical transactions poses a problem to the financial insurance industry. This is because these transactions could have players involved from different states. While the insurance provider would be from one state, the subsidiary in which the money has been invested could be from a different state.

The insurance policies which were sold to customers could have been sold to customers in many different states.
Thus, instead of the federal government regulating the country’s insurance businesses, states would have to end up regulating them. State regulators profess that if a lack of uniformity would exist, then the complete financial solvency model would fall apart. State regulators note that it is important for them to understand what their sister states are doing with regards to regulating such transactions. In the interim, New York State continues to independently conduct its own investigation, looking into off-balance-sheet investments in subsidiaries. The state regulators called on the insurance providers under their jurisdiction this year, asking them to submit detailed information about their special vehicle subsidiaries. They demanded to understand why these subsidiaries had been created. They also wanted to know whether these subsidiaries were considering assets that insurance providers hadn’t been allowed to include on their own balance sheets.

Through the recent years, certain states have passed laws which allow insurance providers to be able to set up their own subsidiaries. This allowance was given because the creation of subsidiaries was assumed to also be creating jobs, thus helping the economy. Traditional state regulators protect insurance policy holders by demanding that insurance companies set aside the premium payments which they accept from insurance holders, in order to build future reserves that would help them settle all claims in the future. Life Insurance insurance companies will also be required to maintain health excess of money.

State regulators can make these companies stop the sale of new plans if they happen to fall short of money. When life insurance companies secure their plans and coverage costs through special purpose subsidiaries, they can continue to do so without having to build up any liquidity or cash reserves, as stated by state regulators. Instead, insurance companies offer up collateral as assurance for these insurance policies. A good example of collateral would be a letter of credit. However, state regulators have admitted that there have been cases where the collateral put up has often been inadequate.