In Wake Of Market Decline, Insurers Advised To Assess Warning Systems

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The equivalent of a fire drill was rung last month for equity-linked insurance products when the stock market sank. Now, regulators and rating agencies are saying it is a chance for everyone in the industry to assess warning systems.

Larry Gorski, chief actuary with the Illinois insurance department, says companies offering guarantees can evaluate hedging programs. Insurers selling equity indexed annuity products–often smaller companies–should also check for proper hedging, he adds.

The need may increase as guarantees proliferate. For instance, LIMRA International, Hartford, Conn., says that in the past two years, many companies have begun offering earnings-related death benefits, a feature in which a predetermined percentage of the investment gains is added to the sum the beneficiary receives upon the annuitants death.

Regulators should also test to see if hedging is effective and proper disclosure is being made, Gorski continues.

So, for instance, in Illinois, companies explain to consumers the difference between the guaranteed annuitization rate and the current annuity rate in a guaranteed minimum income benefit, he says.

The New York insurance department says it monitors both guaranteed minimum death benefits and GMIBs and intends to send out a second survey on the matter shortly. It did a survey last year, the results of which have not been made public, the department says.

Julie Burke, managing director with Fitch Ratings, Chicago, says that given the market impact on variable products, “I think there are a lot of VA companies that will be making some increase in reserves this quarter. Second quarter will be a tough quarter.”

How the quarter ends up is the result of several factors, including credit losses. “Credit losses in 2000 were not particularly good; in 2001, they were terrible; and in 2002 they are looking pretty bad as well,” she says.

Kevin Ahern, a director with Standard & Poors, New York, also maintains that the impact of guarantees would be one contributing factor to any ratings changes. Overall, the industry has a stable outlook with several negative modifiers including earnings and asset quality.

Guarantees will be a problem for insurers if the market continues to decline or if it moves up and down and guarantees lock in when the market is up, says Arthur Fliegelman, a vice president and senior credit officer with Moodys Investors Service, New York.

But, the guarantees are here to stay, says Scott Robinson, Moodys vice president and senior credit officer, who says that in order to get shelf space with brokers, an insurer needs a standard set of features that makes the product more attractive.

Donna Claire of Claire Thinking, Port Salonga, Long Island, says that until recently, many companies considered the GMDBs a “throwaway benefit.” Company actuaries should be considering different economic environments under which these benefits need to exist, she adds. “Some are already doing it and if they arent, they should be.”

Any time you have an industry as competitive as this one, then benefits such as guarantees will remain, says Barbara Lautzenheiser, Lautzenheiser & Associates, Hartford, Conn.

There is another cost that needs to be considered, according to Lautzenheiser: the marketing arm of a company. “A major cost is a market force. To have them stop selling these guarantees and impair the market force is a cost that is also expensive.

“I think that the field will see it as something that they should be selling.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 5, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.