NU Online News Service, Aug. 30, 3:15 p.m. – Moody’s Investors Service, New York, says it will use a tougher formula to measure the safety of U.S. life insurers’ institutional investment products.
Life insurers that sell institutional investment products try to profit by earning a higher rate of return on their own investments than they pay the institutions.
Moody’s argues that managing assets for institutions is a risky, low-profit business, and it wants life insurers to limit their exposure to the business to less than 30% of general account insurance reserves.
In the past, the agency has counted all institutional investment products about the same, but now it says it will use a “risk weighting” system to penalize insurers that have unusually risky institutional investment operations.
Moody’s will count product risk more heavily if it believes a life insurer is backing the products with large investments in shaky bonds, the agency says.
Moody’s will also count institutional product risk more heavily if it believes a life insurer might have trouble coming up with the cash needed to support the products.
Because the formula for counting institutional investment product liabilities is changing so drastically, some life insurers might see big increases in their institutional investment liability exposure figures, Moody’s says.
In some cases, the agency says, the increases might be enough to cast doubt on an insurer’s current credit rating.
“If this occurs, Moody’s analysts will have discussions with the insurer about the growth trends of the business and possible plans to decrease their risk-weighted exposure,” says Bob Donohue, a Moody’s vice president. “However, Moody’s does not expect to take any rating actions based solely on this change in our methodology.”