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N.Y. Expands On Default Test Demands

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NU Online News Service, Jan. 27, 12:40 p.m. – New York state insurance regulators have given life insurers more instructions about how to incorporate worries about bond defaults into their annual reserve analyses.

The regulators warned in a November 2002 circular letter that a life insurer would have to do more than show that it had enough reserves to cope with occasional bond defaults. But the November 2002 letter gave only general guidelines, and many insurers called regulators with questions about how to implement it.

The regulators have followed up with a second letter giving a few more details.

This year, for example, life insurers will have to test the corporate bonds and related investments in their portfolios using the assumption that, after defaults, the corporate bonds will yield only 1 percentage point more than comparable U.S. Treasuries.

“The purpose of this test is to provide a common frame of reference to identify situations where significant default risk may exist,” the regulators write in the latest letter.

But in some cases, the regulators concede, assuming an investment will yield only 1 percentage point more than comparable U.S. Treasuries will be too conservative.

“Professional judgement should be used to produce results that comply with the spirit of this request and a variety of alternative approaches may be acceptable,” the regulators write. “In any event, appropriate explanation and justification should be provided for the methodology that was employed and the results that were obtained.”

The letter is available on the Web at //