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Life Health > Life Insurance

U.S. Life Insurers Face Funding Gap: S&P

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NU Online News Service, March 25, 2005, 10:51 a.m. EST

U.S. life insurers still are struggling to meet reserve funding requirements set by regulators 5 years ago, according to a leading corporate rating service.[@@]

To meet the reserving requirements, life insurers often are covering long-term debt with short-term instruments such as 1-year letters of credit, according to a report from Standard & Poor’s Ratings Services, New York. The big problem with 1-year LOCs is that they carry a significant rollover risk because they must be renegotiated every year, S&P points out.

The advent of Regulation Triple-X in 2000 and Actuarial Guideline A38 in 2003 forced the industry to set aside added reserves for life insurance policies that cover a term as long as 60 years. These rules are based on conservative mortality assumptions that date back to the 1970s and force insurers to set aside the same reserve levels for policyholders who live healthy lifestyles as those who lead unhealthy ones, S&P says.

This will force life insurers to set aside as much as $200 billion in additional reserves over the next 10 years, the report predicts.

Investors have cause for concern because the reserving rules force life insurers to lock up too much money in reserves to pay for LOCs, S&P says. For policyholders, the concern is that insurers will pass their increased funding costs on to them in the form of higher premium.

“The regulations as implemented result in significant uneconomic reserves, which by their sheer conservatism and scale are counterproductive,” concludes Robert Swanton, head of life insurance ratings at S&P.


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