Regulators in the New York State Insurance Department Life Bureau emphasize their concerns about variable annuity benefits guarantees in the department superintendent’s latest annual report.
“Several insurers have approached the department with product concepts that would wrap mutual funds with similar guarantees,” bureau officials write in the report’s Life Bureau section.
Few life insurers had to make good on VA living benefits guarantees after the 2001 market downturn, because most of the guarantees that were in place were still in the middle of a waiting period, bureau officials write.
Because stocks have been doing well since 2001, “companies selling these [guarantee] products have been reporting high profits, which has created incentives to increase their share of the market in this area,” officials write.
“Due to the lack of availability of reinsurance for these products and the high cost to hedge these risks in the capital markets using options, most insurers have turned to dynamic hedging programs,” officials write. “The department is concerned that such programs may not work as planned under severe market conditions.”
The Life Bureau may develop new guidance for insurers that want to get VA living benefits approved using the New York department’s certified form approval process, officials write.
In another part of the Life Bureau’s section of the New York department annual report, bureau officials talk about their participation in efforts by the National Association of Insurance Commissioners, Kansas City, Mo., to shift toward flexible, “principles-based” methods for establishing standards for reserves and capital.
A 2006 NAIC review of insurers’ VA benefits guarantee reports “showed that tight restrictions are needed at the current time to ensure solvency, auditability, and consistency in principles-based standards,” Life Bureau officials write.
In other sections in the annual report:
- The Life Bureau says it is trying to come up with $600 million for the Executive Life of New York estate, to make sure the estate can continue to make full payments to annuity holders. Earlier Life Bureau administrations may have “significantly understated” the Executive Life of New York shortfall “by utilizing accounting methods that did not accurately reflect the estate’s financial condition,” officials write. Unless the estate gets a capital infusion, it may be able to make full payments for only 15 years, officials warn.
- Department officials say New York law does not permit life insurers to exclude coverage for the effects of nuclear, biological, chemical or radiation attacks in individual policies. So far, no companies have asked the department for permission to put an NBCR exclusion in a group life contract, officials write.
- New York is now home to 7 viatical settlement companies. At the end of 2005, the companies had $42 million in assets and had purchased policies with a total of $16.9 million in face value. The companies spent $12.6 million, or 75% of the face value, to buy the policies, officials report.
- The number of life insurers using the System for Electronic Rate and Form Filing system to file policy forms increased to 127 in 2006, from 102 at the beginning of the year.
A copy of the New York insurance superintendent’s annual report is on the Web