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Life Health > Life Insurance

Credit Crunch Puts Reserves In Spotlight

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Life insurers may need relief from excessive statutory reserve requirements, because the turmoil in the credit markets seems to be reducing their ability to meet the requirements with securitizations.

Members of the Life & Health Actuarial Task Force at the National Association of Insurance Commissioners, Kansas City, Mo., discussed the problem here during the NAIC’s spring meeting.

Earlier, the NAIC sent out a memo pointing that credit downgrades have made it more difficult for some insurers to get the cash they need to operate.

“The fear of investing in monoline businesses is spilling over to other lines, including life insurance,” NAIC officials wrote in the memo. “More than one department of insurance has expressed concern about companies’ liquidity/solvency because the ability to finance excess XXX-reserves is ‘drying up.’ “

Some insurers have what appear to be statutory reserves that are about 3 times as large as economic analysis suggests the insurers need, the officials wrote.

“Without the ability to reinsure these reserves or securitize them, some major term life carriers could become statutorily insolvent while being very economically viable,” the officials wrote.

The credit markets’ reaction to securitizations bears watching, according to Al Gross, Virginia insurance commissioner, at the Orlando meeting LHATF session.

Gross, who is chair of the NAIC Financial Condition Committee and chair of the technical committee at the International Association of Insurance Supervisors, Basel, Switzerland, emphasized that life insurers now face no solvency issues.

Today, however, “not only has there been a decline in investors, but also a secondary auction market seemed to dry up and make short-term financing scarcer,” Gross said at the LHATF session. “Replacing short-term money with letters of credit has its own problems.”

Mike Streck, who represented Principal Financial Group Inc., Des Moines, Iowa, expressed concern about the possibility that the credit market turmoil could disrupt funding for products such as term life insurance and lead to higher rates.

Steve Ostlund, an Alabama regulator, recommended that regulators form a working group keep the problems in the credit markets and other financial services sectors from affecting life insurers.


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