The current credit crunch is making successful completion of principles-based reserving more urgent, regulators and proponents of PBR cautioned.
Al Gross, Virginia commissioner, took the unusual step of addressing regulators and attendees of the Life & Health Actuarial Task Force during the spring meeting of the National Association of Insurance Commissioners here.
Speaking as a chair of the NAIC’s “E” Committee and the chair of the technical committee of the International Association of Insurance Supervisors, Basel, Switzerland, Gross said the tentative reaction of the current credit markets to securitizations bears watching. Although he emphasized that currently there is no solvency issue, he did note that the shrinking capital market for Triple-X reserves needs to be watched.
“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. “Replacing short-term money with letters of credit has its own problems.”
But, Gross continued, the crunch does create “more of an impact on future business plans and product offerings.” And it could affect the funding of Triple-X and A-Triple-X reserving, he warned.
In a memo sent by the NAIC regarding the discussion, it was noted that “there are some liquidity issues companies are facing with respect to recent credit downgrades. The fear of investing in monoline businesses is spilling over to other lines, including life insurance. 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 companies have statutory reserves that are about thrice the economic reserves. Without the ability to reinsure these reserves or securitize them, some major term life carriers could become statutorily insolvent while being very economically viable.”
Because of such concerns, Steve Ostlund, a regulator from Alabama, recommended that regulators form a working group to make sure problems that other parts of the financial industry that have been hit by market forces, such as the subprime market, do not impact life insurers. Monoline insurers are already facing problems from a roiled subprime mortgage market which they have guaranteed.