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Life Health > Life Insurance

Regulator: Credit Crunch Makes Principles-Based Reserving Urgent

By Jim Connolly

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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.

Leslie Jones, representing South Carolina on the LHATF subgroup, explained how while South Carolina has encouraged securitizations, it has discouraged ‘warehouse securitizations’ because companies have not, in general, been willing to secure funding as they write new business to secure reserves for this new business, a practice which she contends could create an exposure for these companies.

And Mike Streck, a representative with Principal Financial Group, Des Moines, Iowa, expressed concern that there could be potential disruption in the marketplace for products such as term insurance and that any increase in funding costs will be passed through to consumers.

Companies are trading reserves for other risks, including liquidity and monoline risks, said Tom Campbell, chair of the Life Practice Council of the American Academy of Actuaries, Washington. Whether that is good is debatable, but it is important that the work on principles-based reserving continue, according to Campbell, who is also a life actuary with Hartford Life Insurance Co., Simsbury, Conn.

Other proponents of PBR including Donna Claire, who is heading up the Academy’s PBR efforts and Scott Harrison, executive director of the Affordable Life Insurance Alliance, Washington, said the difficulties in the credit market point to the need to get principles-based reserving done so that such issues will not become problems for life insurers.

Sheldon Summers, an actuary with the California insurance department, said that amending the Standard Valuation Law was really key since both Triple-X and A-Triple-X were just plugs for loopholes in the SVL. And, Blaine Shepherd, a life actuary with the Minnesota Insurance Department, said that it was a good idea if LHATF regulators kept abreast of any potential difficulties in the credit markets for insurers.

John Bruins, a representative with the American Council of Life Insurers, Washington, said that if there was any indication that a problem was surfacing, the ACLI would raise it with regulators. He emphasized the importance of advancing the PBR effort.

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