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What Does ACLI's Capital Relief Plan Mean In Practical Terms?

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With a possible vote by state insurance regulators on a capital and surplus relief proposal advocated by life insurers scheduled for shortly after press time, different constituencies are trying to assess what the controversial request means in practical terms.

On Jan. 27, the National Association of Insurance Commissioners, Kansas City, Mo., held a hearing in Washington to receive testimony on the issue. This hearing was scheduled to be followed on Jan. 29 with a joint executive committee/plenary call to hear a report from the NAIC’s recently formed capital and surplus relief working group and to possibly vote on any recommendations.

Meanwhile, two top officers of the National Conference of Insurance Legislators want insurance regulators to delay action on the ACLI proposal.

In mid-November, the American Council of Life Insurers, Washington, met privately with state insurance commissioners to advance a capital and surplus relief plan. The 9-point actuarial and accounting plan was presented to technical working groups at the NAIC and these groups made recommendations during the 2008 winter NAIC meeting. (See chart on this page.)

ACLI estimates that adopting some of the components in the proposal would improve insurers’ financial standing by $27 billion to $44 billion.

Consumer advocates, some commissioners and at least one industry representative have questioned the speed of the project as well as the dearth of openness throughout its discussion and development.

But Whit Cornman, an ACLI spokesman, explains what ACLI believes is the importance of the proposal as follows: “It’s a difficult question to answer but one thing is certain–financially strong companies are good for consumers and therefore producers. Our proposal before the NAIC is intended to release capital that is currently being tied up by ultra-conservative capital and reserving standards. Allowing companies to access their capital will provide a more accurate picture of a company’s financial strength.

“With this more accurate picture, producers can provide better guidance to their clients in these turbulent economic times,” Cornman says.

Christopher Greis, president of Leaders Partners Inc, Great Barrington, Ill., a brokerage general agency which acts as a wholesaler to financial planners and producers, says the financial strength of a company will be critical this year.

Although he says that to date “we don’t think we have seen the flight to quality at the retail level,” he adds that with publicized problems at banks that trend could accelerate in 2009.

The flight-to-quality trend will be more pronounced among independent producers than those producers representing companies, Greis explains.

Ratings do matter, according to Greis. At Leaders Partners, he maintains that the preference is to work with life insurers who have at least an ‘A+’ rating.

In general, he says, ratings are the first indicator of a company’s strength followed by an insurer’s stock price. It is “prescient” how the market can price a stock and “lo and behold, the reason manifests itself.”

Greis notes that while it might seem counterintuitive to relax capital and surplus requirements right now, judicious requirements that accurately reflect a company’s situation can actually make a company stronger. He referenced Actuarial Guidelines Triple-X and A-Triple-X, which outline reserving for term and level premium products and UL products with secondary guarantees, as examples.

While ratings are one of the major things producers look at, he says that about 5% of assets seems an appropriate level for capital and surplus, although for very large companies that might be too much.

In a Standard & Poor’s Corp. commentary last month, the New York-based rating agency notes that “the proposed changes would have a limited effect on our view of capital adequacy, which, although important to our rating assessments, is only one of eight major factors we look at when determining our ratings on insurers.

“We expect insurance companies to maintain certain levels of capital and liquidity at each rating category, but competitive positions and operating performance–two of the other factors we consider–tend to be the key differentiators at investment-grade rating levels,” S&P says. “Major rating factors also include management and strategy, enterprise risk management, investments, and financial flexibility.”

The report by S&P analysts Matthew Carroll, Kevin Ahern, and Robert Swanton says the changes would have only a “slight impact” on S&P’s view of capital adequacy but could increase financial flexibility and increase dividend capacity for some companies.

The leaders of NCOIL, Troy, N.Y., are preparing to send a letter urging the NAIC not to vote on the proposal.

New York state Sen. James Seward, R-N.Y., NCOIL’s president, says NCOIL’s leaders will “urge the NAIC to slow down until consensus is reached,” because the NCOIL leaders believe a “proper vetting of this issue is needed,” and, “frankly, the timing could not be worse. It leaves the appearance that standards are being relaxed when the rest of the world is calling for more oversight.”

NCOIL leadership has not determined whether it will try to prevent enactment of the proposal in state legislatures if the NAIC votes to adopt the proposal, Seward says.

Kentucky state Rep. Robert Damron, D-Ky., president-elect of NCOIL, says that, if the proposal were adopted, he would consider advancing legislation to prevent the proposal from being used in Kentucky and would advance a proposal to have Kentucky withdraw from NAIC membership. Damron says it is possible that action could be taken to remove references to the NAIC and its models from state law.

“It takes more guts than a slaughterhouse,” Damron says, for the ACLI to submit the capital and surplus proposal under current conditions.

“Asking regulators to reduce protection to policyholders is just absurd,” Damron says. “If the NAIC does this, as far as I’m concerned, it is absolutely a good case for federal regulation.”

Any member of Congress considering the possibility of federal regulation would have to ask “how the industry could have that much power over regulators,” Damron says. “How can you tell Congress to leave us in charge of insurance when you are getting in bed with the industry? I think [NAIC members] will be handing over insurance regulation to the federal government if they go through with that.”

The Independent Insurance Agents & Brokers of America, Alexandria, Va., is watching the issue closely and believes that the issue needs to be examined judiciously, according to Wes Bissett, representing the Big “I.”

When asked for comment, the National Association of Insurance and Financial Advisors, Falls Church, Va., referred to an article in its GovTalk publication authored by Ron Panneton, NAIFA senior counsel-government relations. The article offers a dateline on the project’s development.


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