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November 03, 2009 at 07:00 PM
The New York State Insurance Department is ordering life insurers in the state to adjust assumptions about investment portfolio calls, prepayments and defaults to reflect the true state of the economy.
The department has spelled out detailed rules for reporting Dec. 31, 2009, reserves “and other solvency” issues in a letter to carriers.
When the economy was strong, life insurers often could rely on rough, standard estimates of factors such as how often the home owners responsible for the mortgages supporting residential mortgage-backed securities might pay off loans early.
Today, however, “examples cited by regulation may no longer be appropriate as safe harbors,” New York department officials write in the letter. “Assumptions should be commensurate with the underlying economics.”
Similarly, when insurers are feeding securities default rate assumptions into forecasting formulas, “examples cited by regulation may no longer be appropriate as safe harbors,” officials warn. “Expected defaults should be commensurate with the current market values for investments of like kind and quality. “
When life insurers are describing their MBS portfolios, “subprime exposure must be explicitly addressed, including the continued appropriateness of any default provisions carried over from the prior year’s analysis,” officials write.
