A New York state insurer should think twice before making securities loans with a total value in excess of 5% of its admitted assets.

The New York State Insurance Department has put the 5% asset guideline in Circular Letter Number 16 (2010), “Prudent Practices for Insurers Engaged in Securities Lending.”

The New York department does not set a firm 5% limit, but, if an insurer lets the value of securities New Yorkloans exceed the 5% guideline, “then the insurer making such a loan may not be acting prudently,” New York Deputy Superintendent Michael Moriarty writes in the circular letter.

An insurer that participates in securities lending lends securities, “either directly or through a custodial bank, to a borrower in exchange for collateral, each to be returned at a specified future date or on demand by either party,” Moriarty says.

In the summer of 2008, around the time the world financial system was experiencing severe turmoil, the New York department quietly drew attention to concerns about securities letter in Circular Letter Number 16 (2008) (“CL 16″).

“At that time, the department had become aware that some insurers had experienced significant losses due to their securities lending programs,” Moriarty says.

The department was not sure whether insurers were getting enough collateral for the securities, doing a good job of managing cash collateral investment risk, or providing clear reports on securities lending activities, Moriarty says.

“The economic environment since CL 16 was issued has

exacerbated the risk to insurers,” Moriarty warns.

In addition to recommending limits on the size of securities lending programs, the New York department is recommending that an insurer avoid lending too many securities to any one borrower and invest cash collateral in what are believed to be relatively low-risk securities, such as U.S. government debt securities, state debt securities or corporate debt securities.

The New York department superintendent “will continue to monitor insurers’ securities lending practices and may promulgate regulations or seek legislation, as necessary, if the superintendent concludes that insurers are not engaging in securities lending activities in a prudent manner and in accordance with the Insurance Law,” Moriarty says.