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Systemic Risk: Lawyers Wonder About Non-Insulated Separate Accounts

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WASHINGTON BUREAU — State insurance commissioners are thinking more about ways to track products, such as corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI), with assets held in non-insulated separate accounts.

One of the concerns is how the products might interact with the general account at a troubled company, according to lawyers at Sutherland, Asbill & Brennan L.L.P., Washington.

Lawyers at Sutherland write about the matter in an alert about the work of the Financial Analysis Working Group (FAWG), an arm of the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.

FAWG conducted a survey of state insurance departments and found 300 non-variable products in separate accounts, including 81 products in non-insulated separate accounts that may be non-insulated.

The 81 separate account products include market-value-adjusted annuities, BOLI, COLI, group annuities, and modified guaranteed annuities. The products have been described as being not legally insulated, although FAWG notes that there are “different views on what is defined as legally insulated,” Sutherland lawyers report in the firm’s new alert, “Insurance Regulators Heighten Focus on Life Insurer’s Separate Accounts.”

FAWG also note that state insurance departments place very different limitations on investments that may be held within separate accounts, potentially increasing solvency risks.

The FAWG report was made public during an NAIC Financial Condition Committee conference call March 8. The committee agreed that the issue warrants further attention from several NAIC bodies, such as the Receivership and Insolvency Task Force, the Separate Account Risk Working Group and the Financial Analysis Handbook Working Group.

State regulators have proposed new holding company reporting and inspection requirements for non-insulated separate account products and heightened corporate governance standards, the Sutherland lawyers say.

State regulators also are looking at how to improve the regulation and monitoring of separate account products — particularly non-variable products — and minimize potential negative impacts on insurer solvency.

Another lawyer familiar with insurance matters notes that, earlier this week, the board of the Federal Deposit Insurance Corp. (FDIC) approved a new rule outlining how the FDIC will handle a troubled insurer that comes under its control.

In the new rule, the FDIC reserves the right to impose liens on the assets of a troubled insurer if the FDIC has advanced funds to help the insurer liquidate.

One concern is whether the assets of non-insulated separate accounts could be reached by the FDIC liens if the FDIC advanced the funds needed to liquidate an insurer, the lawyer says.

“There is also the question about how the FDIC liens will interplay with the guaranty funds,” the lawyer says.

Separate account insulation is a topic that the FIO is supposed to consider when it studies the idea of modernizing the U.S. insurance structure, the lawyer says.

“The FIO is directed to study, among other things, the potential consequences of subjecting insurance companies to federal resolution authority, including the effects of federal resolution authority on the ‘loss of the special status of life insurance separate account assets and separate account liabilities’,” the lawyer says.

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