If U.S. financial services regulators fail to stand up for life insurers, poorly designed international rules could kill the insurers’ ability to offer long-term guarantees, Ben Nelson said Thursday.
Nelson, the chief executive officer of the National Association of Insurance Commissioners (NAIC), used a high-profile speaking slot to try to get other U.S. insurance industry players to pay more attention to regulatory projects under way at the International Association of Insurance Supervisors (IAIS), the G-20′s Financial Stability Board (FSB), and other international organizations.
Nelson — who has been the insurance director in Nebraska, the governor of Nebraska, and a U.S. senator from Nebraska — spoke at lunch at an insurance industry conference organized by Standard & Poor’s Rating Services.
S&P runs a rating system that helps determine whether corporations and governments can borrow money, how much big borrowers pay for loans, and which investors can hold the debt.
Nelson reminded conference attendees that insurers themselves are the biggest buyers of corporate bonds. If ill-advised regulations reduced or eliminated insurers’ ability to sell products such as long-term care insurance (LTCI) and variable annuities with guarantees, that would sharply reduce the insurers’ need for bonds to back up long-term obligations, Nelson said. ”What would that do to the bond market in general?” the executive asked.
Advocates of increased integration of financial services company regulation have noted that problems at American International Group (NYSE:AIG), an insurer, contributed to the severity of the 2008 financial crisis. Nelson repeated arguments that the problems at AIG were caused by investment operations, not by insurance activities that were regulated by U.S. insurance regulators.
Holders of bank deposits can withdraw their deposits at any time during a normal business day, without having any reason to do so. Because banks are susceptible to “runs,” international regulatory efforts dominated by bankers and bank regulators tend to focus on preventing by increasing capital levels, Nelson said.
Insurers typically have obligations that are structured much differently, and face little need to hold capital to cope with runs, Nelson said. Life insurers with long-term obligations do need to have enough assets to match liabilities, and they do have to make sure they will have enough cash available at the time to send out the required benefits payments at the right time, the executive stated.
But bank-centric capital standards have little to do with insurer asset-liability matching strategies, Nelson argued. ”‘More capital’ always sounds like it’s good. The question is, ‘Is it necessary?’”
In an interview, Nelson said he thinks anyone involved with selling products such as long-term care insurance or long-term disability insurance should be paying attention to the international negotiations. ”This could directly affect them,” he added.
U.S. insurers have only a small voice in the international financial services standards negotiations, and sellers of health-linked protection products have an even more difficult time getting international regulators to understand their concerns, according to the executive.
Also, banking regulators tend to dominate the discussions. When insurance regulators are involved, they may not have much familiarity with health-related products, because, in most wealthy countries other than the United States, government programs handle health risk, Nelson said.