Stock Companies

  • Many stock life insurance companies seem to feel that it is imperative for them to offer new and attractive products in order to survive in the present environment.

1981-1, NAIC Proceedings

  • Those who are interested in the stock plan of life insurance, maintain that this rule holds even to the extent of a six percent reserve..

1871-2, NAIC Proceedings

Company Investments

  • The nature of the life insurance industry calls for a relatively conservative investment policy, with safety of principal being of highest importance.

—  ROBERT R. WYAND II

1977 – SOA – Investment Strategy and Planning, rsa77v3n110 0 Society of Actuaries – 16p

  • (p86) – 27. Selected assets and liabilities of savings institutions – C. Life insurance companies – Millions of dollars, end of period

1980 – FRB – Annual Statistical Digest, Board of Governors of the Federal Reserve System – 244p

  • (p20) – Life insurers are the single largest source of corporate bond financial, and hold approximately 18 percent of total U.S. corporate bonds.

—  Statement of Patrick S. Baird, Chief Executive Officer, Aegon USA, LLC, On Behalf of the American Council of Life Insurers (ACLI)

[PDF-181p,

  • (p977) – The life insurance companies have pretty much abandoned the residential mortgage market in the past 10 years.
    • The life insurance companies and the pension funds which are the primary sources of long-term credit for corporations have had a significant and steady build-up in their resources.

—  Statement of John Hart, President, National Association of Home Builders

1976 0317-23 – GOV (House) – The Financial Reform Act of 1976 – Part 2 – [PDF-761p-GooglePlay

  • When the MSVR was first established in 1951, common stocks represented only 1.2 percent of the assets of U.S. life insurance companies.
  • However, the sharp rise in common stock prices during the 1950s and early 1960s, combined with the stimulus of statutes enacted in New York and other states authorizing increased common stock purchases by life insurers, resulted in a substantial growth in holdings.
    • Common stocks for all companies increased from $820 million in 195l to $7.6 billion at the end of 1969 and amounted to 3.9 percent of total assets in the general accounts.

1983-2, NAIC Proceedings

  • 1952 – LR – Legal Framework, Trends, And Developments In Investment Practices Of Life Insurance Companies – 41p
  • 1959 – SOA – The Changing Pattern of Life Insurance Investments in the United States, Society of Actuaries – 34p
  • 1980 – SOA – Investment Policies of Life Insurance Companies, Society of Actuaries – 20p
  • Between 1947 and 1952, the excess of the rate on new investments was due to an expansion in the field of investment, from largely Federal Government bonds to a wide range of mortgages, public utility, industrial and other purchases.
  • From 1952 to 1956, the structure of market interest rates has itself generally moved upwards.

—  B. T. Holmes

1957 – SOA – Life Insurance Policies, Premiums and Dividends, Society of Actuaries – 9p

  • 1983 0506 – Governor Proposes Insurance Law Reform
  • STATE OF NEW YORK-EXECUTIVE CHAMBER
    • Governor Cuomo announced today he has submitted
      legislation reforming the New York State Insurance Law
      to liberalize limitations on investments and activities of
      insurance companies in the State and at the same time
      make boards of directors of insurance companies more
      accountable to the public.  (p376 / 1600)

1983 – New York – Public papers of Governor Mario M. Cuomo, Part 2 – p1225-2210 – 999p

  • One important class of investors in Government securities is insurance companies.
    • Life insurance companies have been liquidating a small proportion of their Government security holdings since the end of the war as new investment opportunities unfolded, as shown on Chart 9. (p160)

1949 01 – (GOV-JEC) – January 1949 Economic Report of the President – 698p

ATTACHMENT ONE-A1

TO: Prudent Person Model Investment Law Working Group
FROM: Wisconsin Office of the Commissioner of Insurance

DATE: April 17, 1996

SUBJECT: Wisconsin’s Approach to the Regulation of Insurance Company Investments

  • The Wisconsin approach to the regulation of insurance company investments, while very different from the pending model and the concept drafts under review by this working group, has been very successful for Wisconsin.
  • No domestic insurer has suffered investment-related insolvency since this approach was adopted in 1971.
  • We appreciate this opportunity to explain the methods Wisconsin has employed to achieve these results and our observations as to why this success was possible. (p564)

1996-1, NAIC Proceedings

Demutualization

  • 1983 12 – SOA – The Actuary – act-1983-vol17-iss10-angle – Society of Actuaries
  • 2000 – SOA – U.S. and Canadian Demutualizations-Postmortem, rsa00v26n3130pd – Society of Actuaries – 21p
  • (p54) – 1:34-1:41 – Bruce BRALEY (D-IA) – Mr. Dinallo, I want to start with you.
    • Twenty-five years ago,I was a research assistant to Professor Alan Whitus, who was updating the Keeton and Whitus basic text on insurance law; and I think both Professor Whitus and Professor Keeton would be rolling over in their graves seeing what has happened to the industry that they were so passionate about.
      • I think you would agree with me that industry has changed radically in the 25 years that I’ve been talking about.
  • Eric DINALLO, Superintendent, New York State Insurance Department – Yes. In particular going from mutual companies to publicly traded companies.
  • Mr. BRALEY. And a lot of those demutualizations resulted in a significant financial loss to policyowners who owned the shares of those mutual companies-who owned the mutual companies and during the conversion in many cases were screwed out of their financial share of those companies.
  • Mr. DINALLO. I might not use the same verb, but I will agree.
  • Mr. BRALEY. I think you get my point.

 GOV (House-OGR) – The Causes and Effects of the AIG Bailout- AIG Bailout Oversight Hearing, Henry Waxman (D-CA)  —  [BonkNote]

Class Actions

  • The actual versus expected performance for some Universal Life policies led to class-action lawsuits that have caused a substantial amount of negative attention to be focused on cash-value life insurance in the illustration of projected values. 

—  Deanne Osgood, Milliman & Robertson

1999 – SOA – The Next Generation Universal Life, Society of Actuaries – 30p

  • 2003-1, NAIC Proceedings – 2022 1216 – Legal Times – Class Actions to Raid Insurance Coffers Recklessly Undermine Expert Decisions of State Regulators, By Lawrence H. Mirel (Larry Mirel) – District of Columbia Insurance Commissioner – Attachment Four-B – 
  • 1997 1024 – WSJ – MONY Wins Dismissal of Suit Over ‘Vanishing Premium’ Policies, by Leslie Scism – [link]
    • The company, popularly known as MONY, won a dismissal this week of a national class-action lawsuit that is similar to more than 30 suits pending against major life insurers.
    • … in the MONY case, New York state judge Beatrice Shainswit found that..
      • while thousands of consumers nationally “have been deeply aggrieved by what they perceive to be a grave injustice perpetrated upon them by the numerous insurance companies who contrived, and profited, from the “vanishing premium” concept,” this “ill-conceived product” doesn’t necessarily “equate to fraud, or any other actionable wrongdoing, which can be compensated for in a court of law.”
      • Her 29-page decision debunks key arguments in almost all of the suits. – <WishList = “29-page decision”>
        • She said insurance agents don’t have a fiduciary relationship with their clients, as plaintiffs’ lawyers contend.
        • She also maintained that sales documents stating that dividends aren’t guaranteed at high levels were sufficient warning to consumers that they couldn’t rely on other promotional literature showing rosy dividend scenarios.
    • [ACLI] – “This case, being typical of many other baseless class actions, will be cited as authority in other jurisdictions for dismissing those frivolous cases,” predicted Phillip Stano, senior counsel for the American Council of Life Insurance, a trade group in Washington. “And we congratulate MONY for standing up to those who sought to intimidate them into a frivolous settlement.”
  • 1998 – SOA – Corporate Governance of Investments: Avoiding the Next Class-Action Suit?, Society of Actuaries – 20p
  • 1998 0305 – GOV (House) – Mass Torts and Class Action Lawsuits, Howard Coble (R-NC) – [link]
    • Barney Frank (D-MA)
    • House – Committee on the Judiciary – Subcommittee on Courts and Intellectual Property
  • 1999 0914 – GOV (House-Report) – Interstate Class Action Jurisdiction Act of 1999  —  [BonkNote]  —  47p
    • The Committee on the Judiciary, to whom was referred the bill (H.R. 1875) to amend title 28, United States Code, to allow the application of the principles of Federal diversity jurisdiction to interstate class actions, having considered the same, reports favorably thereon with an amendment and recommends that the bill as amended do pass.
    •  
  • 2018  08 – DRI For the Defense – As Universal Life Insurance Premiums Increase, So Does Class Action Litigation”, p12-19 – [92p]
  • (p37) – AARP – Cristina Martin Firvida, Director, Financial Security and Consumer Affairs – There are two additional things that I would just like to add briefly, because we have talked a lot about the litigation risk in this rule. And I would like to make sure that we say today, reminding everyone that the litigation that is permitted in the rule is class-action litigation. And there are two things about that we need to remember.
    • ⇒  First, there has to be a systemic problem before a class-action cause of action can be brought, and I think that we can all agree that if there is a systemic issue in advice that is being provided, we would want to address that. So this is not about individual rights of action. This is about a systemic problem that affects a class.
    • And second, it is extremely difficult to certify a class, extremely difficult and more so in recent years after certain Supreme Court cases have been decided. So I really just wanted to make sure that we were all clear on what is the scope of the litigation risk.

2017 0713 – GOV (House) – Impact of the DOL Fiduciary Rule on the Capital Markets, Bill Huizenga (R-MI)  —  [BonkNote]

  • 2005 0209 – GOV (Senate) – Senate Session
    • Class Actions, KB Toys (Deceptive Pricing Practices – 05:28:00 – Hatch), Coca Cola (Apple Juice – 05:29:00 – Hatch)
    • 2005 0209 – Congressional Record – [PDF-70p]
    • 05:17:00 (pS1178) – Orrin Hatch (R-UT) – Abuse of the class action system has even become the inspiration for popular literature.
      • In 2003, the author, John Grisham, released a book entitled ”The King of Torts.” Grisham’s novel takes its reader into the world of the mass tort/class action lawyer where clients are treated like chattel and bargaining chips.
      • The value of a potential action is not measured by the merit of the claim but on the number of class members that can be rounded up.
      • The end game is not the pursuit of justice for the class members and clients, but in the pursuit of a hefty attorney’s fee.
      • Although Grisham’s book is intended as fiction, it is hard to distinguish it from the facts of our broken class action system. Let me read a few passages: 
      • 05:46:00 – Settlements, Verdict Money – Big, even if unjust, This doesn’t take away consumer rights, important cases should be in important courts. Less Jackpot Justice, Forum Shopping. Madison County Illinois, It’s a disgrace what has gone on. Disgrace in the Law in this country.
    • 04:55:00 – pS1176 – Senator Patrick Leahy (D-VT) – I have been in the Senate for 31years. I came at a time when there was a real effort for Republicans and Democrats to work together, and for White Houses to do so.
      • 05:00:00 – Senator Patrick Leahy (D-VT) – Attack on Senator Reid.  We should be working together.
      • 05:04:00 – Senator Patrick Leahy (D-VT) – They might stir up some of the true believers this way. They do nothing for the country. They do nothing for the Nation. All they do is deepen the divides instead of healing them. It would be nice if we could have leaders.
        • class actions – 
  • Commissioner Mirel distributed a proposed outline for a white paper on class action lawsuits (Attachment Three A).
    • He announced that the outline was a draft and he welcomed input from everyone on it.
    • He observed that the civil justice system is very different from the regulatory system in that the courts are asked to decide justice between or among the parties while the regulatory system is asked to determine the best public policy for all citizens.
    • The two systems can become conflicted when the civil justice system goes beyond its usual realm and renders judgments that have profound impact on persons not represented in the courtroom, and on the public in general.
    • Insurance regulators and the courts both rely on state laws to guide their efforts.
      • Often, however, there is little awareness by courts and trial lawyers of the regulatory system and its purpose.
      • This is of concern to regulators and legislators as they try to draft laws that are clear and convey the public policy decisions that they wish to make. (p336)

2003-2, NAIC Proceedings – Class Action Insurance Litigation (C) Working Group, Property and Casualty Insurance Committee

  • Equitable Life Insurance was accused of misleading and cheating customers.
  • This was a situation of the so-called vanishing premium cases in the 1980s.
    • They sold policies when interest rates were high.
    • They told customers as soon as the interest rates went down their premiums would be lower.
      • That was not true.
    • Class action lawsuits were filed in Pennsylvania and Arizona state courts, and Equitable settled the suits for $20 million helping over 130,000 people.
    • However, because the insurance company was based in another state, under this legislation, the case would have been removed to federal court and these people harmed between 1984-1996 would still be waiting for justice.  (S1150)

—  Harry Reid (D-NV) 

  • 2005 0209 – GOV (Senate) – Senate Session
    • Class Actions, KB Toys (Deceptive Pricing Practices – 05:28:00 – Hatch), Coca Cola (Apple Juice – 05:29:00)
    • 2005 0209 – Congressional Record – [PDF-70p]
    • [VIDEO-CSPAN]
  • Plaintiffs wrongly accuse the court of speculating about agent disclosures.
    • What the court concluded was that the non-uniform sales process inherently defeats Plaintiffs’ class-wide omission theory. ER791 49:11-50:3.
    • The trial record supports that conclusion, and is dispositive. See Kaldenbach v. Mutual of Omaha Life Ins., 178 Cal. App. 4th 830, 847-848 (2009)

– LC – Walker et al v. Life Insurance Company of the Southwest Settlement, Case No. CV-10-9198-JVS-JDE  —  [BonkNote]

http://lswclassaction.com/docs/download/SANFRAN-%238165194-v1-2016_02_08_042_Appellees_Answering_Brief.pdf

  • 2002 0731 – GOV (Senate) – Class Action Litigation, Patrick Leahy (D-VT)  —  [BonkNote]  
    • (p55) – AEGON – Patrick Baird
      • The life insurance industry has experienced over a decade of abusive class actions.
      • In one of the more recent examples of such class action abuses.
      • State courts in New Mexico are certifying nationwide classes of plaintiffs for the manner in which their premiums are disclosed in their policies.
      • These cases are being certified even though State Commissioners of Insurance reviewed and approved these policy disclosures.
      • These class action cases have steadily weakened the very fabric of State regulation of insurance as the State judges’ decisions have had national implications for insurers in other states.
      • The result of nationwide regulation through targeted class action litigation has indirectly usurped the role and authority of the State Commissioners of Insurance.
    • Senate – Committee on the Judiciary
  • 1996 – SOA – Legal Issues Affecting Nontraditional Products, Society of Actuaries – 14p
    • Metlife – Florida – Nurses
    • Prudential – Multi-State Task Force
    • Media
  • p11 – Philip A. Loomis, SEC Commissioner, Securities and Exchange Commission – …and the Superintendent of Insurance case, has considerably expanded the scope of private litigation for violations of the securities laws, as compared with what existed before.
    • And this, of course, has encouraged private plaintiffs to bring actions.
    • Class actions have also become more common than they used to be.
    • And class actions are frequently used in securities cases where you will have a person who has defrauded each of 10,000 people out of a $100, and no one of them can effectively sue, but if you have got a class action for all 10,000, it is an action worth bringing and may be brought. 

1975 – GOV (Senate) – The Bankruptcy Reform Act, Quentin N. Burdick (D-ND)

⇒  Part 2 – APRIL 29, 30; JUNE 4; JULY 31; SEPTEMBER 24, 25; OCTOBER 1 , 8, 30; NOVEMBER 5, 6, 11, 12, AND 18 –  [PDF-717p-GooglePlay]

  • Civil Rule 23 – Working Papers of the Advisory Committee – on Civil Rules on Proposed Amendments to Civil Rule 23 – Volume Two, Compiled by the Rules Committee Support Office, Leonidas Ralph Mecham, Director Administrative Office of the United States Courts
  • It has an impact on other insurance companies, too.
    • A few years ago, I found I had been made a plaintiff in a case brought in Santa Fe, New Mexico, against Massachusetts Mutual Life Insurance Company.
  • What was it alleged Massachusetts Mutual had done wrong?
    • Well, when you get your premium, your bill, from Massachusetts Mutual, you can pay it on a monthly, quarterly, or annual basis.
      • If you pay it on a monthly basis, you pay a little more than on a quarterly basis, and that is a little bit more than on an annual basis.
      • Why? Because if you pay on an annual basis, it costs them a lot less money to send out one bill than to send out 12 bills a year, and they have the opportunity to get that money sooner invested.
      • So it is a little less expensive to them, and they pass that savings along to the consumer.
    • The plaintiff in this case and their attorney said they should have to spell out exactly what the difference in savings is rather than simply look at the bill and see that these payments are 12 times what there is and that that is a little more.
      • They said they had to make a disclosure under laws that are not even supposed to apply to insurance companies.
    • Well, they went ahead and settled that case.
      • Why? I asked them.
        • They said because they did not want to get in the same situation that State Farm Insurance Company found itself in with a $1.3 million lawsuit.
    • What was the agreed-upon settlement they sent to the judge in that Santa Fe, New Mexico, court?
      • Well, it provided for $13 million in attorneys’ fees, $5 million up front, $5 million over a period of time, and a nice $3 million universal life insurance policy for the plaintiffs’ attorneys. Is that not nice?
    • Now, what did the plaintiffs get?
      • The plaintiffs, all the plaintiffs got a promise that Massachusetts Mutual would not do this again.
    • Now there is a new settlement proposed because that one actually was withdrawn when they realized how embarrassing it was for the plaintiffs’ attorneys to get $13 million in fees and the plaintiffs would simply get a promise for nothing.
  • Now they have changed it so the plaintiffs might get as much as $50 off on their policy.
  • The plaintiffs’ attorneys would still get the massive 8-digit settlement amount in the multimillions of dollars.  (p55 / H687)

—  Congressman Bob Goodlatte (R-VA)

2002 0216 – Congressional Record – 255p

  • That is wrong.
    • And it is just one more clear example of evidence why this is an extortion racket.
  • Here are some more of what we call the class action wheel of fortune.
    • If you are a company, or if you work for a company that gets caught up in the class action wheel of fortune, watch out, because it can affect your job, it can affect the success of your company and get you tied up in these multimillion dollar cases where there really is little or no damage; or, even if there is, like there was in the Thompson Electronics case, where the television sets were not working, the attorneys got $22 million and the plaintiffs got a coupon, a $50 coupon or a $25 coupon to buy more of the same thing they were not happy about in the first place. (p55 / H687)

— Congressman Bob Goodlatte (R-VA)

2002 0216 – Congressional Record – 255p

Guaranty Funds

  • NAIC – National Association of Insurance Commissioner
    • Financial Condition Committee – (E) – NAIC  —  [BonkNote]
    • Guaranty Fund Issues Working Group – (E) – NAIC  —   [BonkNote]
    • NAIC – Life and Health Insurance Guaranty Association Model Act – 68p
  • NCIGF – National Conference of Insurance Guaranty Funds – ncigf.org/   —  [BonkNote]
  • NOLHGA – National Organization of Life and Health Insurance Guaranty Associations  —  [BonkNote]
  • Penn Treaty
  • (p515) – The working group identified several issues relevant to the charges, including:
    • Does the current structure for handling life insurer insolvencies encourage a policyholder “run”?

1995-2, NAIC Proceedings – Guaranty Fund Issues Working Group – (E) – NAIC

  • Most insurers face risk and uncertainty from a source not normally covered by classical theory of risk texts. This additional element of risk is insolvency, not of your company, but that of other licensed insurers.

—  Joseph W. LEVIN, not a member of the Society, is a fellow of the Casualty Actuarial Society and Vice President and Actuary of the Employers Reinsurance Corporation. 

1978 – SOA – Capacity and Solvency — The Outside Influence, Society of Actuaries – 20p

  • 1978 – SOA – Capacity and Solvency — The Outside Influence, Society of Actuaries – 20p
  • 1986 – SOA – Guaranty Funds, Society of Actuaries – 22p
  • 1991 0926 – GOV (House) – Resolution of Troubled Insurance Companies and the Role of State Guaranty Associations – [PDF-151p-GooglePlay]
  • 1992 – NAIC – Issues Concerning Insurance Guaranty Funds, by Robert Klein – 317p
  • 1992 – SOA – Guaranty Fund System, Society of Actuaries – 14p
  • 1993 0111 – Ledger-Enquirer – State Guaranty Funds Need to be Overhauled, by Jane Bryant Quinn – [link-newspapers.com]
  • 1993 0124 – The Washington Post – States Need to Reform Insurance Guaranty Funds, by Jane Bryant Quinn – [link]
    • To reduce the lottery element of settlements, the National Conference of Insurance Legislators (NCOIL) has proposed a single, interstate guaranty fund.
  • 2021 1008 – LC – In Re: Penn Treaty Network America – No. 1 PEN 2009 – Insurance Company in Liquidation Liquidator’s Brief in Support of Exceptions – 456p
  • [Re: State Guaranty Funds]
  • 2021 1008 – LC – In Re: Penn Treaty Network America – No. 1 PEN 2009 – Insurance Company in Liquidation Liquidator’s Brief in Support of Exceptions – 456p
    • 2015 0511 – Proceedings Taken May 11, 2015
    • THE COURT, Mary Hannah Leavitt: What’s going to happen when the guarantee associations take over these policies is that their policyholders, who had nothing to do with this insolvency, are going to make up the difference.
      • Guarantee associations get their money from insurance companies.
        • Insurance companies get their money from their policyholders; so you are shifting the burden from one set of policyholders to another.
      • That’s a policy decision that’s been made by the legislature, but I think there are problems with holding it up as a model of equity and fairness.
        • In a global sense I don’t think it is very fair; but it doesn’t matter because we are not here to talk about the wisdom of the legislature.
      • We are really here to decide what the legislature has decided we must do in this circumstance.  
    • MS. GLAWE: Exactly right.
      • That burden shifting is what the legislature and 52 jurisdictions have decided.
    • THE COURT: That’s right.
    • MS. GLAWE: So that —
    • THE COURT: I wouldn’t hold it up as a wonderful thing.
      • That’s all I’m saying.
      • For every upside there’s a downside on someone.
  • (p588) – Dwight K. Bartlett III (Md.). …told the working group that guaranty associations were developed during a time when “life insurers sold life insurance.”

1995-1, NAIC Proceedings – Guaranty Fund Issues Working Group B of the Insolvency (EX5) Subcommittee – September 11, 1995

  • (p16) – Willis B. Howard, Jr. (NOLHGA – National Organization of Life and Health Insurance Guaranty Associations):
    • I’d like to respond briefly to my honorable friend, Commissioner Bartlett.
    • Dwight, the guarantee association system works, and it works well.
  • Dwight K. Bartlett III (Maryland Insurance Commissioner):
    • Are you going to tell me, Bill, in all honesty that you really believe that the policyholders of Executive Life and Mutual Benefit Life have been well-served?
    • For example, with Mutual Benefit, if you opted out of that rehabilitation plan you get, as I recall, 55 cents on the dollar of your account value.
      • If you opt into the plan, you agreed to subject yourself to a moratorium period, which means you do not get full access to the cash values of your policy until the next century.
    • Are you going to say that’s meaningful coverage for those policyholders?
    • ⇒  I think that’s ridiculous.

1994 – SOA – Valuation Actuary – Symposium Proceedings – Session 1 – Introduction and Overview, Society of Actuaries – 110p

  • **David B. ATKINSON. (Executive Vice President, Reinsurance Group of America (RGA), on behalf of the Reinsurance Association of America (RAA)) –
    • There have been insolvencies. We do have a State guarantee system that backs up
  • Spencer BACHUS (R-AL) –  So there were no losses? 
  • Mr. ATKINSON. Insolvency regulation has worked well. It has been a success.  (p75)

2009 1006 – GOV (House) – Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, And Creating a National Insurance Office – [PDF-325p]

  • The thing that concerned us, because we did not have an FDIC behind us, we have a system of guaranty funds in the states, if there were a run on life insurance companies, what would that do to us as an industry?

—  Frank Keating, ACLI, President and CEO

2009 1026 – InsuranceNewsNet – Relieved to Have Survived a Dangerous Year, ACLI Members Look Ahead, By Ron Panko, Senior Associate Editor, Best’s Review – [link]

  • Cardiss Collins (D-IL) – Chair
    • (p107) – Our first witness illustrates the importance of an adequate guaranty fund system.
      • Olga Pegelow’s Executive Life annuity has been reduced 30 percent.
    • (p108) – While insurance companies pay into guaranty funds, it is often the taxpayers who actually pay for insolvencies.
  • Mrs. Olga Pegelow, Policyholder,  Chicago
    • (p111-112) – Since April 1991, I am only receiving 70 percent of my check, while 30 percent is being withheld from each monthly payment and credited to my account with the current interest.
    • But you know, I don’t believe them.
      • Any day I expect to get a notice that Executive Life is bankrupt.
    • I know the State Department of Insurance in Springfield, Ill., is one of the 48 States that belongs to a guaranty fund, but I need my income now, as do all of us in my generation.
    • We elect our Representatives and expect them to do their job to protect us.
      • Where has everybody been since 1984 ?
    • l realize that this will affect all of you, and that is why I am here.
      • I am not only talking for our generation.
      • I am talking for your generation.
    • I just hope that you will be able to insure the future for our young people. 
    • —  Thank you for listening to me.
  • (p118) – Mrs. Olga Pegelow, Policyholder, Chicago  – May I ask a question? — I know there is a guaranty fund in 48 States, but in that guaranty fund, is the money there?
  • Alex MCMILLAN (R-NC).  Well, that is another question.  — In most cases, since it is a guarantee.
  • Mrs. PEGELOW.  But the money is not there. — The money has to first be collected.
  • Mr. McMILLAN. But that means that those who participate in that State in the sale of insurance are obligated to pay into the fund.
  • Mrs. PEGELOW. In other words, all the other insurance companies that are solvent in that State will have to donate the money or pay the money to this guaranty fund;
    • …. it isn’t like the FDIC where the money is there.
  • Mr. McMILLAN. I wish it were.
  • Mrs. PEGELOW. Right. So there is that difference. There is a guaranty fund, but there is no life —
  • Mr. McMILLAN. Those are based on guarantees too. The fact of the matter is —
  • Mrs. PEGELOW. But the Government is behind the FDIC.
  • Mr. McMILLAN. The reason why the taxpayers are having to pay off S&L depositors is because the fund wasn’t adequate to meet the guarantee of the deposits.
  • Mrs. PEGELOW. Correct. And this is the same problem with the insurance money.
    • The money isn’t there.
  • Mr. McMILLAN . You obviously make a very valid point.

1991 0717 and 0724 – GOV (House) – Life Insurance Solvency Issues – Cardiss Collins (D-IL)  —  [BonkNote]

  • Although the guaranty funds are designed so that the industry initially pays for the costs of failed companies, in the event of widespread guaranty fund capacity problems a potential liability for the states may exist.

(p12) – Johnny C. Finch (GAO – Director for Planning and Reporting, General Government Division, General Accounting Office)

  • Who Pays for the Guaranty Association Protection?
    • (p154) – The funds necessary to fulfill an insolvent insurer’s obligations are obtained by assessments levied against other insurance companies doing business in the state.
    • (p155) – State law also provides that an assessment may be waived for an individual insurer if the commissioner of that state determines that payment of the assessment would endanger the insurer’s ability to meet its own obligations.
      • Assessments waived for an individual insurer are paid by the remaining insurers doing business in the state.

—  (p154) – Statement of The American Council of Life Insurance (ACLI),  Marcia Horton – Lincoln National Life Insurance Company

1991 0227, 0507, 0509, 0523 – GOV (House) – Insurance Company Solvency, Cardiss Collins (D-IL)  —  [BonkNote]

  • (p247) – Senator Richard BRYAN (D-NV) – There is generally no public membership?
  • Mr. SARFATY – (NOLHGA) –  Yes, right.
  • (p247) – Senator BRYAN. Now, you talked about the cost.
    • How are the costs passed along to the public?
  • …
  • (p247) – Senator BRYAN.  How are the costs passed on?
    • You talked about the enormous costs that are involved, and very clearly there are substantial costs when you have a big failure like this.
      • How are those passed on?
  • Mr. SARFATY. Well, it does depend on a number of things.
    • It depends on the line of insurance, the type of policy.
    • It depends on whether there is a tax offset provision in the statute for that particular State, and what the characteristics of that statute are, et cetera .
      • In other words, some of the cost is in effect reflected in increased premiums.
    • There are obviously many types of contracts, like life insurance contracts where you cannot raise the premium, the premium is fixed.
      • So that would then be passed on to new policyholders in higher premiums, offset against the tax over an extended period, along the lines of the deductibility of a bank’s FDIC premium.
      • That same general idea, if that is available in that State.
        • Lower interest rates on interest-sensitive products is another way it gets passed on.
        • Lower dividends.
        • So, naturally it spreads through the entire system.
      • There is simply no free money.
  • Senator BRYAN. So, ultimately the public does-
  • Mr. SARFATY. Ultimately the public pays for everything.
  • Senator BRYAN [continuing]. Either in the form of lower dividends, lower interest rates, perhaps higher premium, depending upon the product.
  • Mr. SARFATY. That is correct. That is absolutely right.
  • Senator BRYAN. And ultimately the general fund of those States that permit offsets would have an affect.
  • Mr. SARFATY. That is absolutely right.

1991 0227, 0507, 0509, 0523 – GOV (House) – Insurance Company Solvency, Cardiss Collins (D-IL)  —  [BonkNote]

  • (p29) – Senator Richard SHELBY (R-AL).  Mr. Hunter, do you agree with his statement [Michael McRaith (Illinois Insurance Commissioner / NAIC)]?
    • What is your take on it.
  •  J. Robert HUNTER (CFA).  I didn’t hear him answer the question.
  • Chairman Chris DODD (D-CT). He did–
  • Mr. HUNTER. I don’t think it could handle-I don’t think the guaranty funds could handle it, no.
  • Senator SHELBY. Couldn’t handle it–
  • Mr. HUNTER. That was your question, and I don’t think they–
  • Senator SHELBY. It would be too big for them to handle, would it not?
  • Mr. HUNTER. Of course. Yes.
  • Senator SHELBY. I thought so, too. Thank you.

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

  • In the U.S., many states have laws that permit insurers to offset a portion of their future premium, income and/or franchise tax liabilities by the amount of the guaranty association assessments they have paid (e.g., 20% over 5 years).
    • This, in turn, reduces the tax bases of those states.  (p4)

2018 0223 – Letter –  ACLI to FSB (Financial Stability Board) – re: Key Attributes Assessment Methodology for the Insurance Sector – 5p

  • In order to protect the policyholders and claimants, the liquidator must turn to the State Guaranty Fund.
    • The Guaranty Fund is a kind of insurance for insurance companies.
  • All insurance companies must contribute money to the Guaranty Fund to protect legitimate-claimants from the danger of not receiving their claims payments.
  • Of course, the payments made by the Guaranty Fund are a cost of companies, and these costs in turn insurance companies to business to insurance are passed on to the consumers of insurance in the form of higher premiums.

—  1988 0809 – NAIC – Testimony – GOV – John Washburn, Illinois Insurance Commission – Comments on H.R. 4923 – 13p

  • In contrast, every state except New York (which has a FDIC like pre-loss insurance fund)17 uses an ex post assessment on healthy insurers to fund any insurable loss not payable by the bankrupt insurer.
  • Each state’s insurance guarantee fund has the power to assess the remaining insurers based on their premium volume.
    • 17 New York’s fund is funded by assessments every year. If the insured losses increase, the New York guarantee fund can increase assessments.
      • However, it does not have statutory access to the state treasury to make up shortfalls. See e.g. The Life Insurance Company Guaranty Corporation of New York Act, 77 N. Y. Comp. Codes R. & Regs.

2010 – AP – The Insurance Industry and Systemic Risk: Evidence and Discussion, by Martin F. Grace – 41p – ssrn.com – link 

  • 1995-1, NAIC Proceedings – Guaranty Fund Issues Working Group B of the Insolvency (EX5) Subcommittee – September 11, 1995
    • (p588) – The first person to testify was Commissioner Dwight K. Bartlett III (Md.).
    • Commissioner Bartlett told the working group that guaranty associations were developed during a time when “life insurers sold life insurance.”
      • He cited the recent rehabilitation of Mutual Benefit Life Insurance Company as an example of the shortcomings of the present guaranty association system.
      • The receiver and guaranty associations did the best job possible within the current framework, but policyholders were forced to bear a disproportionate share of the costs involved, he said.
      • Commissioner Bartlett characterized his proposal as representing a middle ground between the current system and a system like the Federal Deposit Insurance Corporation (FDIC) advocated by some.
    • …
    • (p588) – Len Stillman (Utah) asked why consumers who purchase investment type insurance products should be afforded protection that other investors are not offered.
    • Commissioner Bartlett responded that there is a perception that products offered by life insurers are more secure than other investments.
    • …
    • (p589) – Ms. Pruitt said that some limitation on policy restructuring is fair, but that the working group should note that some insolvencies have been caused by insurers issuing policies containing unrealistic promises and guarantees.

[Words: “run on the bank.”, 1. Moratoria on Surrenders and Withdrawals of Cash Values, ]

  • 1995-2, NAIC Proceedings – Guaranty Fund Issues Working Group
  • (p515) – The working group identified several issues relevant to the charges, including:
    • …are the current limitations on moratoria sufficient?
    • What degree of discretion should the receiver and the supervising court be given to enable them to deal with the unique circumstances of each insolvency?
    • What obligations do guaranty associations have to policyholders in the event a moratorium exceeds six months?
    • Are the hardship criteria in use in most insolvencies adequate to address the needs of policyholders?
    • What factors should be considered by the supervising court with regard to extension of a moratorium?
    • Does the current structure for handling life insurer insolvencies encourage a policyholder “run”?
    • Are the shortcomings of the post insolvency assessment state-based guaranty fund system sufficient to justify serious consideration of alternative systems, or can the problems be fixed? 
  • Policyholder Protection In Insurance Company Failures
    • ATTACHMENT FOUR-C – Statement of The American Council of Life Insurance, ACLI – Before The Guaranty Fund Issues (EX5) Working Group B – September 11, 1995

1995-3, NAIC Proceedings 

  • Further, state guaranty funds protect policyholders from any shortfalls. (p2)

— Vaughan, McCarty, etc., NAIC, Insurance Commissioners

2010 0420 – Letter – NAIC to Senators – re: Restoring American Financial Stability Act of 2010 (RAFSA) – 4p

  • GUARANTY FUND (EX4) TASK FORCE
    • Brian Quigley (Travelers) …..noted that the task force should be aware that the trend is toward no coverage for GICs.

1987-2, NAIC Proceedings

  • With several life insurers in trouble today, the life insurance guaranty associations nationwide could muster under $9 billion if they were called upon.
    • As I put it in my testimony, that would hardly pay the bonuses that these companies are offering.

—  J. Robert Hunter, Director of Insurance, The Consumer Federation of America

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

  • Despite unfounded concerns from some circles, our state guaranty fund system has robust capacity to resolve insurance company failures and provides an important incentive to the insurance industry to manage risk and promote solvency, as insurers are assessed for the failures of their fellow competitors.
    • Given that policyholder dollars are paid into a proven system of resolution (coupled with appropriate solvency standards), these policyholder dollars should not also be used to pay for the failure of systemically risky entities within the new federal authority.

2010 0603 – Letter – NAIC to GOV (Frank, Bachus, Dodd, Shelby) – re: Conference on Financial Regulatory Reform Legislation – 4p

  • Meanwhile, the state guaranty funds may create the illusion of safety where it does not exist.
    • While the funds might be able to absorb the failure of a single large insurer, it is almost certain that they would not be able to handle the simultaneous failure of several large insurers in a timely fashion.2  (p4)

—  J. Robert Hunter, Director of Insurance – Consumer Federation of America – Testimony – 47p

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

  • Mark SOUDER (R-IN). If I was trying to go through the different guarantee funds and so on, if insurance companies would start to need to be rescued, do you have a fee much like do we for FDIC–
  • Eric DINALLO (New York State Superintendent of Insurance.)  Yes.
  • Mr. SOUDER. And others like the insurance companies would kick in?
  • Mr. DINALLO. Yes, we have what’s called a guarantee fund.
  • Mr. SOUDER. Do you have right now-……
  • Mr. DINALLO. Yes.

GOV (House) – The Causes and Effects of the AIG Bailout- AIG Bailout Oversight Hearing, Henry Waxman (D-CA) – Panel 1 —  [BonkNote]

  • 2010 0526 – COP – Hearing – TARP and Other Government Assistance for AIG, Congressional Oversight Panel  —  [BonkNote]
    • (p144) – Damon SILVERS (COP Member / policy director for the AFL-CIO):  [continuing]. You-it has been represented to us, and I think you heard some of it this morning, that absent what the Fed did and precisely the way it did it, there would have been a crisis for the insurance subsidiaries and their ability to maintain their business, pay their obligations, and the like, a crisis that’s so serious that it was absolutely necessary to rescue the parent in the manner the parent was rescued in order to avoid such an outcome.
      • I think there is a kind of implicit analysis made by the Federal Reserve and the Treasury in saying so, that whatever problems might have arisen in the insured subsidiaries, they would have been beyond the ability of the state insurance regulation and guarantee system to manage.
      • What is your response to both those propositions and specifically what was the view of the New York State Insurance regulators and the-I forget the term of art now, but there’s a sort of coordinating body of state insurance regulators. 
      • What was your view during the so-called Lehman weekend around these questions?
    • Michael MORIARTY (New York State Insurance Department, Deputy Superintendent)
      • Sure. I’d like to bifurcate my answer into two parts.
        • We do not believe that the existing policyholders of the AIG property and casualty companies for sure or even the life insurance companies would have suffered any losses should there-would there have been a bankruptcy of the AIG holding company system.
        • State insurance laws through the McCarran-Ferguson Act clearly give the states the authority to regulate insurance companies and to rehabilitate and liquidate them, which is a different process from a bankruptcy.
        • So we would maintain that the existing policyholders would have been made whole, even if there was a bankruptcy.
        • The life insurance subsidiaries would have suffered significant losses and the cushion, which we call surplus, which is effectively capital between assets and liabilities, would have taken a severe hit, but we still think it would have been positive.
      • Now, when we look at AIG as a going concern that would have been a problem
  • In the early 1990s, there were a number of large insolvencies.
  • …
  • This led to creative solutions to some of the major insolvencies, such as establishing the Guaranty Reassurance Corporation, which was formed to take over the assets and liabilities of the insolvent Guaranty Security Life.
    • In this plan, there was a 25% moratorium surrender charge assessed against policyholders who wished to surrender.
    • These graded off over a five-year period.
  • The funding of the guaranty associations’ obligations for Guaranty Re was also spread over a five-year period.
    • They funded them, in effect, with notes at the beginning of the 1993 Reassurance Plan.
  • As many of you know, the funding for Executive Life was also spread out over a number of years.
  • Who bears the cost?
  • …
  • To determine the cost of recent insolvencies, and how long has it taken to resolve them, let’s define a major insolvency as one that has policyholder obligations of more than $100 million.
  • There have been 14 of these in the last 10 years, including three big ones:
    1. Confederation Life,
    2. Executive Life, and
    3. Mutual Benefit.
  • Total policyholder obligations were $28 billion as of the date of the liquidation order.

—  Willis B. Howard Jr., NOLHGA – National Organization of Life and Health Insurance Guaranty Associations

1998 – SOA – Once in a Hundred Years, Society of Actuaries – 22p

Operational Risk

  • 2005 02 – SOA – Operational Risk, by Michel Rochette, The Actuary, ope2005february – Society of Actuaries – [link]

  • 2008 – SOA – A New Approach for Managing Operational Risk: Addressing the Issues Underlying the 2008 Global Financial Crisis, /research-new-approach – Society of Actuaries – 91p
  • Operational risk increases significantly when an organization experiences rapid growth.
  • Growth typically involves new markets and/or products and new people in the organization.
    • That usually puts significant pressure on the systems in place and on the control system. (p9)

—  International Actuarial Association

— 6.14 Operational risk – Q205

Compiled Comments on Risk-based Global Insurance Capital Standard Version 1.0 Public Consultation Document 19 July 2016 – 19 October 2016 – 22p

  • Operational risk
  • 57. Operational difficulties and business transition issues at insurers generally have not caused serious market disruptions in the past and have not raised financial stability issues.
    • However, operational difficulties and business transition issues could potentially become a financial stability concern if they were to materialise during stressed market conditions, depending on the nature and scope of the activities of the affected firms.
    • Insurers are exposed to a number of operational risks, which may have significant impacts on their business and in an extreme case could also cause disruptions to broader markets.
      • Similar to asset managers, another example of where operational difficulties at an insurer may have systemic implications is when an insurer, which itself may be under stress, faces the need
        to transfer policies during stressed market conditions.

2017 1208 – IAIS – Activities-Based Approach to Systemic Risk – 62p

  • 2. Heard a Presentation from the Operational Risk Consortium John Simone (Operational Risk Consortium-ORIC)
    • The definition of operation risk management would include any issues regarding people or governance as it pertains to oversight, technology, infrastructure, business continuity management, outsourcing, mis-selling, data protection, or transaction processing and products.
    • He explained that this is a broad definition, which makes it difficult to quantify because of the vast amount of variables involved, and is people-driven with a large amount of technology included, which makes it difficult to measure.
    • Operational risk also includes legal risks.  (10-596)

2012-3, NAIC Proceedings 

Surplus Notes

  • 1989 – SOA – Securitization of Assets, rsa89v15n225 – Society of Actuaries – 10p
  • 1995 – SOA – Survival Strategies for Mutuals, rsa95v21n127 – Society of Actuaries – 14p
  • 2015 – Book – The Insurance Forum: A Memoir, contains a chapter (Chapter 25) devoted to the subject of surplus notes.,  by Joseph Belth – 11p
  • 2016 0710 – IAIS – Risk-based Global Insurance Capital Standard, Version 1.0 – Public Consultation Document – Comments due by 19 October 2016 – 175p
    • 5 Capital resources – 149p
  • Senator Howard Metzenbaum (D-OH): A surplus note is, in effect, as I understand it, the IOU issued by the insurance company to a lender when the insurance company borrows money from the lender.
    • In other words, the insurance company gets a loan from a bank or from somebody else.
    • The loan is used to make the company look economically healthy when it otherwise might be in trouble. 
  • Now, what I can’t believe is that insurance law allow these loans to be entered on the balance sheet as an asset rather than as both an asset and a liability, since the loan must ultimately be paid back.
  • By 1988, surplus notes had inflated the capital of insurance companies by $4.4 billion.
  • Professor Belth of the Insurance Forum says that 35 life insurance companies would be insolvent today without the use of surplus notes to inflate their reserves.
  • Senator Metzenbaum.  Mr. Lennon, I want to tell you I think I read balance sheets-pretty well and P and L sheets pretty well.
    • I have looked-at insurance company statements and I never had any idea what a surplus note was until I got into the intricacies of this hearing, and I am just amazed at what a surplus note is and the fact that it is permitted.
      • I think it comes pretty close to fraudulent misrepresentation.

1990 1210 – GOV (Senate) – Insurance Company Solvency:  Insurance Company Solvency and Reporting Methods, Howard Metzenbaum (D-OH)

  • Treatment of Surplus Notes
  • First, the proposed rule indicates there will be limitations placed on the recognition of surplus notes as available capital starting November 2020.
    • As you are undoubtedly aware, surplus notes are an important source of capital for mutual insurance groups and other non-stock companies, some of which are also Savings and Loan Holding Companies.
    • The proposed limitations could require such companies to increase capital in other ways.
  • However, given their structure, the primary alternative source of capital for these companies outside of issuing surplus notes is to raise premium rates.
  • At bare minimum, this could have an adverse impact on policyholders, but could potentially also reduce the availability of certain insurance products.
  • As the primary stewards of policyholder protection, our hope would be to avoid such outcomes.
  • This limitation on surplus notes is also inconsistent with our proposed GCC.

2019 1219 – NAIC to FRB – Re: Docket No. R-1673; RIN 7100-AF 56: Regulatory Capital Rules: Risk-Based Capital Requirements for Depository Institution Holding Companies Significantly Engaged in Insurance Activities – 3p

  • Every successful life insurance company has to deal with the problem of maintaining its statutory surplus at a time when its sales are increasing.
  • As for surplus notes, because of regulatory restrictions, they are used almost exclusively between affiliated companies.
    • They are of little value to mutual companies (except to capitalize their own subsidiaries).

—  Alan R. Badanes, not a member of the Society, is Vice President of Chase Manhattan Bank in New York

1989 – SOA – Securitization of Assets, Society of Actuaries – 10p

  • 2016 – IAIS – ACLI Comments – FINAL_ACLI response to the IAIS Insurance Capital Standard consultation (Version 1.0) – 16p
    • Q77. – Do existing financial instruments issued by mutual IAIGs (for example, but not limited to surplus notes, Kikin, and other forms of subordinated financial instruments) absorb losses on a going concern basis? Please identify which instrument and explain.
    • A-ACLI – Surplus notes that are issued by mutual IAIGs in the United States can absorb losses on a going concern basis.
      • If the issuing insurance company is in good financial condition, the insurer would make applicable interest and principal payments when due and as permitted by the applicable financial regulator.
      • However, as discussed above, in times where the issuing insurance company is under financial stress, the financial regulator will disallow payments of interest and principal on the surplus notes.
      • When payments are disallowed, the surplus notes and other obligations of the company will not go into default, there is no requirement for a receivership proceeding, and the company can continue to operate in a normal fashion, i.e., the issuing insurance company can still be solvent when the financial regulator determines that no distributions should be allowed.
      • If the insurance company’s financial condition improves, the financial regulator may permit distributions to be made, but while distributions are not permitted, the insurance company can continue to operate as a going concern.
      • There are examples of this type of scenario in the marketplace today.

Deceptive

—  Allen D. Booth, a consultant in the Milwaukee office of Towers, Perrin, Forster and Crosby

1982 – SOA – Universal Life Update, Society of Actuaries (rsa82v8n34) – 26p

  • In guarding the public against insolvent insurance companies state supervision has been eminently successful.
  • In protecting the people against frauds, impositions and abuses by solvent companies it has been only partially successful.  (p89)

—  “Deceptive Insurance Methods –The Cure”, Speaker: Mr. E. E. Rittenhouse (Colorado, Insurance Commissioner of Colorado)

1907-0, NAIC Proceedings

Captive Reinsurance

  • Shadow Insurance
  • 2016 0317 – OFR – Mind the Gaps: What Do New Disclosures Tell Us About Life Insurers’ Use of Off-Balance-Sheet Captives?, by Jill Cetina, Arthur Fliegelman, Jonathan Glicoes, and Ruth Leung – 10p
  • (p41) – Use of captives has grown rapidly since 2000, when the National Association of Insurance Commissioners (NAIC) passed its Valuation of Life Insurance Policies Regulation.
    • The regulation, which most states have adopted, requires insurers to hold higher reserves on newly issued term and universal life insurance.
    • Reserves ceded through captive reinsurance grew from $11 billion in 2002 to $364 billion in 2012 and now have expanded to include risk-sharing on products such as annuities that are not covered by the regulation.

2014 – OFR – OFR Annual Report – 164p

  • October 2011, the NAIC Executive (EX) Committee charged the Financial Condition (E) Committee to: “Study insurers’ use of captives and special purpose vehicles to transfer third-party insurance risk in relation to existing state laws and regulations and establish appropriate regulatory requirements to address concerns identified in this study.
  • The appropriate regulatory requirements may involve modifications to existing NAIC model laws and/or generation of a new NAIC model law.”
  • 2021 06 – Brookings – Task Force on Financial Stability, Glenn Hubbard, Donald Kohn – 135p
    • Captive reinsurance, or “shadow insurance,” has also increased the opacity of the industry.
    • Shadow insurance developed in response to regulatory changes in 2000 and 2003 for term and universal life insurance, known as “Regulations XXX and AXXX.”**
    • These regulations tightened the regulatory capital requirements for these traditional products-for operating companies, which sell directly to consumers, but not for reinsurance companies.