Universal Life Insurance does not "Fit" into the existing regulatory framework

  • This regulation is designed to address those areas where universal life insurance does not "fit" into the existing regulatory framework.  (p1)

NAIC - Universal Life Insurance Model Regulation - [MDL-585 - BonkNote] - 22p

  • New York reports that they have determined that Section 216 and 208, (a) and (b), and perhaps other sections of their law, prohibit the issuance of universal life type products.
  • Their law is currently being amended to permit such policies.

1982-2, NAIC Proceedings

  • Traditional plans are fairly simple in their structure.
    • One can look at their premiums, their cash values and their dividends, if there happen to be any. 
  • Universal life presents something of a paradox.

--  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta - Years-?]

1981 - SOA - Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Society of Actuaries - 16p 

  • In December of 1983, the National Association of Insurance Commissioners adopted the Universal Life Insurance Model Regulation that sets forth minimum reserve standards for universal life policies.
    • These standards represent an effort to fit universal life into traditional valuation methodologies. 
    • An assumption was made regarding future premium payments, and a factor was developed to adjust for actual policy performance.

2018 - Book - Statutory Valuation of Individual Life and Annuity Contracts | 5th Edition, Donna Claire, Lombardi and Summers

  • Just as universal life was a quantum leap over traditional products administratively, variable universal life is a quantum leap over universal life.

--  Zafar Rashid

1985 - SOA - Variable Universal Life Insurance Society of Actuaries - 22p

  • Bill White, chief actuary, New Jersey, reported on their special project pertaining to universal life.
  • Their commissioner, on June 25, 1982, declared an 81-day moratorium on "Universal-Flexible Factor" type of policies.  

1982-2, NAIC Proceedings

  • I think most of us have probably been involved in UL product development and recognize it to be a quantum leap in product design theory as opposed to the jiggling that we used to do in trying to innovate within our product portfolios.

--  Allen D. Booth

1982 - SOA - Universal Life - Three Different Viewpoints: Stock, Mutual, Canadian - 26p

Consolidated Appropriations Act 2021

  • 2020 0521 – NAIC – Life Actuarial (A) Task Force Conference Call May 21, 2020
  • You’re caught into this box where you’ve got a product that, when you go back to that format, it’s an iteration of the product that can’t exist.
    • The intent is, if you’re selling this thing as a level premium permanent product, there should be a way of dealing with that.
    • I really think it’s just again hitting another flaw and another hole in how the UL model regulation applies to the real world today.

—  Craig R. Raymond

1999 – SOA – 1999 Valuation Actuary Symposium, (va99-44of), Edward L. Robbins, Society of Actuaries – 28p

  • 2021 0202 – Joseph Belth – No. 408: A Recent Change in the Federal Income Tax Law Designed to Benefit Wealthy Life Insurance Policyholders – [link]
    • The 1984 Change in the Tax Law
      • I asked representatives of the American Council of Life Insurers (ACLI), which had lobbied for the 2021 change in the tax law, whether they could provide me with material about the 1984 change.
      • They said they could not locate any such material.
      • Therefore, I will describe what happened, based on my memory.
  • WSJ – A Small Tax Change Is a Boon for Permanent Life Insurance – Insurers worried that a government rule from 1984 threatened certain products-and sought Washington’s help, Leslie Scism – [link]
  • In a memo to the ACLI Board dated March 5, 1982, two approaches to this were outlined.
    • The first proposed guideline measures and limits premium payments based on a guideline premium defined in the contract.
    • The second proposed guideline classifies life insurance cash values as amounts not in excess of the net single premium necessary to purchase the life insurance or to endow this contract after a stated period.

—  Christian Desrochers

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

  • MR. MARKS: Do any companies have concerns regarding not being able to charge a premium that would be high enough to mature the policy on a current interest rate basis with the new guideline premiums being lower?
    • In other words, since the interest rates are being credited or say, in the 5 to 5.5 percent range, and there’s a six percent interest rate in the calculation of guideline single premiums, would there be a concern that you couldn’t even fund the policy on a guaranteed basis?
  • MR. BERLIN: I’ve heard of that issue.
    • Your guideline level is calculated at four percent.
    • This is just my feeling, but I don’t think that we want to approach the Service to reduce the interest rates from four percent to say, 2.5 to 3 percent because then it opens 7702 up for scrutiny and a whole host of other issues.
    • Sometimes the evil you know is better than the evil you don’t.

2002 – SOA – Implications of the New CSO Mortality Table, Society of Actuaries – 28p

  • NAIC – LAHTF
  • 2020 – GOV (House) -The Heroes Act Summary – 90p
  • Sec. 308. Minimum Rate of Interest for Certain Determinations Related to Life Insurance Contracts.
  • In order to qualify as life insurance contracts for tax purposes, permanent life insurance policies must meet several requirements under Internal Revenue Code section 7702.
    • These requirements include two interest rate assumptions for determining the premiums that can be used to fund the contracts.
    • The interest rate assumptions were set by statute at 4 percent and 6 percent when the requirements were put in place in 1984.
  • At the time, the average long-term Treasury rate was around 12 percent.
    • The recent public health and economic crisis has prompted the Federal Reserve to reduce already persistently low interest rates to around 0 percent, and the daily long-term Treasury rate has hovered at 1 percent.
  • Without adjusting the section 7702 interest rates to reflect economic realities, consumer access to financial security via permanent life insurance policies-which represent approximately 60 percent of the individual life insurance market-could decrease significantly.
    • This legislation updates section 7702 to reflect the interest rate environment that has been exacerbated by the current crisis, and ensures that the rates will continue to appropriately reflect economic conditions, by tying the rates to either a floating rate prescribed in the National Association of Insurance Commissioners’ Standard Valuation Law or a floating rate based on the average applicable Federal mid-term rates over a 60-month period.
  • 2020 0512 – House – H. R. 6800 – [PDF-1815p]
  • 2020 0528 – JCT – JCX-16-20 – [LINK-DOWNLOAD]
    • 7. Minimum rate of interest for certain determinations related to life insurance contracts…… cia 12/31/20 — -8 (2021) -38 -92 -160 -242 -334 -438 -553 -672 -791 -540 (2020-2025) -3,328 (2020-2030)
  • 2020 1019 – Congressional Record https://www.congress.gov/116/crec/2020/10/19/CREC-2020-10-19-pt1-PgS6075.pdf
  • 2020 1221 – Senate – RULES COMMITTEE PRINT 116-68 -TEXT OF THE HOUSE AMENDMENT TO THE SENATE AMENDMENT TO H.R. 133 – [PDF-5593p] – [PDF-p4923-3927]
    • TITLE II-OTHER PROVISIONS
      Sec. 205. Minimum rate of interest for certain determinations related to life insurance contracts
  • 2020 – H. R. 133 – [PDF-2124p]
  • 2020/1?? – ACLI – Consolidated Appropriations Act Updates to Internal Revenue Code Section 7702 – 3p
  • 2021 03 – SOA – Rightsizing the Floor Interest Rate Rules of Sections 7702 and 7702A, By Craig Springfield, Brian King and Robert Fishbein, Taxing Times, Society of Actuaries – [link]
  • 2021 02 – SOA – Recent Change to IRC § 7702 Interest Rates and Impact on Life Insurance Products, Society of Actuaries – [link]

2021 – H. R. 133 – 2124p]

SEC. 205. MINIMUM RATE OF INTEREST FOR CERTAIN DETERMINATIONS RELATED TO LIFE INSURANCE CONTRACTS.
(a) MODIFICATION OF MINIMUM RATE FOR PURPOSES OF CASH VALUE ACCUMULATION TEST.-
(1) IN GENERAL.-Section 7702(b)(2)(A) is amended by striking ”an annual effective rate of 4 percent” and inserting ”the applicable accumulation test minimum rate”.
(2) APPLICABLE ACCUMULATION TEST MINIMUM RATE.-Section 7702(b) is amended by adding at the end the following new paragraph:
(3) APPLICABLE ACCUMULATION TEST MINIMUM RATE.-For purposes of paragraph (2)(A), the term ‘applicable accumulation test minimum rate’ means the lesser of-
”(A) an annual effective rate of 4 percent, or
”(B) the insurance interest rate (as defined in subsection (f)(11)) in effect at the time the contract is issued.”.
(b) MODIFICATION OF MINIMUM RATE FOR PURPOSES OF GUIDELINE PREMIUM REQUIREMENTS.-
(1) IN GENERAL.-Section 7702(c)(3)(B)(iii) is amended by striking ”an annual effective rate of 6 percent” and inserting ”the applicable guideline premium minimum rate”.
(2) APPLICABLE GUIDELINE PREMIUM MINIMUM RATE.-Section 7702(c)(3) is amended by adding at the end the following new subparagraph:
”(E) APPLICABLE GUIDELINE PREMIUM MINIMUM RATE.-
For purposes of subparagraph (B)(iii), the term ‘applicable guideline premium minimum rate’ means the applicable accumulation test minimum rate (as defined in subsection (b)(3)) plus 2 percentage points.”.
(c) APPLICATION OF MODIFIED MINIMUM RATES TO DETERMINATION OF GUIDELINE LEVEL PREMIUM.-Section 7702(c)(4) is amended-
(1) by striking ”4 percent” and inserting ”the applicable accumulation test minimum rate”, and (2) by striking ”6 percent” and inserting ”the applicable guideline premium minimum rate”.
(d) INSURANCE INTEREST RATE.-Section 7702(f) is amended by adding at the end the following new paragraph:
”(11) INSURANCE INTEREST RATE.-For purposes of this section- “Consolidated Appropriations Act”

H.R.6800 – The Heroes Act – 116th Congress (2019-2020)

Sponsor: Rep. Lowey, Nita M. [D-NY-17] (Introduced 05/12/2020)
Committees: House – Appropriations; Budget; Ways and Means
Committee Meetings: 09/22/20 10:30AM 09/16/20 12:00PM 09/10/20 12:00PM (All Meetings)
Latest Action: Senate – 07/23/2020 Committee on Small Business and Entrepreneurship. Hearings held.  (All Actions)
Roll Call Votes: There have been 2 roll call votes

 

Sec. 307. Minimum rate of interest for certain determinations related to life insurance contracts. https://www.govinfo.gov/content/pkg/CREC-2020-10-19/html/CREC-2020-10-19-pt1-PgS6075.htm [Congressional Record Volume 166, Number 178 (Monday, October 19, 2020)] [Senate] [Pages S6075-S6295] From the Congressional Record Online through the Government Publishing Office [www.gpo.gov] STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTION
  • 2020 Summer, NAIC Proceedings, 6-198  Attachment Six – Life Actuarial (A) Task Force
  • 2. Exposed Amendment Proposal 2020-07
    • Paul Graham (American Council of Life Insurers-ACLI) said the Heroes Act, a bill passed recently by the U.S. House of Representatives, contains a revision to Section 7702 of the Internal Revenue Code (IRC), which for tax purposes provides the definition of life insurance.
      • The definition uses the cash value accumulation test (CVAT) to determine whether a policy qualifies as life insurance, allowing it to avoid being taxed as an investment.
      • The interest rate used in the Section 7702 CVAT is currently floored at 4%.
      • He noted that the 4% nonforfeiture interest rate floor in the Standard Valuation Law (#820) and the Valuation Manual was set to match the 4% floor in the Section 7702 CVAT.
    • Mr. Graham further explained that the Heroes Act changes the CVAT by replacing the interest rate floor from the 4% static rate to an indexed rate.
      • He said the change necessitates a similar change in the Valuation Manual for policies issued after the congressional bill is adopted by the U.S. Senate.
      • He said the challenge is that the timing of the Senate adoption is uncertain.
  • Brian Bayerle (ACLI) said amendment proposal 2020-07 (Attachment Six-C) removes Valuation Manual references to the 4% interest rate floor and replaces it with language that sets the nonforfeiture rate floor in the Valuation Manual to the rate determined by Section 7702, eliminating the need for future adjustment to align the two sets of requirements.
    • He reiterated that the change will not affect any existing policy.
  • Mr. Tsang said lowering the nonforfeiture rate will result in higher cash values.
    • He asked if there is a business reason for lowering the rate.
  • Mr. Graham said that as interest rates decline, premiums on new policies will increase.
    • He said providing higher cash values as premiums increase is a matter of equity.
  • John Norton (Globe Life) said Globe Life is not in favor of the change recommended in amendment proposal 2020-07.
    • He said Globe Life is concerned the change will lead to higher costs that will affect the affordability of basic life protection.
    • He said Globe Life is supportive of comprehensive reform of the nonforfeiture laws.
  • Jim Hodges (National Alliance of Life Companies-NALC) said that the NALC agrees with the Globe Life viewpoint.
  • Mr. Yanacheak made a motion, seconded by Mr. Tsang, to expose amendment proposal 2020-07 for a 21-day public comment period ending June 10.
    • The motion passed unanimously.

2020 1019 – Congressional Record – 221p

SEC. 307. MINIMUM RATE OF INTEREST FOR CERTAIN DETERMINATIONS RELATED TO LIFE INSURANCE CONTRACTS.
(a) MODIFICATION OF MINIMUM RATE FOR PURPOSES OF CASH VALUE ACCUMULATION TEST.-
(1) IN GENERAL.-Section 7702(b)(2)(A) of the Internal Revenue Code of 1986 is amended by striking ”an annual effective rate of 4 percent” and inserting ”the applicable accumulation test minimum rate”.
(2) APPLICABLE ACCUMULATION TEST MINIMUM RATE.-Section 7702(b) of such Code is amended by adding at the end the following new paragraph:
”(3) APPLICABLE ACCUMULATION TEST MINIMUM RATE.-For purposes of paragraph (2)(A), the term ‘applicable accumulation test minimum rate’ means the lesser of- ”(A) an annual effective rate of 4 percent, or ”(B) the insurance interest rate (as defined in subsection (f)(11)) in effect at the time the
contract is issued.”.
(b) MODIFICATION OF MINIMUM RATE FOR PURPOSES OF GUIDELINE PREMIUM REQUIREMENTS.-
(1) IN GENERAL.-Section 7702(c)(3)(B)(iii) of such Code is amended by striking ”an annual effective rate of 6 percent” and inserting ”the applicable guideline premium minimum rate”.
(2) APPLICABLE GUIDELINE PREMIUM MINIMUM RATE.-Section 7702(c)(3) of such Code is amended by adding at the end the following new subparagraph:
”(E) APPLICABLE GUIDELINE PREMIUM MINIMUM RATE.-For purposes of subparagraph (B)(iii), the term ‘applicable guideline premium minimum rate’ means the applicable accumulation test minimum rate (as defined in subsection (b)(3)) plus 2 percentage points.”.
(c) APPLICATION OF MODIFIED MINIMUM RATES TO DETERMINATION OF GUIDELINE LEVEL PREMIUM.-Section 7702(c)(4) of such Code is amended- (1) by striking ”4 percent” and inserting ”the applicable accumulation test minimum rate”, and (2) by striking ”6 percent” and inserting ”the applicable guideline premium minimum rate”.
(d) INSURANCE INTEREST RATE.-Section 7702(f) of such Code is amended by adding at the end the following new paragraph:
”(11) INSURANCE INTEREST RATE.-For purposes of this section-
”(A) IN GENERAL.-The term ‘insurance interest rate’ means, with respect to any contract issued in any calendar year, the lesser of- ”(i) the section 7702 valuation interest rate for such calendar year (or, if such calendar year is not an adjustment year, the most recent adjustment year), or ”(ii) the section 7702 applicable Federal interest rate for such calendar year (or, if such calendar year is not an adjustment year, the most recent adjustment year).
”(B) SECTION 7702 VALUATION INTEREST RATE.-The term ‘section 7702 valuation interest rate’ means, with respect to any adjustment year, the prescribed U.S. valuation interest rate for life insurance with guaranteed durations of more than 20 years (as defined in the National Association of Insurance Commissioners’ Standard Valuation Law) as effective in the calendar year immediately preceding such adjustment year.
”(C) SECTION 7702 APPLICABLE FEDERAL INTEREST RATE.-The term ‘section 7702 applicable Federal interest rate’ means, with respect to any adjustment year, the average (rounded to the nearest whole percentage point) of the applicable Federal mid-term rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the most recent 60-month period ending before the second calendar year prior to such adjustment year.
”(D) ADJUSTMENT YEAR.-The term ‘adjustment year’ means the calendar year following any calendar year that includes the effective date of a change in the prescribed U.S. valuation interest rate for life insurance with guaranteed durations of more than 20 years (as defined in the National Association of Insurance Commissioners’ Standard Valuation Law).
”(E) TRANSITION RULE.-Notwithstanding subparagraph (A), the insurance interest rate shall be 2 percent in the case of any contract which is issued during the period that- ”(i) begins on January 1, 2021, and ”(ii) ends immediately before the beginning of the first adjustment year that beings after December 31, 2021.”.
(e) EFFECTIVE DATE.-The amendments made by this section shall apply to contracts issued after December 31, 2020.

NAIC - Documents

1950s

  • 1958 - NAIC - Insurance Regulation in the Public Interest "A BETTER N.A.I.C.", by Robert E. Dineen - 122p

1970s

  • 1973 - Report - McKinsey - Strengthening the system for exercising surveillance over insurance companies - HG 8536 M34 S78 - <WishList>
  • 1973 - Report - McKinsey - Improving the efficiency and effectiveness of the system for exercising surveillance over insurance companies - HG 8536 M34 S77 - <WishList>
  • 1974 - Report - McKinsey - Strengthening the surveillance system : Phase 1 report -  HG 8536 M34 S79 1973 - <WishList>
  • 1974 - Report - McKinsey - Strengthening the surveillance system : final report - Electronic resource - 126p - naic.soutronglobal
  • 1974 - Report - McKinsey - Improving the property/liability early warning system McKinsey & Company, Inc 1974 HG 8535 M34 S81
  • 1974 - Report - McKinsey -  Improving the life and health early warning system McKinsey & Company, Inc 1974 HG 8535 M34 S80 - <WishList>

1980s

  • 1981 - NAIC - Background Paper on the Status of the Regulation of Market Conduct in the Insurance Industry - 17p
  • 1981 1001 - NAIC -  Report by the task force on life insurance replacement

1990s

  • 1992 - NAIC - Issues Concerning Insurance Guaranty Funds, by Robert Klein - 317p
  • 1994 - NAIC - Annual Report - 28p
  • 1997 0319 - NAIC - Questions & Answers: Life Illustrations Model Regulation - 22p
  • 1998 - NAIC - Alternative Approaches To Insurance Regulation - 216p
  • 1998 - NAIC - Financial Analysis Handbook - 349p

2000s

  • 2000 - NAIC - The Statement of Intent: The Future of Insurance Regulation - 5p
  • 2000 06 - NAIC - Suitability of Sales of Life Insurance and Annuities, LIAC - Life Insurance and Annuities (A) Committee - 33p
  • 2000 06 - NAIC - Consumer Complaints White Paper, Consumer Complaint White Paper Working Group was appointed by the Market Conduct and Consumer Affairs (EX3) Subcommittee - 66p
  • 2003 0610 - NAIC / FRB - Report of the National Association of Insurance Commissioners (NAIC) and the Federal Reserve System - Joint Subgroup on Financial Issues - 51p
  • 2003 0914 - NAIC - A reinforced commitment: insurance regulatory modernization action plan - 9p
  • 2004 - NAIC - Best Practices Organizations White Paper - 50p
  • 2004 - NAIC - Market Analysis Handbook - 92p
    • Ceased publication in 2004; incorporated into the Market regulation handbook.
    • Supported by: Market Analysis Working Group (MAWG)
  • 2005 - NAIC - Market Analysis Handbook, Supported by Market Analysis Working Group (MAWG) - 96p
  • 2005 0419 - NAIC / FRB - Report of the NAIC and the Federal Reserve System Joint Troubled Company Subgroup: a comparison of the insurance and banking regulatory frameworks for identifying and supervising companies in weakened financial condition - 44p
  • 2005 - NAIC - A Regulator's Introduction to the Insurance Industry 2ed - by Robert W. Klein - 266p
    • 1999 - NAIC - A Regulator's Introduction to the Insurance Industry - 1ed - by Robert W. Klein - 252p
  • 2007 0329 - Report - NAIC to Congress - Life Insurance Sales to Members of the Armed Forces - Report to Congress  --- [BonkNote]  ---  50p   
  • 2007 0928 - Report - NAIC to Congress - Life Insurance Sales to Members of the Armed Forces - Second Report to Congress - 22p
  • 2009 0731 - Letter - NAIC to NYT (New York Times) - re: The New York Times July 30 article, "After Rescue, New Weakness Seen at A.I.G" by Mary Williams Walsh - 1p
    • 2009 0731 - NYT - After Rescue, New Weakness Seen at A.I.G., by Mary Williams Walsh - [link]
      • 2009 0803 - InsuranceJournal.com - States Dispute Article Questioning AIG Insurance Units' Finances - [link]

2010s

  • 2011 1207 - NAIC/FIO Meeting on Market Conduct, (Documents shared with FIO to facilitate discussion are attached) - 83p
  • 2012 - NAIC - Existing U.S. Corporate Governance Requirements - 22p
  • 2013 - NAIC - Annual Report - State-Based Insurance Regulation: The System at Work - 37p
  • 2013 - NAIC / CIPR - State of the Life Insurance Industry: Implications of Industry Trends - 220p
  • 2013 - NAIC - The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative - 76p
  • Date-? - NAIC - Capital Markets Bureau Special Report - Securities Lending in the Insurance Industry - 9p

2020s

  • 2020 05 - NAIC - Historical context of NAIC conversations surrounding disease outbreaks: A retrospective from the NAIC Proceedings - 22p
  • 2021 - NAIC - Legislative Priorities -  <1p - ,Bad Link>
  • 2022 - NAIC - Directory of Receivership and Run-off Resources - 97p
  • 2022 10 - NAIC Research Library - Part I: History of the NAIC Consumer Participation Program - 18p
  • 2022 - NAIC - Valuation Manual - 338p
  • 2022 0531 - Letter - NAIC Response to Senator Senator Sherrod Brown (D-OH) regarding Private Equity - 11p
  • 2022 1024 - Letter - NAIC - To: NAIC Members, From: Director Judith L. French, Chair (LIAC) - RE: Survey Inquiry about Enhanced Cash Value Offers on Universal Life Insurance Policies - 8p
    • 1983 - Book - Why Universal Life, by Buechner, Eason & Manzler, The National Underwriting Company, (2nd ed.) - <WishList>
  • 2025 08 - NAIC / CIPR - Modeling Behavioral and Attitudinal Drivers of Life Insurance Selection and Premiums - 22p
  • 2021 0811 - LIAC - NAIC - Summer National Meeting, Proceedings - 43p
    • (p8) - 2021 0811 -  LIIIWG Next Steps Summary Comment Chart
  • 2021 1216 - LIAC - NAIC - Executive (EX) Committee and Plenary - Attachment Four -
    • 4. The Life Insurance Online Guide (A) Working Group will:
      • A. Develop an online resource on life insurance, including the evaluation of existing content on the NAIC website, to be published digitally for the benefit of the public.
  • 2021 1231 - LIAC - NAIC - 2021 Fall National Meeting - 62p
    • 7. Consider Adoption of its 2022 Proposed Charges-Commissioner Glen Mulready (OK)
      • A. Discuss the Life Insurance Illustration Issues (A) Working Group "Chair Report"
        • CEJ - Birnbaum - He said this is the only effort that remains at the NAIC that is seeking to improve life insurance disclosures for consumers.
      • B. Discuss the Life Insurance Online Guide (A) Working Group

2024

Insolvencies

  • In the early 1990s, there were a number of large insolvencies

—  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

  • 1991 0427 – Los Angeles Times – State Allegedly Knew Executive Life Was Insolvent in ’83, by Robert A. Rosenblatt – [link]
  • Baldwin United
  • You can give me what has happened from the days when the whole business was technically insolvent in the spike during the 1977-82 period when everybody valued bonds at book.
    • The well-kept secret, of course, was that the industry was insolvent, not bankrupt on a cash-flow basis.

—  Larry A. Brossman, Duff & Phelps

1990 – SOA – Rating Agencies And Asset/Liability Matching, Society of Actuaries – 18p

  • We find that companies have been operated with all the appearance of solvency for periods of months, and even years, while it was known that they were actually insolvent.

1936 December 1, 2, 3, 7, 8 – GOV (House) – Investigation of Real Estate Bondholders’ Reorganizations – Part 20 – Adolph J. Sabath (D-IL)   —   [BonkNote]

  • 1991 0612 – Insurance Insolvencies – [VIDEO-CSPAN]
  • Senator Howard Metzenbaum (D-OH), known for his contentiousness on the floor of the Senate, addressed a luncheon audience at the National Press Club.
    • He discussed the recent spate of financial crises in the insurance industry, such as the financial collapse of Executive Life Insurance company, which has left hundreds of thousands of policy holders in California and New York unsure of the state of their insurance coverage. 
    • Sen. Metzenbaum criticized state insurance regulators for failing to adequately maintain knowledge of the financial affairs of the insurance agency.
      • He claimed insurance laws written by the insurance industry, inadequate staffing, infrequent examinations, inadequate capital regulation, and lack of coordination between the states are the reasons for the instability of the insurance industry.
      • He recounted several “accounting gimmicks” used by the insurance industry to appear financially solvent despite true financial instability
  • 1992 – LR – The Effects of the Insurance Industry Insolvency on Pensioners’ Incomes: A Plan for Federal Insurance, by Lee Anne LeBlanc – 33p
  • 2015 – Geneva – U.S. and Japan Life Insurers Insolvencies Case Studies: Lessons learned from resolutions, A Geneva Association research Report, Edited by Etti Baranoff – 52p
    • APPENDIX – Insolvencies 2008-2012 by country – p45
  • 2018 – SOA – A Review of Root Cause in Insurer Insolvencies and Impairments,  by Dave Heppen and Veronika Cooper, fr-2018-iss113-heppen-cooper – Society of Actuaries – 6p
  • 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
    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

  • ……..life insurance companies are not nearly so solvent as their re­ports might indicate.

— Mr. Gregory (Editor of the Prairie Farmer, Chicago, Ill..)

1932 – FRB – Federal Reserve Board : Bill Opposition – Price Stabilization, 1932, Subject File, Box 119, Folder 8 –  [link-212p]

  • (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.

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

  • Commissioner Hager (IA) discussed the resolution, prepared by the Securities and Insurance Regulation (EX) Task Force, which was adopted by the NAIC in December 1987 encouraging reciprocal treatment of assets in cases of insurer insolvency.
    • He proposed that a letter from the Task Force be sent to the states which have not adopted the NAIC Book Entry System Model Act and Book-Entry System Regulation, encouraging them to do so.
    • He also suggested that the Task Force monitor ongoing reciprocal treatment among states in the event of insolvencies in line with the resolution which was adopted in December.

Financial Services and Insurance Regulation (EX) Task Force

1988-2, NAIC Proceedings – March 14, 1988

  • Significantly, until the 1980s, no major life insurance company had failed during the working lifetime of most actuaries then in practice.
  • But as with so many aspects of the life and health insurance business, the last decade was, in many respects, a watershed.
    • Most of us have witnessed a revolution in the kind of products we offer, the way they are marketed, the investments made to match the liabilities they create, and the levels of profitability they generate.
  • As we have seen, the failure of such institutions as Baldwin United, and more recently Executive Life, First Capital and Mutual Benefit, have made us cogently aware of this issue.

—  Michael J. Cowell

1991 – SOA – Mandated Risk-Based Surplus, rsa91v17n4a11 – Society of Actuaries – 28p

  • (p29) – Insolvencies among U.S. life insurance companies have been on the rise over the past few years.
    • Before 1987, insolvencies numbered 10 or less and involved smaller companies with assets below $50 million.
      • In 1989 there were 40 insolvencies, including an insurer with $646 million in assets.
    • A task force of the ACLI that undertook a special study of the insolvencies during the 1985-1990 period focused on 68 cases, finding the causes to include:
      • … affiliate transactions (often involving fraud) in 47 cases,
      • … problems in accident and health insurance lines in 41 cases,
      • … underpricing of products in 40 cases,
      • … investment problems (often real estate) in 31 cases,
      • … and problems with new management in 25 cases.
    • The identified causes were, of course, often interrelated.

1992 – WorldBank – The Life Insurance Industry in the United States An Analysis of Economic and Regulatory Issues. by Kenneth M. Wright – 54p

  • Between January 1975 and December 1990, 170 life insurance companies failed — 40 percent during 1989 and 1990.
    • Most of these failed insurance companies were small.
    • In April 1991, however, the California Insurance Commissioner placed the Executive Life Insurance Company in conservatorship.
    • If this company eventually fails, it will be the largest U.S. insurance company ever to do so.
    • Recently, a few other life insurance companies have been placed in conservatorship.  (p1)

1991 0627 – GAO – Insurance Company Failures Threaten Retirement Income – Testimony – Joseph F. Delfico,  Director, Income Security Issues, Human Resources Division – 24p

  • 2. Insolvencies involving insurance companies have risen in recent years.
  • The amount of money assessed by state guaranty funds to pay for insolvencies has increased as well.
    • Historically, life company failures and guaranty fund assessments have been low.
      • For example, from 1975 to 1982, those assessments averaged $6.2 million a year.
    • Recently, however, life company failures have increased significantly.
      • For example, life guaranty fund assessments tripled from $154.8 million in 1990 to $469.7 million in 1991.
  • The problem of insolvency of life companies is not limited to small companies.
    • In April 1991, the California Department of Insurance seized Executive Life Insurance Company of California.
    • Assessments for Executive Life of California could reach $400 million per year over five years.  (p1)

1992 – California GOV – State Solvency Regulation of Property-Casualty and Life Insurance Companies – 144p

  • 1909 – PROPOSED NEW INSURANCE LAW
  • Acting upon the suggestion by Superintendent Hotchkiss, Governor Hughes sent to the legislature last week a message, asking for the enactment of a law conferring created the necessity for some such law, it will be noted that upon the Superintendent power to deal summarily with insolvent insurance companies, or when their affairs are so managed as to render their continuance in business hazardous to the public.
  • The necessity of some such authority being commended in the head of the Insurance Department was demonstrated most emphatically in the recent entanglements connected with the attempt to transfer the Washington Life to a Pittsburg company and remove its assets from the jurisdiction of the State of New York, which attempt was frustrated by the prompt action of the Attorney General.

1909 0318 – The Spectator, VOL. LXXXII

  • 2019 0519 – GOV (House) – The Science of Insolvency – [PDF-67p, VIDEO-YouTube
    • House – Committee on Science and Technology – Subcommittee on Investigations and Oversight Committee on Agriculture

ASOPS – Actuarial Standards of Practice

  • One of my concerns is that we have Practice Notes that people may not be looking at, which in a court of law could be used against you.
  • Read the ASOP; read the regulation and get your hands on the Practice Notes and do what the profession says you should be doing.
  • That’s all you can do

—  Timothy F. Harris

1996 – SOA – Life Insurance Sales Illustrations-What’s Next?, Society of Actuaries – 22p

  • 2014 1205 – Letter – AAA to NAIC – Comments on Exposure Draft of Life Insurance and Annuity Pricing ASOP – Life Products Committee (LPrC) comment letter to Actuarial Standards Board on exposure draft of an Actuarial Standard of Practice (ASOP) on Life Insurance and Annuity Pricing – 6p
  •  
  • Other
    • ASOP 1 – “Introduction to Actuarial Standard of Practice”
    • ASOP 25 – “Credibility Procedures”
    • ASOP 27 – “Selection of Economic Assumptions for Measuring Pension Obligations”
    • ASOP 51 – “Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.”
    • ASOP 23- for data quality compliance.

ASOP NO. 1

ASOP NO. 2

NOLHGA – National Organization of Life and Health Insurance Guaranty Associations

  • These events, of course, were the reasons that NOLHGA was created (under the auspices of the ACLI).

2006 0803 – DOTT – Remarks of David G. Nason Deputy Assistant Secretary, Financial Institutions Policy U.S. Department of the Treasury Before the National Organization of Life and Health Insurance, Department of the Treasury – [link]

  • (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

  • In the early 1990s, there were a number of large insolvencies

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

1998 – SOA – Once in a Hundred Years, rsa98v24n393pd – Society of Actuaries – 22p

  • Finally, I have mentioned the NOLHGA.
  • Quite frankly, I still don’t know what to make about this, but there’s no question that they have had a substantial impact on the Executive Life Insurance Company transaction.
  • I have no idea how that’s going to play out, but the talking process in Executive Life has been significantly impacted by NOLHGA.
  • And the last I heard, they are to be considered a serious buyer.
  • So in rehabilitation situations, they are a force to be reckoned with.

—  Patrick S. Baird, Vice President and Chief Tax Officer of Aegon U.S.A., Inc.

1991 – SOA – What is a Life Company Worth? rsa91v17n4b12 – Society of Actuaries – 24p 

1990s

  • 1991 0227, 0507, 0509 and 0523 – GOV (House) – Insurance Company Solvency, (CSPAN) Insurance Company Insolvencies, Cardiss Collins (D-IL)  —  [BonkNote]
  • 1993 0629 – GOV (Senate) – NOLHGA Bails Out a Healthy Insurance Company: Examining the Current System The State Guaranty Fund System Uses to Pay Off Insurance Policyholders, re: Security Benefit Life Insurance Company –
  • 1993 0629 – GOV (Senate) – NOLHGA Bails Out a Healthy Insurance Company: Examining the Current System The State Guaranty Fund System Uses to Pay Off Insurance Policyholders, re: Security Benefit Life Insurance Company
  • 1993 0629 – GOV – (Antitrust, Monopolies and Business Rights), State Insurance Guaranty Funds: Controlled by the Industry or by the Public? <Bonk: Can’t Find- Same As
    • 1993 0629 – GOV (Senate) – NOLHGA Bails Out a Healthy Insurance Company: Examining the Current System The State Guaranty Fund System Uses to Pay Off Insurance Policyholders, re: Security Benefit Life Insurance Company
  • 1995-1, NAIC Proceedings – Testimony from Jack H. Blaine, President National Organization of Life and Health Insurance Guaranty Associations Public Hearing on Policyholder Protection in Insurance Company Failures – September 11, 1995 – p
  • 1995-1, NAIC Proceedings – Guaranty Fund Issues Working Group B of the Insolvency (EX5) Subcommittee – September 11,1995

2000s

  • 2009 – NOLHGA – NOLHGA, the Life and Health Insurance Guaranty System, and the Financial Crisis of 2008-2009, Peter G. Gallanis (President, NOLHGA) – 31p

2010s

  • 2011 1216 – NOLHGA – Joint Comments of NOLHGA and NCIGF in Response to FIO’S Request for Public Input – 51p
  • 2012 02 – NOLHGA Journal – 16p
    • Second, the collapse of AIG’s securities lending program was an effect, not a cause, of AIG’s failure
  • 2014 10 – NOLHGA Journal – 24p
    • (p2) – Insurers, Systemic Risk, and the Debate Over Regulatory and Resolution Policy. This column is the first of a two-part discussion; the conclusion will follow in the next issue of the NOLHGA Journal, President’s Column by Peter G. Gallanis 
    • (p4-) – Harvey Miller discusses the Lehman Brothers bankruptcy, the challenges in unwinding a multinational company, and how Dodd-Frank doesn’t really end “too big to fail.”
    • Eric Dinallo, Ben Bernanke
  • 2016 – NOLHGA – NOLHGA Report Comparing The Federal Pension System and the State Insurance System – 68p
  • FRANKLIN PROTECTIVE LIFE Insurance Company – Martin Frankel
    • mid.ms.gov/companies/pdf/fplicliquidorder.pdf
      • John Hackney, President of the Company, has advised that he invested the Company’s assets in bonds through the broker known to him as LNS, Inc. Petitioners have confirmed that records of the Company reflect these investments, however, LNS, Inc. and the money invested in bonds throughLNS, Inc. is missing. With total liabilities of$21,857.487, and the missing bonds, the Company is insolvent.

Capital

  • 1981 – SOA – Effective Use of Capital, rsa81v7n14, Society of Actuaries – 26p
  • 1981 – SOA – Effective Use of Capital, rsa81v7n312, Society of Actuaries – 24p
  • 1987 – SOA – Sources of Capital for Investment and New Business, rsa87v13n318 – Society of Actuaries – 42p
  • 1990 – SOA – Capital-Raising Issues, rsa90v16n32 – Society of Actuaries – 34p
    • Bill is Executive Vice President of A. L. Williams Corporation, whose affiliate Milico has entered into a controversial commission financing transaction.
  • 1998 10 – FRBNY / AIG – Economic Policy Review – Capital from an Insurance Company Perspective, by Robert E. Lewis, Chief Credit Officer at American International Group – 3p
  • 2003 – SOA – Bringing Risk Into Capital Management, rsa03v29n124of – Society of Actuaries – 35p
  • 2008 – SOA – What Is a Robust Level of Risk Capital?, rm-essay-2008-rubin-shi – Society of Actuaries – 4p
  • 2023 – SOA – Rating Agency Perspectives on Insurance Company Capital, rating-agency-perspectives – Society of Actuaries – 28p
  • (p5) – Shelley Moore Kapito (R-WV) – Unfortunately, the consequences of Dodd-Frank are not limited to access to credit.
    • Life insurance policyholders could potentially see increases in premiums if life insurers are forced to capital levels designed for a lending institution.
    • I will continue to work with both Chairman Hensarling and Chairman Neugebauer to resolve this unintended consequence. 

2014 0723 – GOV (House-CFS) – Assessing the Impact of the Dodd-Frank Act Four Years Later – [PDF-169p,  VIDEO-CSPAN]

  • Even if we concede these differences, insurance policy holders can “run,” just differently.
    • A life insurance policy is not indentured servitude.
    • Policyholders can cash out whole life and annuity products, and halt premium payments on term products.
    • Indeed, one of the biggest life insurance failures – $15 billion Executive Life – suffered debilitating policy surrenders contributing to its failure in 1991.
  • I question the argument that insurance organizations should have weaker bank/thrift holding company protections because their insurance policy holders can’t easily cash out if they make bad investments.

2014 0310 – Letter – Sheila C. Bair to Senator Sherrod Brown (D-OH) – 6p

– Finding the Right Capital Regulations for Insurers – [PDF-105p,  VIDEO-Senate]

ALM – Asset Liability Matching

  • Let me be elementary to begin.
  • Asset/liability matching in its purest form likely means that we purchase assets such that whenever cash is needed to meet obligations, those assets will provide that cash.
  • However, in the real world, we are going to be mismatched either because
    • … we are not able to match 100% or
    • … because we make a corporate decision to be unmatched. 

—  Peter J. Bondy

1990 – SOA – Rating Agencies And Asset/Liability Matching, Society of Actuaries – 18p

  • The situation is always very fuzzy without a great deal of background knowledge as to what the value of the assets is in their case, and how it matches up against the liabilities.

—  Thomas S. Sutton, Pacific Life / ACLI

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

  • 1985 – SOA – Actuarial Opinions On Asset-Liability Matching, Society of Actuaries – 24p
  • 1990 – SOA – Rating Agencies And Asset/Liability Matching, Society of Actuaries – 18p
  • 1994 – SOA – Asset / Liability Management (ALM): AN International Perspective, Society of Actuaries – 18p 
  • 2003 – SOA – Are We In A Different Market Paradigm?, Society of Actuaries – 7p
  • My topic is asset/liability management in the U.S., with an emphasis on the past.
  • I have been involved in the asset/liability management practice area for over ten years.
    • ALM began, in its current form, in the late 1970s or early 1980s.
    • There are many valuable lessons we can learn from history, and my purpose is to share some of those with you through some personal experiences and stories.

—  Dennis L. Carr, vice president in charge of product development and asset/liability management for the ARM Financial Group

1994 – SOA – Asset / Liability Management (ALM): AN International Perspective, Society of Actuaries – 18p 

  • When we give the liabilities a quick checklist, I would recommend the following:
    • First and foremost I think is the disintermediation risk.
      • You need to look at the financial and psychological deterrents that contract holders have to surrender their contracts.
    • Obviously a very important factor is the prevailing interest rates in the market for comparable products and for other financial instruments in general.
      • Obviously we cannot operate in a vacuum.
      • Historically credited interest rates to policyholders, particularly the existing level, is a substantial consideration.
    • Any “expectations to policyholders that may have been created.”
      • The past experience for the product and how that relates to the original pricing assumptions is also needed.
    • Product specific characteristics including embedded policyholder options in the program.

—  Allan L. Chapman, a Senior Vice President with Executive Life Insurance Company in Los Angeles

1988 – SOA – Repricing Considerations — In Force Blocks of Business, Society of Actuaries – 20p

  • Assumptions regarding long-term expected returns play a critical role in Asset/Liability Management (ALM) of financial institutions.
    • This article questions the validity of assumptions regarding long-term expected returns used by many financial institutions at the present time.

2003 – SOA – Are We In A Different Market Paradigm?, Society of Actuaries – 7p

  • We also became more aware of the exercise of policyholder options.
    • This was not just through surrenders of annuities but also through options that we thought were safe, such as policy-loan provisions in ordinary life policies with fixed interest rates of 5% or 6%.
    • I remember Sylvia Porter, the financial columnist, writing about borrowing against your life insurance at 5% or 6% fixed interest and investing in a money market account at 15% interest.
    • Insurance companies experienced a cash-flow squeeze as money flowed out through the policy-loan feature.
    • There were some company failures at this time; Baldwin United was one of the most prominent.
    • Other companies suffered lesser degrees of financial stress.

—  Dennis L. Carr, vice president in charge of product development and asset/liability management for the ARM Financial Group

1994 – SOA – Asset / Liability Management (ALM): An International Perspective, Society of Actuaries – 18p 

  • 2015 – European Parliament – Interrelation between financial stability and monetary policy at the current juncture, Monetary Dialogue – 76p
    • 2.5 Negative impact on life insurance companies
    • Conceptual issues
      • Banks’ liabilities generally have shorter maturity than their assets.
        • But life insurance companies are typically characterised by the opposite maturity mismatch.
      • Whenever the liabilities have much longer duration than assets and the return on liabilities is fixed or guaranteed, unexpectedly low interest rates can challenge profitability and solvency.
      • According to the European Insurance and Occupational Pensions Authority (EIOPA) (2014), Moody’s (2015) and Standard and Poor’s (2014), the life-insurance industry in several euro-area countries is exposed to such risks.
      • Most life insurers’ liabilities have long maturities with a guaranteed minimum return.
        • However, other (non-life) insurance products are typically not characterised by such duration mismatches and guaranteed returns and these segments of the insurance industry might not face major risks arising from persistently low interest rates.
      • Evidence
        • The mismatch between the duration of liabilities and assets held by life insurance companies is estimated by EIOPA to about 10 years in Germany, Austria and Lithuania. In  all other euro-area countries, the mismatch is smaller – about five years in Finland, France, Luxembourg and the Netherlands, while in southern Europe (Greece, Italy, Portugal and Spain) it is below two years.
          • Therefore, Germany is particularly exposed to unexpectedly low interest rates, which is a concern for financial stability.
        • According to both Moody’s (2015) and Standard and Poor’s (2014), German life insurers have some options for mitigating the negative impacts of declining investment returns, such as reducing expenses or investment returns to policyholders, diversifying their portfolios towards new asset classes, such as infrastructure and real estate, and re-pricing new sales.
        • Stress tests conducted by EIOPA underline the vulnerability of German life insurers to a prolonged period of low interest rates.
        • Recent EU (Solvency II) and specific German regulatory changes affecting life insurance providers should improve the long-term stability of the sector, but the transition during the next few years could pose special challenges if interest rates stay low.

Claims Settlement

  • (p1501) – John Durkin, New Hampshire Insurance Commissioner: As a starting point, there is little regulation of the life insurance industry by the States.
    • The States do little with respect to life insurance regulations for many reasons, mainly because there are very few problems with complaints over claims.
    • Most of the staffs are involved with complaints relating to automobile insurance and health insurance.
    • Life insurance is sort of the stepchild of many, if not most, insurance departments.

1973 0221 and 0222 – GOV (Senate) – The Life Insurance Industry – Part 2 of 4 – Philip Hart (D-MI)  —  [BonkNote-Part 2 of 4]  —  [PDF-733p-GooglePlay]   

  • The insurer must remember that offices have unjustly refused, at the time of the death, to pay either the amount assured or to return the premiums, on the ground of error in the description of age-although no fraud was intended or reasonably suspected.
  • Legal objections of a technical nature have frequently succeeded in inducing claimants to forego a part or the whole of their demands, without the office injuring itself by appearing to be of a litigious character.
  • And I have heard of an office the trustees of which boasted of their power to litigate a claim for three years.

1850 – Book – Practical Remarks on the Present State of Life Insurance in the United States: Showing the Evils which Exist, and Rules for Improvement, by Harvey Garnett Tuckett

  • … I want to express my disappointment that the DoD decided not to participate in today’s hearing.
    • This is the second time that the DoD has refused to testify at one of our Subcommittee hearings and I am hoping that this does not become a customary response from DoD.
    • For this hearing, I invited DoD to provide views on high rate of denials for TSGLI claims and I am frustrated because I wanted the department to explain why the Armed Services denied 44 percent of TSGLI claims in fiscal year 2017.
      • This denial rate could be due to any number of factors, such as applications not being eligible for-applicants not being eligible for the benefits.
    • However, we don’t know whether this is the reason.
    • I was hoping the DoD would provide insight as to whether the servicemembers may not understand the TSGLI requirements or if they may be inadvertently filing improper claims, or are the Armed Services incorrectly denying benefits that servicemembers are paying for?
    • DoD’s expertise would certainly have been helpful here today as we consider these programs and any improvements to them.
    • [Bonk: Dod = Department of Defense]

—  Mike Bost, Chairman

2018 0425 – GOV (House) – Review of VAs Life Insurance Programs, Mike Bost (R-IL) – 34p

  • Mr. Adkins (CIR) added that in the center’s study, 12 provisions in the Unfair Trade Practices Act and 15 provisions in the Unfair Claims Settlement Practices Act were analyzed.

1996-1, NAIC Proc.