Crisis

  • We’ve all heard a lot about the junk bond crisis.
    • Is the next crisis going to be junk illustrations?

—  Judy Faucett

1991 – SOA – Illustrations, Society of Actuaries – 20p

  • 2009 – AP – Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis, Hyun Song Shin – 34p
  • 2013 – SOA – A Qualitative History of Previous Challenging Environments for the Life Insurance Industry, By Evan Borisenko, aof-2013-04-iss34-borisenko – Society of Actuaries – 4p
    • These periods include :
      • the Great Depression,
      • the Great Inflation of the 1970s, and the
      • influenza pandemic of 1918.
      • These past events should be studied to learn the effect of economic conditions on life insurer solvency, as well as to identify the actions that helped firms navigate these conditions
    • Great Depression … certain pressures on the industry during this time are worth noting.
    • In the late 1970s and early 1980s, a crisis with a different source tested the life insurance industry.
    • [Bonk: No mention of 2008, 1990s]
  • Insurance and Systemic Risk) – [PDF-181p,
    • (p42) – Bill Posey (R-FL) – It is clear that if your testimony today was true, very few of you need any more useless bureaucratic regulation.
      • And who would have ever thought that, after the S&L crisis, so relatively shortly after the S&L crisis, with all the additional regulation that was put in place following the crisis, that we would again find ourselves in this hole of a financial crisis.
      • I mean, if regulation would have solved the problem, we wouldn’t be here today,  because brighter minds, creative lawmakers threw a bunch of regulation into the S&L crisis, and obviously it didn’t do anything.
      • And why we would think that we could be successful in trying to advance, out-think a creative risk-taker, kind of defies logic.
      • I think the answer is to hold people who harm people accountable.
      • You know, we pretty much, I think, agree that the cause of the crisis that we’re in now has been caused by greed. 
    • (p42) – And, I mean, if regulation would take care of it, the SEC’s 1,100 attorneys would have prosecuted Bernard Madoff 10 years ago when his scheme was exposed to them, and they refused to take any action.
  • While the dramatic changes envisaged in the scenarios presented to us might generate immediate and drastic response by a firm in another industry, in the life insurance industry the response — if any — comes at a more measured pace.
  • The crisis reaches its peak before the industry begins to respond effectively to the problem.
  • By the time response is forthcoming, the crisis is past and another issue begins to pick up steam to take its place.
  • The financial momentum of the business enables companies to sail by the crisis peak, if I may mix a metaphor, and on into other troubled waters.
  • The slower, more deliberate reaction of the life industry enables the necessary changes to be made over longer periods of time, thereby gradually improving performance.
  • So far, this general avenue of conduct has been successful.
  • Will it continue to be so in the 1980’s?

— John R. Gardner

1980 – SOA – The Future of Permanent Life Insurance, Society of Actuaries – 28p

Functional Regulation

  • vs Entity Regulation
  • Gary Hughes, ACLI, SOA
  • Gramm-Leach-Bliley (GLBA)
  • Banks, Insurance, Securities, CFTC
  • 1985 – LR – Functional Regulation: Looking Ahead – 25p
  • 1998 – LR – Functional Regulation of Bank Insurance Activities: The Time Has Come, Linda Birkin Tigges – 35p
1959 – LC – 91. SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) (Brennan, J., concurring).
The Court in Variable Annuity Life Ins. Co. stated:
  • At the core of the 1933 Act are the requirements of a registration statement and prospectus to be used in connection with the issuance of “securities”….
  • The emphasis is on disclosure; the philosophy of the Act is that full disclosure of the details of the enterprise in which the investor is to put his money should be made so that he can intelligently appraise the risks involved.
  • The regulation of life insurance and annuities by the States … proceeds, on entirely different principles …. The system does not depend on disclosure …. [The] congressional division of regulatory functions is rational and purposeful in the case of a traditional life insurance or annuity policy, where the obligations of the company were measured in fixed-dollar terms and where the investor could not be said, in any meaningful sense, to be a sharer in the investment experience of the company.

1985 – LR – Functional Regulation: Looking Ahead – 25p

Best Interest Standards

  • 2018 – SOA – Changing the Retirement Advice Conversation, 2018-securing-future-retirements-chamberlain-cheng-durbin-sokolic – Society of Actuaries – 5p
  • 2023 0520 – Letter – Barry Flagg / Veralytic to Finseca – 2p
    • I regret to have to resign from Finseca … again, for the following reasons.
      • California Best Interest Rule for insurance products (i.e., CA SB 264). 
      • Lobbying against Client’s Best Interest rules is lobbying for preservation of current NAIC-based regulations that permit agents, brokers and insurers to “quote” low premiums while charging HIGH costs withOUT disclosing either those HIGH costs nor the HIGHer risks of future “premium calls” for more than the originally “quoted” premium or total loss due to policy lapse even when all originally “quoted” premiums were paid.
      • Such “bait-and-switch” sales and marketing practices foster DIS-trust blocking financial security for all, and continue to divide the financial security profession.
      • This current regulatory regime creates an environment where the reckless get rewarded and the prudent get punished.
      • I likewise believe Client’s Best Interests rules for life insurance are BOTH needed to protect consumers against “bait-and-switch” sales and marketing practices AND will lead to sales growth.
      • Insurance products are the last, largest, most-neglected and worst-performing assets on client’s balance sheets (e.g., WSJ: Universal Life Insurance, a 1980s Sensation, Has Backfired – [link-f]). – [Bonk: by Leslie Scism]
      • Client’s Best Interest rules harmonize the operating principles necessary to enable more financial advisors to have more conversations like this with more customers, resulting in BOTH greater financial security for all AND growth in sales.

Private Right of Action

  • 2004 – LR – PSLRA, SLUSA, and Defrauded Retirement Investors: Overlooked Side Effects of a Potent Legislative Medicine, by Michael J. Borden  —  [BonkNote] 
  • A regulator pointed out that a provision for a private cause of action is a major departure from NAIC policy, and after extensive discussion, the working group decided to take out that provision. (p653)

1993 Proc. 4th Quarter

  • After achieving consensus on the set of guiding principles, the working group drafted a model act to provide states with the authority to adopt provisions.
  • One regulator asked if the act would become part of the unfair trade practices act and said he thought it would be important to include a provision for a private cause of action.
  • This would address one of the concerns noted in the position paper, that of insufficient penalties for violation. (p654)

1993 Proc. 4th Quarter – LIFE INSURANCE ILLUSTRATIONS MODEL REGULATION – Proceeding Citations

  • 1998 – JIR / NAIC – Private Rights of Action Under State Unfair Claims Settlement Practices Acts: A Review* – 23p
  • Walker v LSW
    • Video – Appeals Court
  • 3 As explained in further detail below, there exists no private right of action for violations under the Unfair Settlement Practice Act. See Moradi-Shalal v. Fireman’s Fund. Ins. Co., 46 Cal. 3d 287, 313 (1988).

2019 – LC – Openiano v. Hartford Life and Annuity Insurance Company et al -C ase No.: 18-CV-0943-AJB-AGS – ORDER GRANTING DEFENDANTS’ MOTION FOR JUDGMENT ON THE PLEADINGS, (Doc. No. 24) – 11p

  • 1993-4, NAIC Proceedings – (p654)
    • Don Koch (Alaska) asked if the act would be part of the Unfair Trade Practices Act.
    • Mr. Wright asked if there was a private cause of action in the Unfair Trade Practices Act.
    • Carolyn Johnson (NAIC/SSO) responded that the Unfair Trade Practices Act specifically said it did not imply a private cause of action.
    • Mr. Koch said he thought it would be appropriate to include a section in the model to provide for a private cause of action.
      • He suggested either adding language to that effect or inserting a drafting note.
    • The working group decided to add a section authorizing a private cause of action.
      • This would address one of the problems noted in the white paper about insufficient penalties for violations.
    • Mr. Koch suggested a provision such as currently being considered in the draft Title Agents Model Act being prepared by another working group.
      • Tony Higgins (N.C.) asked if this provision would limit regulatory action in any way and the group agreed that it did not.
  • 1993-4, NAIC Proceedings – (p657)
    • The working group reconvened in closed session on Nov. 16, 1993, at 9 a.m.
    • The working group decided to revise the language of Section 3 to delete any reference to unfair and deceptive acts and practices.
  • 1993-4, NAIC Proceedings 
    • The group considered whether the penalties in Section 4 should be combined with the private cause of action in Section 5.
    • The working group decided they should remain separate.
    • Mr. Nepple asked if intent was an element of the violation to use the remedies of Section 5, and the group agreed it was not.
    • Mr. Nepple pointed out that consumers already could sue under a theory of intentional misrepresentation, but this alternative would not include intent.
      • Mr. Wright agreed this was a viable approach.
  • The vast majority of the Department of Insurance’s cases are brought in an administrative as opposed to judicial forum.
  • The Department’s administrative authority to obtain remedies for individual consumers is more limited than that of a plaintiff in a UCL lawsuit with respect to monetary and injunctive relief.
  • Further, the existence of private plaintiffs’ lawsuits helps forward the course of the law more effectively than would be the case if the only adjudications were those proceedings, largely administrative, initiated by the Commissioner.

2015 – LC – Brief of the State of California and the California Insurance  Commissioner as Amicus Curiae in Support of Plaintiffs, Walker vs Life Insurance Company of the Southwest. Case: 15-55809, 12/16/2015, ID: 9795445, DktEntry: 24, p27-28

Abusive

  • 2019 0619 – AP – “Abusive” Acts and Practices: Towards a Definition?, by Adam J. Levitin – Written Submission Prepared for CFPB Symposium on “Abusive” – [CFPB} – 54p
    • Written Submission Prepared for CFPB Symposium on “Abusive”
  • Agency Problems: Policy Replacements
  • A. What information is available on the extent of policy replacement abuses?
    • What steps have individual companies taken to control replacements of existing policies?
    • What procedures have companies adopted to meet the several state regulations regarding replacements?

1961 – SOA – Agency Problems: Policy Replacements, Society of Actuaries – 11p

  • 2012 0124 – GOV (House) – How Will the CFPB Function Under Richard Cordray, Patrick McHenry (R-NC)
    • [PDF-107p, VIDEO-CSPAN-02:35:51] 
    • Unreasonable Advantage of Consumers vs Reasonable Advantage of Consumers
    • 1:59 – Trey Gowdy (R-SC):  Senator Warren never answered the question.  Dodd-Frank – Unreasonable Advantage of Consumers – Duties of Consumers in regard to Educating themselves
    • 2:00 – Richard Cordray, CFPB, Educate yourself, High School, People have to be Responsible for their decisions, what we can do it make clear / transparent, if they make a bad deal… they’ll have to live with it… nobody is going to make a magic wand.
    • Trey Gowdy (R-SC): note that he has answered the question.

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.

Liquidation

  • “asset liquidation analysis”
  • UILA – Uniform Insurers Liquidation Act
    • 1940 – LR – Legislation: The Uniform Insurers Liquidation Act – 12p 
      • Corporations doing business in several states have long faced the problem of ancillary receiverships when forced into insolvency.
        • Because of limited extraterritorial powers of receivers, delinquency has produced a series of diversified liquidation proceedings, which have in turn wreaked
          havoc with the affairs of the company.’
        • Although there has been a vast improvement in national bankruptcy legislation, with the passage of the Chandler Act in 1938,2 so that the receivership device has been abandoned to a large degree by most corporations, insurance companies have been excluded from the Act.3
          • Consequently, they must still rely upon receivership and local statutory substitutes for insolvency proceedings.
        • To cope with the continued existence of the many problems of decentralization, and the expense and delay of ancillary receiverships still necessary for insurers, the Uniform Act was adopted.4 
        • Like most uniform legislation, the Act attempts to cover a broad field.
        • If it is to be extensively used, it must afford remedies for problems that have defied solution for a long time.
        • In order to evaluate its efficiency, therefore, it is necessary to compare the existing law with the new provisions that are embodied in the Act.
    • 1953 – LR – The Uniform Insurers Liquidation Act and Wisconsin Law, by Darrell L. Peck – 10p
  • 1993 – LR – New York Court of Appeals Recognizes that Insured’s Contractual Right to Notice of Cancellation Becomes Vested upon Insurer’s Liquidation, by Joseph F. Muratore – 11p
    • People v. Security Life Ins. & Annuity Co., 78 N.Y. 114, 127 (1879) (concluding that “policyholders are creditors of the [insolvent] company for the present values of their policies” as of date of insurer’s dissolution).
  • 2009 0924 – GOV (Senate) – Systemic Risk and Resolution Issues / Experts’ Perspectives on Systemic Risk and Resolution Issues – [PDF-128p,  VIDEO-CSPAN]
    • (p7) – Paul Volcker – “…..insurance companies, which I would say parenthetically I hope better regulatory systems will be developed, maybe not as part of this legislation but next year.”  
    • (p19) – Paul Volcker – “I would hope this committee would look at the question of national charters for insurance companies and bring them under-at least the big ones-under a framework so that something like AIG with similar problems can’t arise in the future.”  
    • (p49) – Ed PERLMUTTER (D-CO) – How do we resolve insurance companies?
      • Do you know?
      • We liquidate them through the insurance commissioner.  
  • 1953 – LR – The Uniform Insurers Liquidation Act and Wisconsin Law, by Darrell L. Peck – 10p
    • The United States District Court in New York recently handed down a decision which was based entirely on the Uniform Insurers Liquidation Act.’
    • Many persons, upon finding this law cited in the report, thought that the Commissioners on Uniform State Laws must have drawn up the law very recently, because most of them had never heard of it before. Surprisingly enough, however, the history of the U.I.L.A. dates back to the great depression of the 1930’s.
    • Along with the financial crash of 1929 and the subsequent depression years, came forced liquidations 2 of a great number of businesses, many insurance companies among them.
    • Because of their peculiar nature, most states had special liquidation laws for insurance companies unlike their ordinary corporation liquidation laws.3

Predictive Analytics

  • 2014 – SOA – Modeling of Policyholder Behavior for Life Insurance and Annuity Products, Society of Actuaries – 92p
  • 2019 – SOA – The Use of Predictive Analytics in the Canadian Life Insurance Industry, predictive-analytics-canadian-life-insurance-report – Society of Actuaries – 74p

CSO – Commissioners Standard Ordinary Tables

  • On the regulatory front, we have 2001 CSO coming into play.
  • That will help UL writers and variable life writers.
  • It reduces the cost of reserves when we provide guarantees to clients.
  • However, the impact on term and UL is probably moderate, probably low.
  • On the variable life side, a number of variable life products out there today do have no-lapse guarantees.
  • The 2001 table will help that. The impact of the new mortality table on life-insurance-retirement-planning (LIRP) sales, cash accumulation sales, is that it will lower the amount of money that you can get into contracts, but I think that still makes it a relatively attractive sale long-term.

— Thomas P. Kalmbach, assistant vice president of individual life product financial analysis with The Hartford Life Insurance Companies

2003 – SOA – Variable Life-Product and Distribution Issues, Society of Actuaries – 28p

Risk Classification

  • 1980 – SOA – Risk Classification, Society of Actuaries – 18p
  • 26. Five sets of congressional hearings have been held on a bill introduced by Senators Hatfield and Packwood and Representative Dingell that would prohibit classification on the basis of race, color, religion, sex, and national origin.
  • Most of the testimony from the opponents and proponents has focused on gender classification.
    1. See, e.g., Fair Insurance Practices Act: Hearings on S. 372 Before the Senate Comm. on Commerce, Science, and Transportation, 98th Cong., 1st Sess. (1983) [hereinafter cited as Senate Hearings on S. 372];
    2. Fair Insurance Practices Act: Hearings on S. 2204 Before the Senate Comm. on Commerce, Science, and Transportation, 97th Cong., 2d Sess. (1982) [hereinafter cited as Senate Hearings on S. 2204];
    3. Nondiscrimination in Insurance Act: Hearings on S. 2477 Before the Subcomm. on Antitrust, Monopoly, and Business Rights of the Senate Comm. on the Judiciary, 96th Cong., 2d Sess. (1980) [hereinafter cited as Senate Hearings on S. 2477];  Nondiscrimination in Insurance Act of 1983: Hearings on H.R. 100 Before the Subcomm. on Commerce, Transportation, and Tourism of the House Comm. on Energy and Commerce, 98th Cong., 1st Sess. (1983) [hereinafter cited as House Hearings on H.R. 100, 98th Cong.];
    4. Nondiscrimination in Insurance Act of 1981: Hearings on H.R. 100 before the Subcomm. on Commerce, Transportation, and Tourism of the House Comm. on Energy and Commerce, 97th Cong., 1st Sess. (1981) [hereinafter cited as House Hearings on H.R. 100, 97th Cong.]. See cases cited infra note 57.

1986 – LR – Insurance Classification: Too Important to be Left t o be Left to the Actuaries – by Leah Wortham (Columbus School of Law, Catholic University of America) – 77p