Smoothness

  • (p1063) – 14. Disclosure and Sales Illustration Practice
    • The actuarial task force has become aware of two professional actuarial groups which are now studying sales illustrations for life insurance contracts.
      • Presentations on behalf of both these groups were made at the December 1991 actuarial task force meeting.
    • Judy Faucett commented on the work of the Society of Actuaries Task Force for Research on Life Insurance Sales Illustrations under the auspices of the Committee for Research on Social Concerns.
      • She is chair of that Society of Actuaries Task Force. No detailed information on the work of this task force was presented at the April 1992 or the June 1992 actuarial task force meetings.
    • Also studying life insurance sales illustrations is another subgroup of the American Academy of Actuaries Committee chaired by Mr. Polkinghorn.
      • (Please see also Section 13, “Non-Guaranteed Element Annual Statement Interrogatories,” described above.)
      • Attachment One-L is a transmittal letter from Mr. Polkinghorn, with its attachment, forwarding a report that was recently prepared by his committee.
      • The transmittal letter includes comments on the general subject of life insurance illustrations.
      • A report on potential smoothness tests for non-guaranteed cash values was transmitted with this letter, but it was not included as part of this attachment.
      • Mr. Polkinghorn’s transmittal letter requested guidance from the actuarial task force as to whether the smoothness test concept should be pursued further.
      • Mr. Polkinghorn was present at the June 1992 actuarial task force meeting.
      • However, the actuarial task force had only had this material for a relatively short period of time and no position was developed by the actuarial task force regarding the smoothness test.

1992-2B, NAIC Proceedings

Prudential Regulation

  • 2014 08 – SOA – Downside of Prudential Regulation: Lower Liquidity, By Ira Jersey, Risk Management, jrm-2014-iss30-jersey – Society of Actuaries – 4p

Dynamic Financial Condition Analysis Handbook – SOA

  • Let’s begin with a very brief history.
    • The AAA and the SOA were responding to a NAIC concern about company solvency.

—  James F. Reiskytl

1996 – SOA – Dynamic Financial Condition Analysis Handbook Task Force, /rsa96v22n3146if – Society of Actuaries – 21p

  • 1993 – SOA – The Potential Role of Dynamic Solvency Testing in Preventing Insolvencies of Insurance Companies: A Historical Perspective, by Robert S. Fillingham, tsr939 – Society of Actuaries – 30p
  • 1996 – SOA – Dynamic Financial Condition Analysis Handbook Task Force, rsa96v22n3146if – Society of Actuaries – 21p
  • 1997 – SOA – Dynamic Financial Condition Analysis Update, rsa97v23n3120if – Society of Actuaries – 21p
  • Finally, the Dynamic Financial Condition Analysis Handbook of the Society of Actuaries is a good supplemental reference for risk areas and adverse scenarios that may be relevant for a given insurer, beyond those covered here.  (p27)

2020 04 – cia-ica – Educational Note: Financial Condition Testing Committee on Risk Management and Capital Requirements, Document 220057 – 51p

Eric Dinallo – Index

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AIG – Insurance Regulators

  • YPFS: Since AIG is an insurance company, what was the role of the insurance regulators and their interaction with the Fed during this time?
  • Baxter: The insurance commissioners really didn’t help the rescue of AIG, but they didn’t harm it either.

2018 1120 – Lessons Learned Oral History Project Interview: Thomas Baxter – 19p

  • (a) On September 16, 2008, Dinallo reiterated Governor Paterson’s offer to allow AIG to upstream $20 billion from its insurance subsidiaries (Dinallo Dep. 214:13- 21).
  • Geithner responded, “No, we’re good” (id. at 215:16-18).
  • As a result, Dinallo was “led to believe definitively that we were no longer part of the fix” (id. at 215:25-216:2).

Document 281-1 – Plaintiffs’ Corrected Proposed Findings of Fact – 99p

LC – Starr International Company vs United States – 11-0779 

  • 2009 0303 – Missouri Insurance Commission – AIG Frequently Asked Questions – [link]

Regulation – Insurance – Coordination

  • (p10) – Instead of conducting any analysis of the efficacy of coordinated regulation at the state level, FSOC dismissed it. 

  • (p14) – 5 The NAIC offers this discussion of collaborative action in part as a rebuttal to the Scholars of Insurance Regulation’s claim that state insurance regulators are frequently not able to coordinate effectively among themselves. See Scholars Br. at 17.

2015 0626 – 15-cv-45 – NAIC – Document 43 – Consent Motion of the National Association of Insurance Commissioners for Leave to File Brief as Amicus Curiae in Support of Plaintiff Metlife, Inc. – 32p

  • (p17) – The problem, of course, is that state insurance regulators frequently are not able to coordinate effectively among themselves.

2015 0515 – DOC 34-1?? – 15-cv-45 – Brief of Scholars of Insurance Regulation as Amici Curiae in Support of Defendant Financial Stability Oversight Council – 28p

  • I realized, there was nobody else.
  • There was no one for me to get help on this. This was it.
    • I’m in the room.
      • Geithner’s asking.
      • Paulson’s listening. 
  • I finally had no one else to ask.
    • I mean, my experts obviously.
  • But it was one of those moments in life where you’re like, “Okay, this is it. You’re either going to get this right, or you’re going to get it wrong.

There’s no one else to go and chat with about it…

2021 – YPFS – Lessons Learned Oral History Project: An Interview with Eric Dinallo – 19p

  • (p17) – Baxter: One of the fears was that if things had gone in another direction and AIG had to be wound up, each one of the state commissioners would have had its own proceedings.
    • That was part of what created systemic risk for AIG, where there would be a fragmented series of resolutions and every insolvency official appointed by a commissioner would try and seize AIG assets.

2018 1120 – YPFS – Lessons Learned Oral History Project Interview: Thomas Baxter  —  [BonkNote]  —  19p

  • Ed ROYCE – (R-CA)
    • So we have the SEC. We have the Fed. We have the OCC that all serve to get financial instruments to represent the interests of the banking industry in terms of gaining access to markets overseas, and you are speculating that the National Association of Insurance Commissioners is not going to have that same clout or seat at the table in terms of opening those markets for competition?
  • Christopher M. Condron, Chairman of the Board and Chief Executive Officer, AXA Equitable Life Insurance Company, on behalf of the American Council of Life Insurers (ACLI)
    • They just cannot.
    • You know, they cannot agree on what the reserving requirements will be on universal life insurance policies, or when they do agree, they cannot get all of the States to go along, and that is the  frustration, I think, Commissioner Bell and all of the commissioners have always had with the NAIC.  (p163)

2007 1003 – GOV (House) – The Need for Insurance Regulatory Reform – [PDF-163p

2014 12 – re: FSOC SIFI Designation of MetLife, Woodall / Hamm – Views of the Council’s Independent Member Having Insurance Expertise – 13p

  • 2014 12 – re: FSOC SIFI Designation of MetLife, Woodall / Hamm – Views of the Council’s Independent Member Having Insurance Expertise  —  [BonkNote] —  13p
  • Roy Woodall – 
  • I do share concerns about some of MetLife’s activities, particularly in the non-insurance and capital markets activities spheres, and in the resulting exposures identified and described in the Council’s Notice of Final Determination in the Company Overview and Exposure Transmission Channel sections.
    • These activities might conceivably pose a threat to the U.S. financial stability under certain circumstances.
    • It is these types of activities that should be fully evaluated under the Second Determination Standard, as opposed to the flawed Council analysis under the First Determination Standard.
  • I do not, however, agree with the analysis under the Asset Liquidation Transmission Channel of the Notice of Final Determination, which is one of the principal bases for the finding under the First Determination Standard.
    • I do not believe that the analysis’ conclusions are supported by substantial evidence in the record, or by logical inferences from the record.
      • The analysis relies on implausible, contrived scenarios as well as failures to appreciate fundamental aspects of insurance and annuity products, and, importantly, State insurance regulation and the framework of the McCarran-Ferguson Act.2
    • The analysis discusses in detail, and is dismissive of, the U.S. State insurance regulatory framework, the panoply of State regulatory authorities, and the willingness of State regulators to act, thereby overstating shortcomings and uncertainties that are inherent in all regulatory frameworks, State or Federal.
  • The Council’s expressed concerns in the Notice of Final Determination as to existing regulatory scrutiny, the State guaranty associations, and the potential complexities associated with the resolution of a large insurance company, seem to me to be unbalanced and lead to distorted conclusions regarding the Asset Liquidation Transmission Channel.
  • In my considered view, the Council should be more transparent about which of MetLife’s activities, together or separately, pose the greatest risk to U.S. financial stability in order to provide constructive guidance for the primary financial regulatory authorities, the Board of Governors, international supervisors, other insurance market participants and, of course, MetLife itself, to address any such threats posed by the company.
  • It is important to identify particular activities in order to encourage appropriate and further action that could lessen any company-specific threat to U.S. financial stability.
    • Paraphrasing what one insurance thought leader once told me: “We should not tolerate any insurance company posing a threat to our financial system – pinpoint what makes them systemically risky and let’s fix them.”3 < 3Therese M. Vaughan, Ph.D., Dean of the College of Business and Public Administration, Drake University, and former Iowa Insurance Commissioner, President and CEO of the National Association of Insurance Commissioners, International Association of Insurance Supervisors Executive Committee member, and Chair of the Joint Forum.>
  • I believe that not pinpointing specific activities that contribute to the company’s systemic risk profile is a mistake.
    • Importantly, rather than confronting the greater burden tied to the Second Determination Standard, it is easier to simply presume a massive and total insolvency first, and then speculate about the resulting effects on activities, than it is to initially analyze and consider those activities.
  • However, the Notice of Final Determination concludes that the origin of the company’s systemic risk would stem from a sudden and unforeseen insolvency of unprecedented scale, of unexplained causation, and without effective regulatory responses or safeguards.
  • I simply cannot agree with such a premise, which is the central foundation for this designation.
  • On February 14, 2013, MetLife announced that it had deregistered as a bank holding company, as approved by the Board of Governors and the Federal Deposit Insurance Corporation (FDIC), after having been supervised by the Board since 2001.5
    • Many of the company’s activities set forth in the Notice of Final Determination developed over this time period.
  • FSB
  • As the Council continues its work, it is my hope that we can concentrate our efforts to consider regulatory reform and improve regulation of those large nonbank financial companies and their activities that have been left largely unexamined since the financial crisis, but that may significantly risk financial instability.
    • The Council’s vigor in evaluating such unexamined (and in some cases unregulated) nonbank financial companies is imperative in successfully fulfilling its charge to identify threats to our financial system, economy, and the American people.
  • Adam Hamm – 
  • To the extent that the Council speculates about such stays leading to further contagion across the insurance industry, insurance regulators have extensive authorities to intervene to protect policyholders at these other firms as well.
  • Moreover, the Basis implicitly assumes material financial distress at all insurance entities at the same time, yet the Basis cites no historical examples of that having ever occurred. <FTC Report, BTID, etc>
  • As for the exposure channel, the Council makes claims that retail policyholders or corporate  customers would suffer losses as a result of material financial distress at MetLife, but does not detail how those losses translate into “an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.” <Pacific Lumber>
  • A key consideration for the final designation is the asset liquidation channel.
    • The final Basis, like the proposed Basis, continues to offer merely speculative outcomes related to the liquidation of assets based in large part on hypothetical and highly implausible claims of significant policyholder surrenders. 
    • To remedy this, the Council offers additional analysis in an appendix, but that analysis treats all financial institutions exactly the same using broad-based assumptions regarding asset dispositions that do not take into account the specific characteristics of MetLife, its assets and liabilities, the particular characteristics of insurance products or insurance policyholder behavior.
    • There is no explicit provision for the differences in timing and the assets of MetLife are categorized using bank asset categories even though they are substantially different. 
  • For example, in response to the arguments by MetLife seeking to analogize the impacts of a failure of MetLife to other insurance company failures in history, the Council notes correctly that the failure of an insurance company of MetLife’s size and scope has never taken place.
    • While that is a fair statement as each company has its own unique characteristics, the fact that there is no comparable insurance failure is a testament to the state insurance regulatory system, a fact that the Council ignores.
  • I also take issue with certain arguments that are not firm-specific.
    • For example, the Council raises concerns that a MetLife failure could stress the guaranty fund system.
  • Another example is the Basis’ treatment of MetLife’s Funding Agreement Backed Securities Programs and their impact on money market funds in the event MetLife would be unable to meet its obligations under those contracts.
  • Finally, I would be remiss if I did not mention that, despite the sheer volume of arguments (no matter how far-fetched) contained in the Basis, the Council fails to identify the specific set of legitimate issues of concern that has led to the company’s designation.

Regulator Information From Companies

  • However, the regulatory approach in Massachusetts continues to rely on insurer disclosure to enforce insurance holding company laws.  (p2)

1995 – GAO – Insurance Regulation: Observations on the Receivership of Monarch Life Insurance Company. (Letter Report, 03/22/95, GAO/GGD-95-95)  —  [BonkNote]  —  22p