Twisting

  • We have all heard some talk about twisting, and it has strong negative connotations.
    • Universal Life, mainly because of its premium flexibility, has changed that.
  • I recently heard one of our marketing people refer to replacement of old traditional permanent policies with Universal Life.
    • He called it “The Enlightened Liberation of Assets”.

—  Stuart Grodanz, Travelers 

1984 – SOA – Variable Universal Life, Society of Actuaries – 22p

  • Historically, companies were reluctant to replace life insurance because they might be in violation of the “twisting” laws.
    • Times have changed.
  • In 1969, the National Association of Insurance commissioners developed the 1970 Model Life Insurance Replacement Regulation.
    • This removed most of the “twisting” fears. 

—  William T. Tozer, ACLI

1981 – SOA – Individual Life Insurance Cost Disclosure Issues, Society of Actuaries – 22p

  • Bill White, chief actuary, New Jersey, reported on their special project pertaining to universal life. – <WishList>
  • Their commissioner, on June 25, 1982, declared an 81-day moratorium on “Universal-Flexible Factor” type of policies.
  • His staff was directed to
    • (1) study the matter and issue a position paper on the subject;
    • (2) conduct public hearings on March 10-11;
    • (3) terminate the moratorium April 16 with the publishing of a set of guidelines. – <WishList>
  • Reports and results have been mailed to each insurance department.
  • Some of the questions New Jersey conveyed included:
    • (1) are these policies participating or non-participating;
    • (2) the “Bait and Switch” potential;
    • (3) disclosure;
    • (4) Federal Income Tax aspects;
    • (5) non-forfeiture values;
    • (6) replacement problems.
  • The concern was not just with the “twisting” replacements, but was the impact of justified replacements on the solvency of replaced companies.

1982-2, NAIC Proceedings

  • Most life insurance companies, it is true, will cancel the contract of an agent found guilty of replacing a policy already carried in his own or another company, by a new policy and such a practice is usually referred to as “twisting.” (p21)

1940, NAIC Proceeding

  • ROWS ABOUT TWISTING
  • In the seventies, when life insurance companies in the United States were passing through the crucible, all sorts of things were done which nowadays are denounced, at least, if not avoided entirely.
    • The trouble was that more than half the life insurance companies of the country were in a failing condition, and their only hope often was to diminish their liabilities by twisting policies from one form to another or to escape the liabilities in whole, or in part, by making an arrangement with another company to furnish it a list of the policyholders, so that it could do the twisting.
    • The four or five companies that were swallowed up in the Universal reached an apparent state of solvency in that manner.
    • They had some kind of an understanding.

1898 – Book – Things Agents Should Know: An Intensely Practical Book for Life Insurance Agents – by Miles Menander Dawson 

  • Sharp competition was developing among companies and agents, the Massachusetts Commissioner complaining about agents besieging his office for information recommending their companies, or depreciating others,” and the New York Superintendent protesting against agents’  commissions of from twenty-five to fifty per cent of first premiums, which resulted in the selling of policies by any and all methods, followed by a sad lapse record.30
    • Complaints of “twisting“ also began to arise during this year.31  (p138)

1920 – Book – The History of Life Insurance in the United States to 1870: With an  Introduction to Its Development Abroad, by Charles Kelley Knight, University of Pennsylvania – [2xxp-GooglePlay]

Regulatory Arbitrage

  • During the years leading up to the crisis, there was a substantial amount of regulatory arbitrage between bank holding companies and nonbank institutions (investment banks, GSEs, AIG), as well as between large and small banking institutions, with complex, mega institutions being able to operate with thinner capital cushions than the average community bank. (p6)

2014 0310 – Letter – Sheila C. Bair to Sherrod Brown

  • 2022 – LR – Regulatory Competition in the US Life Insurance Industry, by Johnny Tang, Harvard – 88p
    • Competition between jurisdictions is a central feature of many public policy
      problems.
    • I examine the consequences of such competition in the US life insurance industry, where states vie to attract insurers by setting lower capital requirements, but the costs of such actions are borne by consumers in other states.
  • b. Is regulatory arbitrage a problem? What is your understanding oj the scope oj the problem and what causes it? How should regulatory arbitrage be addressed?
  • Regulatory arbitrage can be a serious problem in several dimensions.
    • First, regulatory arbitrage is a problem when different providers of the same or essentially the same financial product are able to operate under significantly different rules, particularly when coupled with significantly different levels of supervisory oversight of compliance with those rules.
    • A prime example of this type of arbitrage, and its disastrous consequences, is the mortgage crisis, where a “shadow banking system” of nonbank lenders operated under an often weak or non-existent patchwork of state lending standards and were not subject to oversight comparable to the supervision of federally-regulated banks.
    • As a result, at the heart of the mortgage crisis was lax underwriting, predominantly by these nonbank mortgage originators, resulting in too many loans that consumers simply could not pay back. This sort of arbitrage between firms subject to different standards and different levels of supervision can also occur within a bank holding company itself.  
    • As a policy matter, the Federal Reserve in the past has chosen not to subject such nonbank subsidiaries to bank-like examination and prudential supervision on the theory that such activities would inappropriately extend “the safety net” of federal protections from banks to nonbanks.1
      • 1 See, e.g., remarks by Federal Reserve Chairman Greenspan before the Annual Meeting of the American Council of Life Insurance, Washington, D.C. (Nov. 15, 1999).

2009 0811 – PWG Working Group on Supervision – FCIC – Questionnaire, OCC22-00362000 – 56p

Moratorium

  • Moratorium
  • Stay
  • Contractual 
  • State
  • Courts
  • (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

  • 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

  • Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection
  • Re: Subcommittee Hearing: “Finding the Right Capital Regulation for Insurers”
  • The very nature of insurance significantly reduces the potential of a run-on-the-bank scenario for property/casualty, health and most life insurance products.
  • For those limited products sold by insurers that could be subject to some level of run risk, mitigating factors exist such as policy loan limitations, surrender/withdrawal penalties, and additional taxes.

—  Kevin M. McCarty – NAIC Testimony – Commissioner, Florida Office of Insurance Regulation and President of the National Association of Insurance Commissioners – 8p

2012 1129 – GOV (House) – Examining the Impact of the Proposed Rules To Implement Basel III Capital Standards – [PDF-439p, VIDEO-?] 

Misconduct

  • Widespread misconduct in the financial sector on a broad scale creates mistrust, weakening the ability of markets to allocate capital to the real economy.
  • This in turn may give rise to systemic risks, which is why addressing misconduct is part of the Financial Stability Board’s (FSB) work programme.
  • Recent instances of misconduct have included collusion in the manipulation of wholesale markets and retail mis-selling schemes.

Corporate Governance

  • Under some permanent insurance, contracts being sold today, the chances are you could stop paying after 7, 8, or 9 years and the insurance would remain in force for the rest of your life without further premium payments. (p6069)

— Robert Beck (Prudential CEO)

1985 0719 and 0722 – GOV (House) – Comprehensive Tax Reform: Hearings Before the Committee on Ways and Means, House of Representatives – Part 7

  • 2013 1216 – ThinkAdvisor – Charges of NAIC corporate governance problems erupt, By Elizabeth D. Festa – [link]
    • 2013 1211 – Letter – Tom Leonardi to NAIC etc – 3p
      • “We have met the enemy and he is us!”
        • This famous line from the comic strip Pogo aptly describes the current state of governance at the National Association of Insurance Commissioners.
  • 1998 – SOA – Corporate Governance of Investments: Avoiding the Next Class-Action Suit, Society of Actuaries – 20p
  • 1999 – AP – Coordination of Earnings, Regulatory Capital and Taxes in Private and Public Companies, by Michael B. Mikhail – 54p
    • This paper analyzes how ownership affects managerial coordination of earnings management, capital management, and tax planning in the life insurance industry between 1975 and 1991.
    • I study the life insurance industry because these companies are required to disclose financial results for regulatory purposes, regardless of ownership structure.
    • My sample includes three distinct ownership structures: public and private stock companies and policyholder-controlled mutual companies.1
  • Report of the Governance Subgroup of the Former Special Advisory Committee to the Joint Working Group on Receivership/Guaranty Fund Policy Issues

1993-2, NAIC Proceedings

Transparency

  • Transparency is a concept imported by Spencer Kimball. Hart Hearings, supra 28, at 1086·1237, 1087·1088 – (testimony of Spencer Kimball);
    • [Bonk: Hart Hearings = 1973 / 1974 – GOV (Senate) – The Life Insurance Industry – Phillip Hart (D-MI) – 4 Parts  —  [BonkNote]]

1980-2, NAIC Proceedings

Ethics

  • 1970 – AP – The Key Ethical Dilemmas in Marketing Insurance: A Comparison of the Two Main Segments of the Insurance Industry, by Robert W. Cooper, Drake University, by Garry L. Frank, Drake University – 7p – Bad Link – <WishList>
  • 1993 – AP – Ethical Issues, Helps, and Challenges: Perceptions of U.S. Actuaries, by Vaughan, Cooper, Frank – 23p
  • 1991 – JFSP – Ethics In The Life Insurance Industry: The Issues, Helps, And Hindrances, by Robert W. Cooper and Garry L. Frank – 
  • 2005 – AP – The Highly Troubled Ethical Environment of the Life Insurance Industry: Has it Changed Significantly from the Last Decade and if so, why?, by Robert W. Cooper & Garry L. Frank, Journal of Business Ethics 58 (1-3):149-157 – 
  • 2011 – JFSP -The Ethical Environment of the Life Insurance Industry – 15p
  • Robert W. Cooper, Drake University
  • CEFLI- cefli.org/about-cefli/
  • “As the only non-advocacy organization devoted exclusively to compliance and ethics in the life insurance industry, CEFLI is the premier provider of compliance-related education and training.”

Market Moving Information

  •  I have heard that the designation process is not transparent, and I am all for increased transparency, but I assume the Council must balance transparency against disclosing confidential or potentially market-moving information. (p37/2:08)

—  Senator Elizabeth Warren (D-MA)

2015 0325 – GOV (Senate-Banking) – FSOC Accountability: Nonbank Designations – [PDF-165p,  VIDEO-CSPAN]

  • 1991 0522 – GOV – Executive Life Insurance Failure
    • 51:00- 52:50 – Garamendi – Tennesee Sundquist – Shouldn’t Say, Have to Say /  Can’t Say. Bonds Prices. 
  • Where Was the Press During the S&L Crisis? – c-span.org/video/?7307-1/press-sl-crisis
    • This program is part of a series of three panel discussions entitled “Where Were the Watchdogs When the Savings & Loans Were Robbed?”
  • He (ACLI – John Bruins) said the ACLI is concerned about the reaction that may be received from consumers when their policy illustration changes, even though no changes have been made to the product being illustrated.
    • He noted that several companies have indicated receiving negative reactions from policyowners when their policy illustration changed.

2016 04 – LATF, NAIC Conference Call

  • 2017 0328 – GOV – THE ARBITRARY AND INCONSISTENT NON-BANK SIFI DESIGNATION PROCESS
    • [PDF-83p, VIDEO-youtube]
    • Anne Wagner (MO)
    • Holtz-Eakin, Douglas, President, American Action Forum
    • Kupiec, Paul H., Resident Scholar, American Enterprise Institute
    • Pollock, Alex J., Distinguished Senior Fellow, R Street Institute 
      Zaring, David, Associate Professor, Legal Studies and Business Ethics, The Wharton School, University of Pennsylvania
    • House – COMMITTEE ON FINANCIAL SERVICES – SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
  • Second, notwithstanding our disagreement with FSOC’s decision to designate Prudential and MetLife, we are even more troubled by the lack of clarity provided to regulators or even the companies themselves on the specific issues of concern that led to these companies’ designation.
  • This approach ultimately fails to make the financial system safer from the risks the company poses because regulators and the company have little information on how to address the company’s risk to the system.

–NAIC Letter to GOV

2015 0325 – GOV – FSOC Accountability Nonbank Designations –  3p

  • (p45) – Q15 – Is the list of products and activities set out in Annex 1 representative of the insurance activities and products that are conducted in the listed jurisdictions? Are there other products and activities that should be added to the list, for example because they have similar features as those in Annex 1? To what extent, if any, will the analysis of the products and activities in Annex 1 allow for the consistent application of the NTNI concept across jurisdictions? Also, are there additional or alternative terms for the listed products and activities that should be added to improve the completeness and clarity of the list?
  • (p47) – Q15 Stakeholders comments
    • Universal life is missing from the list…
      • on behalf of the European GSIIs, Aegon, Allianz, Aviva, Axa and Prudential
      • Association of British Insurers
  • (p48) – Q15 IAIS response

    • (ii) the IAIS decided to discontinue the NTNI product label and to focus on substantial liquidity risk and macroeconomic exposure and their related systemic risk transmission channels, the IAIS believes that it is no longer necessary to proceed with the publication of a list of products as proposed in the CD.

    • It is worth noting that the list of product features, and by extension products considered for the purposes of Phase Il Minimum Guarantees on Variable Product indicator calculation, remains unchanged from the 2013 methodology.

2016 0720 – IAIS – NTNI Consultation Document IAIS Responses to Comments – 51p

  • The IAIS received 56 submissions in response to the 2018 ICS Consultation Document of which 18 were requested by the respondents to be kept confidential.
  • Therefore, the comments that are posted here publicly are a subset of those that the IAIS will be taking into account as it moves forward with the ICS.
  • We thank all stakeholders and members who took the time to provide the many thoughtful comments on all aspects of the ICS.

iaisweb.org/page/supervisory-material/insurance-capital-standard//file/82711/public-2019-iais-field-testing-technical-specifications

  • Mr. Brown, CLU, presented his statement on behalf of the National Association of Life Underwriters.
    • Mr. Brown’s testimony emphasized the market confusion engendered by the FTC’s release of the 1.3% rate of return. He provided numerous examples of misleading and deceptive advertisements based on the FTC press release.
    • He also gave examples of cancellations and replacements of whole life policies caused by the FTC’s misleading release.
    • His point was the grave injury which the FTC’s irresponsible actions have caused average life insurance consumers.

1980-1, NAIC Proceedings

  • (p2) – Q1 – 1 – Based on the above characterisation of NTNI, is the terminology “non-traditional” confusing? If so, what might be a better term than NTNI? Additionally, what might be a better term than “traditional” for products and activities that are not NTNI?
    • The division into “traditional” and “non-traditional” products and activities is not properly fitting, considering that some products classified as systemically risky might be part of an insurer’s traditional business. Thus, terms like “insurance-driven” and “market-driven” would be more appropriate for clarifying the intention behind the distinction of the two. A clearer and also simpler way would be the separation between “potentially systemically risky” and “not systemically.
      • GDV – German Insurance Association
    • Yes, the term “non-traditional” could create confusion. The introduction to the Consultation explains that one main objective is to “provide further clarification on the concepts of NT and explain how their characteristics drive their systemic relevance.” (emphasis added) As this statement suggests, the concept of “non-traditional” is focused on identifying potential sources of systemic significance or risk, and is not intended to define whether an activity is one that insurers have “traditionally” pursued according to the ordinary meaning of that term. As the Consultation notes, an activity might generate systemic risk, even though it is one that has a long-established history, and is therefore one that is “traditionally” offered by insurers in a particular marketplace. Similarly, new products or practices may not be systemically risky, or might reduce overall systemic risk, despite being new or innovative.
      • American Academy of Actuaries
  • (p94) – Q2 – 2 – Are there any other benefit or liquidity features that should be taken into account in identifying NTNI products and activities?
    • It would appear that products where benefits are variable at the discretion of the insurer but where the insurer has no obligation to share profit, such as universal life and certain kinds of deferred annuities sold in the US are not covered in the table.
      • AIA Group – Hong Kong
  • (p94) – Q15 – Is the list of products and activities set out in Annex 1 representative of the insurance activities and products that are conducted in the listed jurisdictions? Are there other products and activities that should be added to the list, for example because they have similar features as those in Annex 1? To what extent, if any, will the analysis of the products and activities in Annex 1 allow for the consistent application of the NTNI concept across jurisdictions? Also, are there additional or alternative terms for the listed products and activities that should be added to improve the completeness and clarity of the list?
    • Universal life is missing from the list, and perhaps some consideration should be given to product packaging, secondary benefits and riders.

—  on behalf of the European GSIIs, Aegon, Allianz, Aviva, Axa and Prudential, Association of British Insurers

IAIS – Compiled Comments on Non-traditional Non-insurance Activities and Products – 153p

A: She <Sheila Bair> was saying that a couple of hundred banks would fail. I thought that was totally imprudent, totally incorrect, and should not have been said.
Q. Why was that imprudent and should not have been said?
A. Because these are people that are supposed to make sure that banks don’t fail.
Q. Why is it that publicly saying that all of these banks are likely to fail, why would you consider that to be imprudent?
A. Because it creates fear.
Q. And what is the problem of creating fear?
A. That it causes the banking system to freeze up. It causes it causes a hording of cash, both within the financial system and outside of the financial system, and that hording of cash results in a negative impact on the economy.
Q. All right. Then you go on to say: are no benefits by having prominent officials claiming that large financial institutions are
“There failing, are insolvent, are incapable of raising funds, or that they should be allowed to fail.”

Bank Atlantic vs. Richard X. Bove and Landenburg

  • Because of the concerns expressed by several states over the potential impact of the survey and at the suggestion of NAIC staff, a draft of the survey was forwarded to the Special (EX) Committee on the McCarran-Ferguson Act.
  • The Executive Committee designated Commissioner Earl Pomeroy, as chair of that committee and as the President of NAIC, to provide further input and direction.
  • Accordingly, on Sept. 10, I met with Commissioner Pomeroy, along with Mike Hessler (Ill.), Tom Reents (Neb.) and Art Chartrand (NAIC) to review these issues.
  • First, I wish to greatly express my appreciation to Commissioner Pomeroy for articulating his concerns and providing a productive framework for this subgroup to continue to carryout its charge.
  • As a result of that meeting, it was mutually agreed to suspend the activity on the current survey and to proceed as follows:
    • 2. Commissioner Pomeroy was very supportive of the subgroup recommending to EX3 Subcommittee that it pursue its investigation and make any appropriate recommendations in regard to the use of purported “consumer” groups fronting as leads or advertising agencies for insurance companies.

1991-1A, NAIC Proceedings

TO: Members of the Market Conduct & Consumer Affairs (EX3) Subcommittee
FROM: Brad Connor (Mo.), Chair of EX3 Subgroup on Unfair Trade Practices
DATE: October 11, 1990 .
RE: Meeting with NAIC Leadership on Subgroup’s Projects

Regulators – AIG – FCIC

  • 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: Part of the reason some people were not comfortable that the Trust owned 80% of AIG was because the investment could be subject to the jurisdiction of state insurance supervisors.
    • We worked with multiple state insurance supervisors and their national organization, the National Association of Insurance Commissioners (NAIC).
    • From the perspective of a federal supervisor, you are working with a collection of state insurance commissioners with very different financial support and very different capabilities.
    • With that understood, the insurance commissioners have significant political power.
    • That combination is one of the complicating factors for AIG and this became an issue with respect to the Trust.
    • ……………….
    • 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

  • AIG has put together a term sheet for NYSID , which they will be discussing this evening.
  • The term sheet would outline all pieces of liquidity plan, and plans for debt and equity injections, plans for asset sales as well as regulatory forebearance to move assets from subs to parent.
  • NYSID: Dinallo outlined the same plan that AIG gave us earlier — ie move muni’s from P&C subs to parent, and parent send equity in life insurance subs to the P&C subs in return.
  • There are a number of multi-state regulatory hurtles to this, but Dinallo thinks it is possible to do.
  • Dinallo described P&C companies in NY and PA as having very large capital cushions, and so he thinks that they can accommodate this.
  • He also noted negative consequences in insurance markets in general if AIG goes down (ie cost of insurance is likely be much higher if they file) and negative consequencies in muni bond market if GICs default so regulatory forbearance can be justified politically.
  • They are very happy to speak with our experts (Elise and team) tomorrow with more details.
  • My impression is that while they are comfortable with the capital dilution at the P&C companies, they are less knowledgable and comfortable about the equity value of the life companies, so they have work to do on that front.

2008 0913 – FCIC – FRB email (Mosser) – SB-AIG-35651 – 1p

Too Big to Fail

  • (p22) – Senator Richard SHELBY (R-AL). A threshold question comes to me: What constitutes ”too big to fail”? What constitutes that? 
  • Senator SHELBY. How do you define that? 
  • Sheila BAIR – FDIC. It is difficult to define.
    • I think it is market perception as much as a precise definition. 

2009 0506 – GOV (Senate-Banking) – Regulation and Resolving Institutions Considered “Too Big to Fail” – [PDF-121p, VIDEO-Senate]

  • We must get rid of “too big to fail.”
    • It must be declared today that there will not be government backup other than some sort of minimum level.
    • You could use  $100,000 on deposits if you want to. Insurance companies have had their own fund.
    • That $100,000 should absolutely be paid solely by the banking industry.
    • There shouldn’t be a nickel to the taxpayer, but it has to be clear that there’s a limit and anyone who has more than $100,000 to put in a bank can gauge whether that’s an appropriate risk reward to take, just as they would with mutual funds for example.
    • We have to address this, and we have to make it clear because there is, as we’ve seen in other countries in Asia, not enough money around to support irrational risk-taking, and there’s lots of irrational risk-taking going on out there.

—  Richard M. Kovacevich, President and CEO at Wells Fargo and Company

1999 – SOA – CEO Perspective: The Future of Financial Services, Society of Actuaries – 19p

  • In a paper read before the insurance commissioners in June last Mr. D. P. Fackler said:
    • Many have grave fears of bad results if the largest companies are allowed to continue to grow indefinitely, and if any fair, person thinks these fears groundless he must certainly admit that he can conceive that some companies might, by some possibility grow to such vast size that their assets and affairs could not be perfectly managed by their officers, supervised by their director. and examined by state insurance officials.

1893 – The Chronicle, v1 – GooglePlay

  • 1905 1208 – NYT – Life Insurance Reform:  Legislation Should Be as Simple as Possible–Put on the Brakes!, by David Parks Fackler, Consulting Actuary – [link]    
    • Vice President Perkins of the New York Life truly stated that without issuing a single new policy his Company’s assets would soon become one thousand millions. Verily, it is not a theory, but an actual situation that confronts us, and what are we going to do about it?
      • The writer has been urging limitation laws for nearly fifteen years, and believes that laws providing for putting on the brakes when a certain amount of assets is attained are more likely to be obtained and also more likely to be enforced than laws based primarily upon Insurance in force.
      • Laws on the latter basis would affect different companies very unequally. 
      • Checking one company when its assets- the source of danger-were only half as great as those of another company.

    • It would be very desirable to have limitation laws become effective when much less than of assets have been attained, but the writer fears that it may be impracticable to obtain such laws.

      • Limitation in some effective way that will begin to operate immediately, or very soon is the great desideratum.