2008 Financial Crisis - YPFS - Lessons Learned

  • YPFS Lessons Learned Oral History Project - [link]
  • One important lesson of the recent crisis is that as financial products and services proliferate and become more complex, they often fall through the regulatory cracks. (p16)

--- Testimony of Ann Yerger, Executive Director - Council of Institutional Investors - 106p

2009 0729 - GOV (Senate) - Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance, (CSPAN) Improving Corporate Governance, Jack Reed (D-RI) - [PDF-252p, VIDEO-CSPAN]

  • 2018 0507 - Yale - YPFS  - Lessons Learned Or YPFS Lessons Learned Oral History Project: An Interview with view with James Millstein, Jim Millstein -16p
  • 2018 1120 – Yale – YPFS – Lessons Learned Oral History Project Interview: Thomas Baxter  —  [BonkNote]  —  19p
  • 2020 - Yale - YPFS - Lessons Learned: A Conversation with Paul A. Volcker - 17p
  • 2020 - Yale - YPFS - Lessons Learned: Wendy Edelberg - 4p
  • 2020 - Yale - YPFS - Lessons Learned: Phil Angelides - 4p
  • Eric Dinallo
    • 2021 0225 - YPFS Lessons Learned Oral History Project: An Interview with Eric Dinallo  ---  [BonkNote]  ---  19p  
    • 2021 - Yale - YPfS - Lessons Learned: Eric Dinallo - 6p
      • (p4) - Which is, even if I had caught it and demanded that we fix it, the amount of political energy that would have been leveled against me would be  inconceivable.
        • Until the crisis happened.
      • (p6) - I wrote an op-ed for the [Financial Times] that lays out that there's a law, that [hedge fund manager] Bill Ackman and I argued about.
        • About not disparaging or questioning the solvency of an insurance company.
        • You can short the stock all day, and you can go out there and trash MBIA stock all day.
        • But when you start to question its solvency, that's actually against the law.
        • [Financial Times Article: 2008 0731- FT - Dinallo - Tackle false rumours about insurance companies]
  • 2021 - Yale - YPFS - Lessons Learned: Alejandro Latorre, Journal of Financial Crises  - 5p
  • 2021 - Yale - YPFS - Lessons Learned: Sarah Dahlgren, Journal of Financial Crises - 3p / 13p
  • Lessons Learned: Christopher Seefer
  • Lessons Learned: Gary Cohen
  • Lessons Learned: Phil Angelides
  • YPFS Lessons Learned Oral History Project: An Interview with Donald Kohn
    • (p6) - We've seen in the current crisis that life insurance companies take a pretty big hit in the stock market more than, someone said, more than airlines. I mean they're threatened on a number of fronts.
    • One obvious one is that there's a spike in mortality, but I think even more they're threatened by continued low-for-long interest rates, by deterioration in business credit quality, because they're huge holders of corporate debt. That's their main asset.
    • If that debt is riskier than they thought and prices have dropped, they've got to mark to market. They're under stress. It'll be interesting to see how that plays out and whether FSOC and others are as complacent coming out of this as they were going into it about the insurance industry
  • Lessons Learned: Eric Kolchinsky
    • Eric Kolchinsky served as managing director of ratings for ABS CDOs (asset-backed security collateralized debt obligations) at Moody's Investor Services from 2005 to 2007. Kolchinsky started his career in structured finance with stints at Goldman Sachs and Merrill Lynch. He joined Moody's in 2000 as vice president for credit.
    • In 2007, after Kolchinsky raised questions concerning the ratings of new deals in light of subprime downgrades, Moody's removed him from his client-facing position. Kolchinsky supervised methodology for structured finance valuations at Moody's Analytics for two years, before Moody's suspended him altogether in 2009.
    • Separated from Moody's, Kolchinsky testified before Congress about fraudulent rating agency practices and conflicts of interests. Since 2009, Kolchinsky has served at the National Association of Insurance Commissioners (NAIC), where he is presently director of structured securities and capital markets. 

ICS – Insurance Capital Standards – IAIS

  • The Insurance Capital Standard (ICS) is being developed as a consolidated group-wide capital standard for IAIGs.
  • 2015 – IAIS – IAIS Capital-related Stakeholder Meeting – 83p
    • Feedback from 2014 field testing
      • Mainly concerns with volatility and harm to the long term nature of insurance business
    • Additional feedback received from industry
    • Long duration discount rates should not be extrapolated from extremely limited tenors
    • Use more stable long-term rate based on a macroeconomic or historical approach
    • Transition period between liquid maturities and long term rate
  • 2019 1114 – IAIS – Technical Note on ICS Version 2.0 for the monitoring period – 4p
  • home.treasury.gov/system/files/311/2020-FIO-Annual-Report.pdf
    • 73 Certain insurers use derivatives to mitigate interest rate risk. See, e.g., NAIC & CIPR, U.S. Insurers’ Derivative Exposure Increased 9% in 2018 (2019), https://www.naic.org/capital_markets_archive/special_report_191217.pdf.
      74 Although interest rates used in discounting reserves are prescribed under statutory accounting principles, life insurers must complete asset adequacy testing as part of their statement of actuarial review required in annual regulatory filings. Reserve adequacy is determined by calculating the difference between invested assets and thepresent value of future premiums, less the present value of future claims under various interest rate path scenarios. See, e.g., American Academy of Actuaries, Asset Adequacy Analysis (September 2017),
      https://www.actuary.org/sites/default/files/files/publications/Asset_Adequacy_PN_092517.pdf
    • 75 American Academy of Actuaries, Report of the American Academy of Actuaries’ C3 Life and Annuity Capital Work Group On RBC C3 Requirements for Life Products (September 2009), 4-6, https://naiccms.org/sites/default/files/inline-files/committees_e_capad_lrbc_AAA_0909_report_rbc.pdf.
  • 2020 – CEPR – Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Eliminating Capital Requirements – 53p
  • 2021 12 – AP – Exploring the market risk profiles of U.S. and European life insurers – 47p
  • Aggregation Method – NAIC
  • Basel
  • Building Block Approach – FRB
  • BCR – Basic – IAIS
  • GAAP Plus
  • Group Capital Calculation (GCC) – NAIC
  • ICS – IAIS
  • ORSA
  • RBC – NAIC
  • Senate passed S. 2270, “the Insurance Capital Standards Clarification Act of 2014
  • Collins Amendment
  • IAIS – Insurance Capital Standards
    • IAIS- [link-IAIS Page]
    • 2016 0721 – IAIS – Global Capital Standards and the Development of the Insurance Capital Standard – [VIDEO-Youtube]
      • 1:00 {US may be the problem – Individual Companies vs Group}
        • Kevin McCarty (NAIC – FL Insurance Commissioner) – {I don’t know that I would agree with that}
    • 2017 – Frequently Asked Questions for The global risk-based Insurance Capital Standard (ICS), Updated 21 July 2017 – 9p
    • 2019 0513 – IAIS – Development of the Insurance Capital Standard (ICS) – 101p
    • 2019 0613 – IAIS – Session 2: ComFrame and the ICS – Moving Towards Implementation – [VIDEO-Youtube]
    • 2022 0624 – IAIS – Panel: Insurance Capital Standard – [VIDEO-Youtube]
    • 2019 1120 – IAIS – Explanatory note on the Insurance Capital Standard (ICS) and Comparability Assessment – 4p
    • IAIS – Comparability Assessment – [link]
      • The comparability assessment project is an initiative that will ascertain whether the Aggregation Method (AM), being developed by the United States and other interested jurisdictions, provides comparable outcomes to the ICS.
    • 2022 – IAIS – Public consultation on draft criteria that will be used to assess whether the Aggregation Method provides comparable outcomes to the Insurance Capital Standard
  • AAA – American Academy of Actuaries
    • actuary.org/node/13808 – Insurance Capital Standards
    • 2021 – AAA – Aggregating Regulatory Capital Requirements across Jurisdictions Theoretical and Practical Considerations, Research Paper 2021, No. 1 – 60p
  • ACLI – American Council of Life Insurers
  • BIS – Bank for International Settlements
  • DOT – Department of the Treasury
    • FIO – Federal Insurance Office
      • FIO Study – ICS – <??>
        • 2020 1008 – Federal Insurance Office Study on the Insurance Capital Standard
          Posted by the Department of the Treasury on Oct 8, 2020 – [link]
          • 14 Comments
      • FACI – Federal Advisory Committee on Insurance
        • 2021 0210 – FACI – FACI International Subcommittee – Perspectives on the Request for Information (RFI) on a FIO Study of the ICS – 22p
          • 2021 0216 – Birny Birnbaum (FACI Member) – Dissenting View of Birny Birnbaum – FACI International Subcommittee Recommendations – 4p
        • 2021 – FACI –  4p
          • re: FIO Study – ICS –
            • The FIO study should be analytical and focus on the performance of the AM relative to the MAV ICS
            • The study should explore the themes identified across the RFI responses and demonstrate how they would be treated/evolve under the AM and MAV ICS individually and relative to one another – e.g., effects for long-duration business and investment, procyclicality, implementation costs, consumer protection, etc.
            • The study should assess the performance of the AM relative to the MAV ICS over time – covering periods or scenarios sufficient to capture economic cycles and catastrophic financial events.
            • Recognizing the respective mandates are different, the FIO study should complement rather than duplicate the study being undertaken by the Federal Reserve Board’s Insurance Policy Advisory Committee (IPAC)
  • FRB – Federal Reserve Board
    • 2019 09 – FRB – Comparing Capital Requirements in Different Regulatory Frameworks – 40p
    • 2021 0526 – FRB to NAIC – Remarks by Randal K. Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System, via prerecorded video to NAIC International Insurance Forum – 9p
    •  IPAC
      • 2022 0502 – IPAC – IPAC Working Group – Comment/Feedback on the Federal Reserve’s Proposed Framework for the Supervision of Insurance Organizations – 15p
      • 2022 06 – IPAC Report / FRB – IPAC to FRB – Potential Impact of the International Association of Insurance Supervisors’ Insurance Capital Standard on the Life Insurance Industry, Policyholders and Markets in the United States – 68p  —  <BonkNote>
        • Milliman – Presentation on the Insurance Policy Advisory Committee (IPAC) Report on the Potential Impact of the ICS on the U.S. Life Insurance Industry, Policyholders and Markets – 32p
  • GAO – Government Accountability Office
    • 1990 05 – GAO – European Community: U.S. Financial Services’ Competitiveness Under the Single Market Program – 76p  —  [link]
    • 1991 03 – GAO – Deposit Insurance: A Strategy for Reform – 220p
    • 1992 03 – GAO – Securities Markets: Challenges to Harmonizing International Capital Standards Remain – 72p  —  [link]
    • 1994 03 – GAO – International Banking: Strengthening the Framework for Supervising International Banks –  82p  —  [link]
    • 2015 0625 – GAO – International Insurance Capital Standards: Collaboration among U.S. Stakeholders Has Improved but Could Be Enhanced – GAO-15-534 – gao.gov/products/gao-15-534?source=ra
  • IASB/FASB
  • NAIC
  • SOA – Society of Actuaries
    • soa.org/search/insurance-capital-standards
    • 2011 – SOA – Recommended Readings – 2p
      • New Basel III Rules are Announced: While most of us will not live under banking rules, the regulators are talking across sectors more and more.
      • You can be certain that they will be looking to eliminate any regulatory arbitrage opportunities across sectors in the future, which means that insurance capital standards will be compared very carefully to these bank standards. 
    • 2015 – SOA – Life Insurance Regulatory Structures and Strategy: EU Compared with US, Society of Actuaries – 92p
    • 2019 – SOA – Insurance Capital Standards: Changes on the Horizon – 4p
  • Other
  • 2016 0421 – Actuarial Association of Europe – IAIS Global Capital Standards – 37p
  • Academic Papers –
    • 2021 – AP – Asset concentration risk and insurance solvency regulation, Fabian Regele, Helmut Gründl – 45p
  • FRB / DOT –
    • 2019 09 – FRB / DOT – Report to the Congress: Efforts of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System with respect to Global Insurance Regulatory or Supervisory Forums in 2018 – 24p
    • 2020 12 – FRB / DOT – Report To The Congress: Efforts of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System with Respect to Global Insurance Regulatory or Supervisory Forums in 2019 – 23p
    • 2022 02 – FRB / DOT – Report to Congress: Engagement in Global Insurance Regulatory or Supervisory Forums in 2020 – 24p
  • NAMIC
    • 2016 0104 – NAMIC / FSB – RE: National Association of Mutual Insurance Companies Submission on Proposed Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms. – 8p
  • PWC –
    • 2016 11 – PWC – Aspirations and realities: Gauging the impact of the ICS on capital management – 16p
  • The purpose of the ICS is to create a common language for supervisory discussions of group solvency to enhance global convergence among group capital standards.
  • The ultimate goal is a single ICS that includes a common methodology by which one ICS achieves comparable, ie substantially the same, outcomes across jurisdictions

2019 1120 – IAIS – Explanatory note on the Insurance Capital Standard (ICS) and Comparability Assessment – 4p

  • 2014 – NAIC – NAIC formed the ComFrame Development and Analysis (G) Working Group (CDAWG) – Kevin McCarty (FL)
  • 2013 1212 – GOV (House) – International Finance System, Part 1 (CSPAN)
    • [PDF- , VIDEO-CSPAN]
    • 01:10:00 – Neugebauer / Lew – FIO, Late Reports, McRaith, FSOC, Banking vs Insurance, US v Europe, Complicated issue, states, feds, opening the conversation, G-20, Capital Standards
    • 01:19:00 – Bill Foster (D-IL) – Banking Capital Standards to Insurance, FSOC
  • 2014 0408 – GOV (House) – Who’s In Your Wallet: Examining How Washington Red Tape Impairs Economic Freedom
    • [PDF-629p, VIDEO-YouTube]
    • Clip – [VIDEO-YouTube] – Congressman Randy Neugebauer questions Scott Alvarez, General Counsel for the Federal Reserve Board of Governors, about capital standards for insurance.
      • Does the Fed support international standards being imposed on our domestic industry?
      • What objective evidence was used to justify global capital standards for insurers?
      • What cost benefit analysis was done?
      • How will the Fed work with state regulators to get their input on this issue?
    • House – Committee on Financial Services
  • S. 2270 – Insurance Capital Standards Clarification Act of 2014.
  • Equity Risk Premium – ICS – Capital Standards
    • 2019 – AIA /IAIS – Three Bucket Approach – 9p
      • Currently the Insurance Capital Standard (ICS) makes no allowance for the spread over the risk free rate that is produced by equities
      • This is despite the fact that it is widely accepted that equities earn more than risk-free assets over the long term
      • This spread is commonly referred to as the equity risk premium and has been widely discussed in academia by financial economists and other experts

Computers

  • New Products and Special Markets
  • A. Modern computers make it feasible to consider marketing a flexible policy under which the premiums and benefits could be changed to meet the changing needs of the policyholder.

 --  Ardian C. Gill

  • Computers may make it feasible to produce a highly flexible policy with benefits and premiums that vary with the policyholder's whim.
  • Whether it is desirable to do so is another question.
  • The truth probably is that the general public neither needs nor wants a great deal of flexibility.
  • Any attempts on our part to anticipate his changing needs and to build into our policies the necessary flexibility may well be futile for the run-of-the-mill policyholder.

1967 - SOA - Individual Life and Health Insurance, Society of Actuaries - 62p

  • The actuarial department programs the various computer aids to selling.
  • Although we print complete booklets containing ledger sheets and similar information, we also have a personalized proposal service.
    • From a simple card questionnaire we can calculate the amount of insurance required for the prospect to complete his desired insurance program.
  • We offer another widely used computer service where the agent checks a card to indicate the type of illustration he desires and the amount and plan of insurance.
    • Within a short time he has a complete ledger statement for the prospect. Illustrations of net cost, split-dollar insurance, key man coverage, deferred compensation plans, and minimum deposit programs are available.

--  Henry C. Unruh, Provident Life

1965 - SOA - Digest of Discussion of Subjects of Special Interest: Individual Life Insurance, tsa65v17pt2dn488 - Society of Actuaries - 11p

Taxonomy – Changes – Term to Permanent

  • A few companies have introduced a product known as Universal or Total Life.
    • The concept involves… the company withdraws an amount sufficient to pay the premiums for an annual renewable term coverage for the amount selected for the for the current policy year. (p70)

1982 – Book – Life Insurance, by Huebner and Black   

[Bonk: This passage was in Chapter 5 titled “Term Insurance]

  • Out of curiosity, I examined Conning and Company’s printed studies on twenty-two large stock life insurance companies …
  • Among those companies showing a more rapid growth in the whole life and endowment account, I found the following changes had transpired between 1961 and 1966:
    •  (2) modified premium whole life policy had been classified as term insurance in 1961 and as whole life insurance in 1966; 

—  Frederick S. Townsend

1967 – SOA – Digest of Discussion Subjects of Special Interest – Individual Life and Health Insurance, Society of Actuaries – 62p

  • The unit expense seeds used in the 2022 GRET and the 2021 GRET recommendations were based on the average of the 2006 through 2010 Annual SOA expense studies.
    • These studies differentiated unit expenses by type of individual life insurance policy (term and permanent coverages).
  • As neither the GRET nor the Annual Statement data provided differentiates between these two types of coverage, the unit expense seed was derived by judgment based this information

2021 0804 – SOA to NAIC – RE: 2022 Generally Recognized Expense Table (GRET) – SOA Analysis, Society of Actuaries – 5p

Trends

  • First of all, what are the current trends with respect to the sales of Universal Life?
  • As most of you are aware, the slow movement to Universal Life has become a tidal wave.

—   Randall P. Mire

1983 – SOA – Universal Life (rsa83v9n32), Society of Actuaries – 22p

  • In recent years many companies have experienced a shift from permanent to term insurance, probably because of the recent recession and the emphasis on the lower going-in cost for term insurance.

— William H. Bowman

1975 – SOA – An Approach to Reserve for Term Insurance Conversion, Society of Actuaries – 36p

  • …. a significant trend within the life insurance industry to conduct business within a holding company….

119 Cong. Rec. (Bound) – House of Representatives: November 26, 1973

Congressional Record (Bound Edition). Thursday, November 29, 1973.

Communication

What they did not understand, they did not find useful.

1990-1A, NAIC Proceedings – NAIC / LIMRA – Universal Life Disclosure Form Focus Group Summary, Consumer Issues Disclosure Working Group – NAIC  —   [BonkNote]  —  10p 

  • By readability, I do not mean the use of two syllable words, three word sentences and a high score on the Flesch test.
  • What I mean is the ability to communicate what you are, in fact, offering in your contracts and the words the agent uses to explain the benefits, conditions and limitations of the contract.

—  Angele Khachadour, Miller & Daar, Mill Valley, CA

1981 – SOA – The Life Insurance Business—The View of Consumerists (rsa81v7n17), Daphne Bartlett – Moderator, Society of Actuaries – 16p

  • When it comes to technical language and technical calculations which can be used to communicate with other actuaries, state insurance department personnel, or lawyers, an actuary is indeed well trained.
  • However, when it comes to talking to a basically uninformed public, a very well intentioned and technical document made up by an actuary might tend to be more confusing to the public at large than that which was made up by an informed and honest member of the company’s agency management. (p5)

—  Frederick A. Randall

1974 03 – SOA – The Actuary – Society of Actuaries – 6p

Root Cause

  • FSB
  • As we began researching this problem, two questions became central.
    1. What criteria should we use to evaluate suggested changes and alternatives?
    2. What is the root cause of current problems, and why have previous corrective efforts been so unsuccessful?
  • As research continued, at some point we started to focus on the uses of life policy illustrations.
    • This proved to be a key concept in addressing those two major questions.
  • First, let’s list the major user groups: (1) consumers, (2) agents and brokers, (3) life companies, and (4) third-party analysts. We are all familiar with the first three groups.
    • The third-party analyst is a more recent phenomenon and could be a CPA, consulting….”

—  John R. Skar

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

  • 2018 – A Review of Root Cause in Insurer Insolvencies and Impairments,  by Dave Heppen and Veronika Cooper, Society of Actuaries – 6p

Tipping Point

Dear Editor:

Life Insurance Sales Illustrations – A Call to Action

  • We have reached the stage where a life insurance sales illustration is hardly worth the paper it is printed on.
  • Yet thousands of agents are confidently presenting these illustrations to frequently unsuspecting clients.
  • I have yet to discuss this issue with anyone in the industry – home office or field – who doesn’t agree that the current situation is a mess.
  • But everyone also agrees that no single company can try to institute change by, withdrawing from the illustration game.
  • Sooner or later, surely, the whole house of cards will come tumbling down.

—  Daphne Bartlett

1988 – Article from: The Actuary June 1988 – Volume 22, No. 6

  • The Tipping Point: How Little Things Can Make a Big Difference, Malcolm Gladwell

 

  • I’d like to take that one step further.
  • What I noticed was there is a requirement for in-force illustrations, and people may have thought they bought one thing and whenever you have to give them an in-force illustration with a current disciplined scale, they’re going to realize they bought something else.
    • I think many companies will have serious problems with policyholder retention.

—  Mark J. Greene, FSA. MAAA, Supervising Actuary, New York State Insurance Department

1995 – SOA – Illustrations and Nonforfeiture Values, rsa95v21n123 – Society of Actuaries – 14p

NON

  • 14. Paragraph 25: The comments regarding level playing field could be extended to noninsurance (ie investment-related) products offered by insurers.

2011 0926 – IAIS to OECD  – Comment on the OECD’s draft paper on Policyholder Protection Schemes: Selected Considerations 

  • IAIS to OECD Comment Letter – [Automatic Download – 5p] <Bad link 05/2022>
  • OECD’s draft paper on Policyholder Protection Schemes: Selected Considerations – 64p