Core Business

  • By contrast, the core business of an insurance company is transferring and pooling risk.258
  • If premiums are prepaid, this does not necessarily entail any short-term borrowing.
    • That means that the risk that an insurance company will have to sell large quantities of assets is smaller.
  • This is not to say that insurance companies face no liquidity risk at all.
    • AIG faced a severe liquidity problem, not just in its parent company, but apparently also in its regulated life insurance subsidiaries.259
  • And it has been recognized for some time that life insurers that issue policies that accumulate large surrender values can become vulnerable to runs.260
  • But it  seems that liquidity risk – the great villain of the recent crisis – is a larger concern for banks than for insurance companies.261
    • That suggests that credit risk is a relatively bigger problem for an insurance company than a bank.

256 See Xavier Freixias & Jean-Charles Rochet, Microeconomics of Banking 4-5 (1997).

257 See Gary B. Gorton, Slapped By The Invisible Hand:  The Panic of 2007, 47-50 (2010) (describing how decreased willingness to accept structured debt as collateral led to asset sales, falling prices, and systemic insolvency).

258 See Jeffrey Carmichael & Michael Pomerleano, The Development and Regulation of Non-Bank Financial Institutions 81 (2002).

259 See supra note 159 and accompanying text.

260 See Vaughan &Vaughan, supra note 1, at 274-75.

261 See Guillaume Plantin & Jean-Charles Rochet, When Insurers Go Bust 2(2007).  

2010 – LR – Rating Dependent Regulation of Insurance, by John Patrick Hunt, Connecticut Law Journal – p101-186p – 303p

  • 2014 0909 – GOV (Senate) – Wall Street Reform: Assessing and Enhancing the Financial Regulatory System, Financial Regulatory System (CSPAN)
    • [PDF-177p, VIDEO-CSPAN] – <Bonk: mp3, mp4>
    • (p24) Mr. TARULLO.
      • So, Senator, I guess I would draw a distinction between the creation of capital standards for traditional or current insurance activities, on the one hand, and an assessment of systemic risk on the other.
      • My own reading of the FSOC process with respect to Prudential and AIG is that there is not a lot of concern about the core insurance activities of those companies.
      • The concerns were with respect to some nontraditional insurance activities where runnability is more of a concern, and also with respect to things that are not insurance activities of any sort.
      • I think that is where the analysis would allow one to conclude there is systemic importance.
      • I personally do not think that the issue of whether there is systemic importance in traditional insurance activities has really been broached, and I am personally not sure we need to broach it.
      • I mean, my pretty strong presumption would be that there is not.
    • Senate – Committee on Banking, Housing and Urban Affairs

Receivership

  • UILA – Uniform Insurers Liquidation Act
  • 1940 – LR – Legislation: The Uniform Insurers Liquidation Act – 12p
    • 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
  • 2021 – NAIC – Legislative Priorities – 1p
  • Support Legislation to Help Protect Policyholders During an Insurance Receivership
    • Current law provides no deadline to the federal government for filing claims in an insurance receivership, causing proceedings to drag on for years and reducing recoveries for insurance consumers.
    • Congress should support NAIC proposed legislation that would require the federal government to file claims it may have against insolvent insurance companies within a specified time consistent with bankruptcy proceedings.
  • Privide State Insurance Regulators a Vote on the Financial Stability Oversight Council (FSOC) (H.R. 3099)
    • The insurance sector is the only financial services sector whose primary regulator is not a voting member of the FSOC.
    • The Primary Regulators of Insurance Vote Act (H.R. 3099) would grant state regulators full participation on FSOC by allowing them to vote.
  • Oppose Preemption of State Insurance Data Privacy and Data Security Standards
    • Federal data privacy and security legislation should acknowledge the state insurance regulatory framework and not undermine state laws and regulations to protect the best interests of insurance consumers.

Premiums, Costs, Values and Benefits

  • In the case of true Universal Life…the product is modular and adjusts instantaneously to changes in benefits, premiums, and experience.

—   George R. Dinney:

1982 – SOA – Programs to Conserve Traditional Life Insurance Policies, Society of Actuaries – 18p

􀁸 How much do the benefits build up in the policy?

􀁸 How will the timing of money paid and received affect interest?

2018 – LIBGWG – Cude Letter / Markup Life Insurance Buyer’s Guide – Revised 2-9-18 for discussion on conference call 2-22-18

  • 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

  • 1988-2, NAIC Proceedings
  • (p434) – Project No. 4a “Universal Life – Review Regulators Problems with Model Adopted, Review Product of NAIC (A) Task Force on Universal Life”
    • ATTACHMENT TWO-B – Draft 4/11/88 – RE: Proposed Regulations Concerning the Valuation of Universal Life Insurance Plans – A proposal for a revision of the valuation section of the NAIC Model Universal Life Regulation is embodied in the draft of a regulation currently being considered by the California Department of lnsurance
      • The Standard Valuation Law assumes that future premiums and future benefits are fixed, and then establishes the reserves as the present value of future benefits less the present value of future premiums, in other words the premium shortfall.
        • Since future premiums and benefits for universal life plans are unknown the formula breaks down and requires restatement.
        • The purpose of the regulation is to establish such a restated procedure for universal life plans.
  • The Working Group discussed some language that was hard to understand referring to premiums and benefits. 
  • The Working Group agreed to include “premiums or values vary from year.”
  • The Working Group agreed that language comparing different types of policies should be included in the next draft.

2018 0319 – NAIC – (LIBGWG) Life Insurance Buyer’s Guide Working Group – Conference Call NAIC Proceedings

  • Section 8. Disclosure Requirements
  • Commissioner Hager of the Universal & Other Plans (A) Task Force stated that there appeared to be disclosure problems with universal life plans and that the identification of these items should be placed on the Actuarial Task Force agenda.
    • The main concern was that an unsophisticated buyer purchased a policy and did not know what the coverages, benefits and limitations were. 
  • Some of the items identified which should be disclosed:
    • (2) adequate disclosure of the fact that a premium quoted will not support the contract for the whole life if the policy is a Universal Life policy; 

1988 Proc. II – Universal Life Model Regulation – Citations (ULMR) (MDL-585)

  • Jack Reed (D-RI): That is, in your notion, too, about simplifying, et cetera, the Consumer Financial Protection Bureau, and Professor Schwarcz mentioned this, has now modeled mortgage sort of language.
    • I presume that you are working toward, your comments, sort of model language for disclosures, for transparency. Is that–
  • …..
  •  Terri VAUGHAN, NAIC CEO / IA – And that is-this working group is discussing how to do that.
    • I have to say, my suspicion is it is going to be a little harder in insurance given the variety of the products.
      • It is a little more complex than it is in the mortgage area.
  • Chairman REED. Right.
    • But I think for that reason also it might be even more necessary so that your efforts are appreciated and should be expedited.  (p19-20)

2011 0914 – GOV (Senate-Banking/SII) – Emerging Issues in Insurance Regulation, Jack Reed (D-RI)  —  [BonkNote]

  • ACLI – American Council of Life Insurance
    • 1982-1, NAIC Proceedings – 1981 0831 – ACLI – Statement of the American Council of Life Insurance  to the NASAA NAIC Joint Regulatory Insurance Products Study Committee – 10p
      • [Universal Life Policy] …merely afford purchasers greater flexibility in designing their contracts so as to meet their individual needs.
    • 1982-1, NAIC Proceedings – 1981 1215 – Letter – ACLI to NAIC – Cost Disclosure for Universal Life, by the Special Task Force of the ACLI Cost Disclosure Subcommittee to NAIC Task Force on Life Insurance Cost Disclosure – 4p
      • The council has now developed a recommendation for universal life insurance, which we would like to present for your consideration.
      • The essence of the proposal is that universal life insurance be treated for cost disclosure purposes as a life insurance plan with a nonguaranteed cost element.
        • Thus, the policy summary would show for the prescribed policy years the anticipated premiums and, both on the guaranteed and currently illustrated bases, the death benefits, cash surrender values, and endowment amounts, if any.
        • An additional item of information that is recommended to be required in the policy summary is the point at which the policy will expire based on the policy guarantees and the anticipated premiums shown in the summary.
    • 2013 0423 – Legal Case – Johnston and Johnston v Conseco, 13-30010_Documents ACLI Amicus Brief – 48p
    • 2015 0930 – ACLI to NAIC Letter –
      • Life insurance policy illustrations contain important and useful information to consumers so they can make informed decisions about the policy they are considering.
      • The NAIC Life Insurance Illustrations Model Regulation was designed to make sure illustrations represent an accurate depiction of the policy and its benefits, foster consumer education and make illustrations more understandable. 
    • 2019 1109 – ACLI – Michael Lovendusky – Life Insurance Illustrations Working Group (NAIC)
      • …completely Dynamic services and policy opportunities for their customers to purchase and to elect a variety of options.
  • The personalized information in the Policy Overview is the premium for the policy – based on information known to the producer or insurer at the time and subject to change based on additional or revised information – and that information can be provided prior to purchase.
  • If an insurer can produce an illustration for a complex, investment type life insurance product prior to the consumer purchase, it is clearly possible for an insurer to provide the premium for a policy prior to purchase.

2019 0830 – Letter – CEJ / Birney Birnbaum to NAIC – LIIIWG – Life Insurance Illustrations Issues Working Group – Birny Birnbaum, CEJ Letter – 12p

Search For Yield

  • 2013 – FRB – Are the Fed’s low interest rate policies pushing investors toward risk? – 4p
  • 81. AIG also chased higher yields by investing heavily in bonds of lengthy maturity
    • As a consequence, AIG grossly mismatched the maturity dates of the collateral investments and the underlying securities loans, which rarely had terms exceeding thirty days.
    • A June 27, 2008 Bloomberg article reported that, state officials said AlG invested more than half the collateral in debt securities that on average would pay off in three to ten years.
      • 2008 0627 – Bloomberg – AIG to Absorb $5 Billion Loss on Securities Lending: Insurance Units Wrote Down $13B Tied To Mortgages, by Miles Weiss  —  [BonkNote]
    • Because AIG loaned bonds for periods ranging from overnight to 60 days, the insurance units could be exposed to a cash crunch if borrowers suddenly returned securities and demanded their collateral back. 
    • “We were surprised at the length of the paper,’ said Joseph Fritsch, director of insurance-accounting policy at the New York State Insurance Department in Manhattan.”  (p22-23)

2010 0629 – LC – Transatlantic vs AIG – Affirmation of Anthony J. Albanese – 116p

<June 28, 2008 – Bloomberg – Miles Weiss>

Mortality Tables

  • The mortality table is the instrument by means of which are measured the probabilities of death and survival.

1940-Supplement NAIC Proceedings 

  • 1919 – Book – Sources and characteristics of the principal mortality tables, by Henry Moir – 98p
    • The Actuarial Society of America
  • It should be remembered that the CET Table was prepared to enable companies to charge a proper rate for extended term coverage.

—  Elgin R. Batho

1961 – SOA – Premiums – Digest of Small Company Forum, tsa61v13pt2d44 – Society of Actuaries – 9p

ERM – Enterprise Risk Management

  • 2010 – SOA – Did Enterprise Risk Management Really Work? – The Case of Lincoln Financial Corporation, Scott Engle, Presented at 2010 Enterprise Risk Management Symposium, mono-2010-m-as10-1-engle – Society of Actuaries – 18p
  • 2013 – SOA – ERM-ILA Model Solutions, Fall 2013, edu-2013-10-erm-ila-exam-sol-wt66id – Society of Acuaries – 38p
    • Learning Objectives:
      • 2. The candidate will understand the concepts of risk modeling and be able to evaluate and understand the importance of risk models.
      • 4. The candidate will understand the approaches for managing risks and how an entity makes decisions about appropriate techniques.
    • Pricing Risk:
      • o Consumer behavior is partially dependent upon product performance, which is contingent upon market performance.

Troubled Companies

1994 04 - CBO - The Economic Impact of a Solvency Crisis in the Insurance Industry, Congressional Budget Office  ---  [BonkNote]  ---  80p

  • Many troubled companies have become so because management has not been structured to recognize and address the problems that can arise in the insurance industry.

2004 - NAIC - Market Conduct Examiners Handbook - 1582p

  • An increase in the number or type of complaints filed by policyholders, claimants, employees, agents or third parties which could indicate liquidity or internal control problems (consumer affairs).  (p8)

1998 - NAIC - Financial Analysis Handbook - 349p

  • The Financial Analysis Handbook (the Handbook) was developed under the direction of the NAIC Financial Analysis Handbook Working Group.
  • 2004 - NAIC - Communication and Coordination Among Regulators, Receivers, and Guaranty Associations: An Approach to a National State Based System, Receivership And Insolvency (E) Task Force - 20
  • 2009 - NAIC - Alternative Mechanisms for Troubled Insurance Companies, NAIC Restructuring Mechanisms for Troubled Companies Subgroup of the Financial Condition (E) Committee - 64p
  • 2005 0419 - NAIC / FRB - Report of the NAIC and the Federal Reserve System Joint Troubled Company Subgroup: a comparison of the insurance and banking regulatory frameworks for identifying and supervising companies in weakened financial condition - 44p
  • NAIC - Troubled Insurance Company Handbook
  • NAIC - Troubled Company Working Group of the Examination Oversight (EX4) Task Force
    • 1990-2, NAIC Proceedings
      • Chair - Norman Koefoed, Chair (Ill);
      • (p ) - The Chair notified the task force that a Non-Investment Bonds Working Group had been appointed to review companies with large holdings in non-investment grade bonds.
        • The group had met three times since being organized.
        • The initial concern has been with Executive Life Insurance Company of California.
        • The group has received reports from both an independent actuarial firm and the company and is monitoring the situation.
        • The chair advised that no precipitous action should be necessary against the company.
        • In addition, the group has provided the California Department with a list of recommendations regarding needed information from the company.
        • The chair stated that information provided to the group indicates the company to be in a very liquid position, with surrenders declining as compared to January and February of this year.
        • Mr. Montgomery stated that the Actuarial Valuation Report from Milliman and Robertson should be completed by week end and copies would be available to states from the actuarial firm. 
  • [Business of Insurance - Liquidation of Insurance Company]
  • (p20) - Karl L. Rubenstein, Special Deputy Insurance Commissioner, State of California -  But the Court went on to say what it saw as the business of insurance is that which touches the fundamental relationship between the policyholder and the insurance company, which, of course, would be things such as the policy,
    • and there are many cases throughout the country that hold that the insurance regulatory statutes, specifically the insolvency statutes, are part of the insurer's - excuse me, yes, of the insured's insurance contract, and that is bound by them, and since these State insurance insolvency regulations will determine whether or not a dollar that is available to - that is in the estate of the insurance company will be paid to the policyholders or paid to somebody else is an issue of overriding importance to State regulators today.
  • (p71) - Several decisions have held that under McCarranFerguson, the state priority statutes should apply and that liquidation of insurance companies is "the business of insurance" within the meaning of McCarran-Ferguson. See, for example, ...
  • (p71) - In the 1987 case of Gordon v U.S. Dept. of Treasury,24 however, it was held that liquidation of an insurance company is not "the business of insurance."

1988 0914 and 0915 - GOV (House) - Insurance Company Failures, John Dingell (D-MI)   ---   [BonkNote]

  • 1878 - GOV (New York) - Testimony Taken Before the Senate Committee on Bank, re: De Witt C. Ellis - Volume III  ---  [BonkNote]  ---    [PDF-681p-GooglePlay]
    • (p1757-1758) - ARGUMENT OF HON. O. W. CHAPMAN ON BEHALF OF THE RESPONDENT   - In the State of Massachusetts, three years ago, there was a life insurance company.  It was being attacked; wreckers were after it.
    • The confidence of the people in it was being undermined; and it looked as though the company was bound to go into the bands of a receiver.
    • What does the Superintendent of the Insurance Department do there? Go down and examine it and on finding a deficiency of assets, pass it over into the hands of a receiver to be crushed?
    • On the other hand, looking over the broad field, he takes the insurance company under his hand, nurses it, carries it along; and today it stands as one of the most prominent institutions of the kind in the State of Massachusetts, saved, and the policyholders saved, and the insurance interest of the State saved by just that kind of policy.
    • And two weeks ago in the State of Connecticut, what occured relative to another insurance company?
      • On examination it was found there was a deficiency of assets from $1,000,000 to $4,000,000, and yet what does the department of that State, in conjunction with the Supreme Court, do in the matter of the supervision of that company?
        • Does it pass it over into the hands of a receiver? If it had been done, the policyholders would not have received twenty-five cents on the dollar.
          • Not at all; but the broad, liberal, charitable view was taken.
        • The State department of Connecticut, in conjunction with the Supreme Court, put new men in charge of it, and the company promises to go on to success.
      • It certainly will unless outside influences are brought to bear against it to undermine and crush it.
    • (p1793) - Take the case, as a further illustration, of insurance companies.
      • There have been failures of small insurance companies within the past few years, and the confidence of the public has been badly shattered in connection with them.
      • Suppose, a few years ago, the larger insurance companies, realizing the rocks that were lying ahead, had joined together, and taken up these smaller ones and gone on, the confidence of the public would have remained in the insurance interest, policyholders would have been protected, and the policyholders in these larger companies would have been uninjured, how much better would it have been for the insurance interest? 

Policy Conversion

  • The option of conversion to permanent insurance without evidence of insurability began to be common in term policies on this continent during the 1890’s.

1949 – SOA – Term Conversion Option, Elgin G. Fassel, Society of Actuaries – 42p