GICs – Guaranteed Investment Contracts

  • 412(i)
  • p4 – Cohen sees the fundamental industry problem as insufficient profitability, leading to greater risk-taking and weaker capital ratios. He attributes this in part to the presence of too many companies, and he would remove barriers to consolidation and not allow banks to enter the field. Cohen Believes that life insurers are not profiting from the issuance of GICs because they write them at too narrow a spread between the yields they receive on their investments and the yields they pay on GICs, not allowing for an adequate risk premium.

—  Jeffrey Cohen, Vice President, Goldman, Sachs & Company

1991 – FRB-Boston -The Financial Condition and Regulation of Insurance Companies – Conference, Series No. 35 – [link to PDFs] – conf35.pdf – 296p

  • 1991 0903 – NYT – Worry Over Retirement Funds, By Eric N. Berg – [link]
    • GIC’s, Executive Life, Mutual Benefit
  • … around 1980, with the growth of 401(k) and defined contribution pension plans, insurance companies entered the guaranteed interest contract (GIC) business.

2005 – SOA – A Strategic Analysis of The U.S. Life Insurance Industry Part II: Products, A look at the evolution and growth of U.S. life insurance industry products, By Narayan Shankar, Society of Actuaries – [link]

  • Also, you had a lot of different interests in Executive Life.
    • You had joint service and Goldman Sachs had bought a lot of the muni-GICs at 10¢ on a dollar.
    • It was looking for the big pop.
      • Whether it was 68¢ or 50¢, it wanted cash back quickly; it didn’t matter. It is going to make a ton of money.

—   Keven Maloney, Vice President and Senior Analyst of Moody’s Investors Service

1999 – SOA – Insurance Company Failures of the Early 1990s-Have We Learned Anything?, Society of Actuaries – 25p

  • 1978 – ABA – The SEC Looks at the Insurance Business, Samuel C. Cantor, The Forum, Samuel C. Cantor, (American Bar Association. Section of Insurance, Negligence and Compensation Law), Vol. 13, No. 3 (Spring 1978), pp. 735-753 – 19p
    • In my judgment one of the major issues confronting the insurance industry today is that which is involved in the present SEC study regarding the so-called guaranteed interest contracts. <WishList>
  • Victor Modugno: We could have called this session FANIPs for Funding Agreement Note Issuance Programs or capital market GICs.
    • This refers to issuing GICs or funding agreements (the term used depends upon the insurer’s domiciliary state) to a special purpose corporation that issues notes to investors.
    • Starting from the first program in 1994, issuance of these note programs has grown to more than $15 billion per year by 1999.
    • These programs have supplanted 401(k) GICs as the main source of institutional business for many insurers as synthetic GICs replaced traditional general account GICs.
    • We have assembled an outstanding panel representing investment banking, insurer, and rating agency views.
    • I’m a consulting actuary who specializes in institutional products.

2000 – SOA – GIC in a Box, rsa00v26n355pd – Society of Actuaries – 25p

  • (p5) – Donald Payne (D-NJ) – Life insurance companies have been often guaranteed investment contracts-GICs-as a pension investment, particularly for defined contribution pension plans.
    • Depository institutions enter the same market, however, with the added benefit of Federal Deposit Insurance for the Bank Investment Contracts-BICs-because many factors, like the window provision and the benefit responsiveness provision and make the GICs and the BICs risky to the issuing institution.

1991 0502 – GOV (House) – Oversight Hearing on the Effect of Proposals to Reform Federal Deposit Insurance on Pension Funds, Pat Williams (D-MT) – [PDF-225p-GooglePlay

  • 1993 0301 – FRB-M – Guaranteeing Disaster: Moral hazard in the insurance industry – [link]
    • Although insurance companies promise holders of SPDAs and GICs fixed returns on their investments, the true worth of these promises is not easy to ascertain.
  • Two new model regulations-one covering synthetic GICs and the other guaranteed separate accounts-are working their way through the regulatory process.

1998 – SOA – Synthetic GIC and Guaranteed Separate Account Model Regulations, by Victor Modugno (p1), Society of Actuaries – 32p

GUARANTY FUND (EX4) TASK FORCE

  • Brian Quigley (Travelers) …..noted that the task force should be aware that the trend is toward no coverage for GICs.

1987-2, NAIC Proceedings

  • 1987-2, NAIC Proceedings
  • 1989 – SOA – Financial Condition of the Industry — A View From Rating Organizations, rsa89v15n3a2 – Society of Actuaries – 14p
  • 1991 0717 and 0724 – GOV (House) – Life Insurance Solvency Issues – [PDF-217p-GooglePlay,
  • 1992 – SOA – GICS and Other Insurance Company Products – Are They Still Alive?, rsa92v18n210 – Society of Actuaries – 26p
  • 1992 Summer – FRB – SPDAs and GICs: Like Money in the Bank?, Federal Reserve – [LINKtoPDF-18p]
  • 1995 – SOA – Asset/Liability Issues of Synthetic GICs , rsa95v21n4a16 – Society of Actuaries – 22p
  • 1996-3v2, NAIC Proceedings – Synthetic GIC Working Group of the Life Insurance (A) Committee
  • 1998 – SOA – Synthetic GIC and Guaranteed Separate Account Model Regulations, by Victor Modugno (p1), rrn9810 – Society of Actuaries – 32p
  • 2000 – SOA – GIC in a Box, Society of Actuaries – 25p
  • The final item on my list is the life liquidity risk working group.
    • This was an outgrowth of concern about GIC contracts with bailout provisions linked to credit ratings of the insurance company.

—  Douglas Doll

2000 – SOA / VASP – Session 1GS – General Session, va00-1gs – Society of Actuaries – 28p

  • The Life Liquidity Risk Working Group arose from an interest in liquidity matters in 1999 by the Life and Health Actuarial Task Force relative to guaranteed investment contracts with bail-out provisions with increased interest subsequent to the General American insolvency.

2001 – SOA – Life Liquidity Risk, by Jon E. Niehus, Society of Actuaries – 2p

  • Then there’s a counterpart to GICs, or bank investment contracts (BICs), which two years ago were an important force; they held a lot of attractions to the buyers and generated a lot of discussion in the insurance industry.
  • Right now, the BIC market is quiet.

— Joseph J. Buff

1992 – SOA – GICS and Other Insurance Company Products – Are They Still Alive?, Society of Actuaries – 26p

  • Likewise, life insurance companies because of the huge growth of the guaranteed investment contracts have liabilities with an average duration of about 3.5 years.
    • Yet, they’re even more heavily invested in long-term mortgages and real estate equities.

— Senator John Kerry (D-MA) (approx. 01:32:30)

1991 – GOV (Senate) – Bank Industry Restructuring – [PDF-,  VIDEO-CSPAN]

  • Pension Products
    • The life insurance industry had always been the major player in the defined benefit pension market.
      • The industry had played a much less significant role in the accumulation of defined contribution plans.
    • However, in the early 1970’s the first Guaranteed Interest Contract (GIG) was developed to provide older workers in defined contribution plans with a means of reducing fund volatility as they approached retirement.
    • The GIC was designed to provide a bond portfolio type return with the ability to transfer-funds without a market value adjustment.
    • Although they were initially designed for workers nearing retirement they ultimately proved quite popular as the conservative option (i.e., fixed interest rate) for all plan participants.

1991 0717 and 0724 – GOV (House) – Life Insurance Solvency Issues – [PDF-217p-GooglePlay,

  • Testimony of Terence Lennon (NEW YORK Department of Insurance) – 17p
  • House – Committee on Energy and Commerce – Consumer Protection and Competitiveness
  • Impact of Junk Bonds Real Estate and Mortgage on the Life Insurance Industry
  • Prior to the Executive Life Insurance Company (ELIC) default there was no such thing as a stable value fund and all GIC funds presupposed that there never would be a default.
  • The problems that would be created by default were more or less unthinkable.
  • Everyone took the view that if you had a default, you would defeat the fundamental premise of a GIC fund which was that principal would be guaranteed, and only the rate of return would vary over time.
    • No one ever thought GIC defaults could occur.
      • It’s hard to imagine that people could think that way today.
      • No one thought that the leading insurance companies that were carrying AAA ratings could default in a short period of time.
      • Most GICs were for five years or less, so who could imagine that a AAA investment could be not only downgraded but go into insolvency within the five years of the time frame. 

 —  Murray L. Becker

1999 – SOA – Insurance Company Failures of the Early 1990s-Have We Learned Anything?, Society of Actuaries – 25p