As state insurance regulators fast-track industry proposals to cut the amount of money that life insurers must set aside for benefits, consumer groups and industry watchdogs are crying foul.
The groups, which include the Consumer Federation of America and the Center for Economic Justice, contend the proposals to lower insurers’ risk-based capital and reserve requirements are detrimental to owners of life-insurance and annuity contracts because they reduce the financial cushion life insurers have to keep on hand to ensure they can pay claims.
“In the midst of the current financial crisis, it is unseemly even to discuss the idea of weakening the conservative statutory accounting rules that have long been in place for insurance companies,” wrote Joseph Belth, editor of the Insurance Forum newsletter, in a letter to the National Association of Insurance Commissioners.
The NAIC, composed of state regulators, has been considering the proposals since mid-November. Insurance is regulated by the states in the U.S. NAIC guidelines, while not mandatory, are often adopted by individual states. The NAIC could take action on the proposals as early as Friday.
Life insurers say the changes are needed because current capital and reserve requirements are redundant and overly conservative. The American Council of Life Insurers, which proposed the regulatory changes, estimates they could free up $22 billion to $28 billion industrywide.
The move is expected to give insurers greater flexibility at a time when the industry is being buffeted by the financial crisis. Many publicly traded insurers’ share prices have taken a beating recently. That’s partly because of investor concerns that insurers would have to raise additional capital on unfavorable terms in order to make good on minimum-return guarantees on variable annuities and other retirement-income products. (Other insurers like Northwestern Mutual Life Insurance Co. are mutuals owned by their policyholders and aren’t publicly traded.)
“In these unprecedented economic times, the goal of all insurance stakeholders — consumers, regulators and life insurance companies — should be to assure that life insurers are in the best possible position to withstand the crisis and continue to serve the interests of their policyholders and annuity contract owners,” Bruce Ferguson, senior vice president of state relations for the American Council of Life Insurers, said in an emailed statement Tuesday.
Under the current regulatory requirements, he said, insurers could be forced to sell “fundamentally sound assets — assets they otherwise would not sell at this time — in a down market.”