Thomas Sullivan
Bruised by falling stock prices and other financial distress, life insurance companies are pushing state regulators for changes in their cash-reserve rules before the end of the year to avoid needing to raise large sums of additional funds in 2009.
States have created complex formulas to determine how much money insurers must keep in reserve to cover expected policy costs such as death benefits and annuity payments. The amounts individual companies must set aside vary by jurisdiction as well as the risk profile of their customers, although insurers largely believe the states have been too conservative with their calculations and require too much money be kept in reserve.
Through an industry trade group, the companies are now asking the National Association of Insurance Commissioners to adjust the capital-reserve formulas by Dec. 31. The deadline is important to the insurers because year-end numbers typically are used to determine reserve levels for the upcoming year.
May See Vote This Month
The NAIC has a small group of commissioners and staff – including Connecticut insurance commissioner Thomas Sullivan – looking at the industry proposals, and will be taking comments from its membership during a conference this weekend in suburban Dallas. Additional meetings by the working group, along with a possible vote, are likely later this month although no specific dates have been set.
In a written statement to The Commercial Record last week, Sullivan said he would need more information before he could make a recommendation to the larger organization.
“I, and my fellow insurance commissioners, have a lot of questions that need to be answered before we can agree to adjust capital requirements in the manner that the [American Council of Life Insurers] has requested,” Sullivan wrote.
He later explained his priority was maintaining a “competitive and solvent” market where insurers live up to the promises they make to policyholders.
“My decisions are guided by understanding what is in the best interest of the consumer,” Sullivan said.
While insisting there is little chance of companies going under, many insurers admit the ongoing upheaval in the financial markets has created one of the more difficult predicaments they’ve faced in years. Falling stock prices, in particular, have seriously cut into their liquidity positions and have significantly increased the possibility they may need to raise additional funds if the current reserve rules remain in place.
Treading Water
For example, the Hartford Financial Services Group Inc. last month estimated it would finish 2008 with a $2 billion capital margin, assuming the Standard & Poor’s 500 index closes at 900 – or right about where the index was at the end of November prior to falling again earlier this week. But that relatively strong cash position was about $1.5 billion below where it was at the end of September, when the S&P was around 1,165 and following a $2.5 billion injection into The Hartford by Allianz.
In its Nov. 3 statement, company officials also stressed The Hartford has access to another $2.4 billion through a pair of loan facilities with a consortium of banks. According to regulatory filings, those loans would carry variable interest rates set about 1.1 percent above the 6-month London Inter-bank Offered Rate, or Libor, which has topped 4 percent as recently as October.
Whit Cornman, a spokesman for the ACLI – which has been spearheading the efforts on behalf of insurers – said the NAIC already is considering changes in cash-reserve rules although he notes those reforms won’t be in place before the end of 2008.
“We came up with this list of changes because we believed they would be easy for commissioners to implement before the end of the year,” Cornman said. “These would be intermediate steps providing capital relief right now for companies, and makes sure that their money isn’t tied up when it could be used to develop new business or reinvested in the economy.”
