:: Dark Clouds Gather On Insurance Industry Horizon

State regulators trying to help life insurance companies cope with the financial crisis have granted $6 billion of relief from requirements meant to ensure financial stability, according to data released yesterday.

“States Give Regulatory Relief to Insurers” David S. Hilzenrath, Washington Post (3/10/2009)

Having been rebuffed by the National Association of Insurance Commissioners, insurance industry leaders recently succeeded in a pursuit along the path of least resistance – direct appeals to state regulators to permit the padding of their financial statements.  It worked.

Mr. Hilzenrath reports that:

The American Council of Life Insurers, an industry group, sought blanket relief earlier this year from the NAIC, an umbrella group for state regulators. When the NAIC refused, many state regulators filled the breach, granting special dispensations to individual companies headquartered in their states.

The relief consists of :

. . . accounting changes that allowed companies to pad their financial cushions, in effect making them appear stronger than they otherwise would. Insurance companies are required to maintain such cushions, known as capital and surplus, to absorb losses and pay claims.  Much of the padding involves increased counting of potential tax benefits that could end up being worthless to the companies.

Though AIG has been an industry poster child for federal relief of insurance debacles,  insurers as a group have not as yet made it to the Congressional trough.  Faking the financials will provide interim relief as until broader strategies emerge.

 The debate over whether insurance regulation should be enforced at the federal level has prompted many state regulators to woo industry with blandishments in efforts to influence the powerful industry lobby to their side.  These recent moves should be seen as a continuation of that trend.

For example, the WP article notes that “[s]ome state regulators said they wanted to make sure their home-state companies weren’t left at a competitive disadvantage.”

Note:  Here’s a short list of petitioners and the relief granted from stability requirements: 

  • Allstate Life Insurance Co. with $1.4 billion;
  • Jackson National Life Insurance Co. with $825.6 million; and
  • Hartford Life Insurance Co. with $655.2 million.

Runners Up –  Other recipients listed in the WP article include:

  • Pacific Life Insurance Co. with $529.8 million,
  • Transamerica Life Insurance Co. with $505 million,
  • Metlife Insurance Co. of Connecticut * with $396.1 million, and
  • Lincoln National Life Insurance Co. with $313.4 million.

* Many of the companies listed are part of larger families, such as the MetLife group, that operate multiple insurers.

Repeating Past Mistakes –   Mortgage lending on weak assets is getting the blame for much of the current fiscal crisis.   It is a well known fact that insurance companies have substantial exposure to declines in the value of real estate and debt instruments associated with real estate.    The financial markets need more transparency not less if the mistakes are not to be repeated.   Yet, the recent relaxation of regulatory requirements results in ”an accounting hodgepodge that makes it harder to compare insurers and gives some companies an edge over others.”

New Factor For Glenn Analysis ?  The link between financial circumstances and claims adjudication has been the subject of criticism in several markets.  In particular, the loss ratios in the long term care markets were linked to unreasonable claim denials.   An interesting benchmark for the future will be the comparison of the decline in financial condition of insurance companies with their claim denial ratios.