New York's chief insurance regulator, Ben Lawsky, criticized life insurers for cutting down the capital cushion they allot for certain insurance products and said companies operating in the state can no longer use a modified model to calculate reserves.
Mr. Lawsky, superintendent of the New York State Department of Financial Services, last week wrote a letter to the National Association of Insurance Commissioners pointing out that a “modified” principles-based reserving approach — a method that allows insurers to determine how much reserves they ought to hold based on the makeup of their business — results in companies holding smaller capital cushions.
Certain life insurers adopted these modified standards last December for certain life insurance policies — namely, universal life insurance with secondary guarantees. So-called UL with secondary guarantees allow policyholders to either use their premiums to fund cash value or to concentrate on building up their protection guarantee. Secondary guarantees ensure that the policy won’t lapse.
However, regulators have raised concerns that companies are setting aside reserves based on the assumption that customers are paying higher premiums, which lead to lower reserves.
Last year, regulators had estimated that carriers would actually step up their reserves for these life insurance policies by about $10 billion if they followed this “modified” principles-based reserving approach, according to Mr. Lawsky’s letter.
In reality, companies not only raised their reserves by less than $1 billion overall, but a review of 16 of the largest writers of universal life with secondary guarantees revealed that 11 of the companies would have been permitted to cut their reserves by as much as $4 billion had regulators not put in provisions that prevented them from doing so, according to Mr. Lawsky’s letter. Only five companies reported an increase in reserves, totaling $668 million.
“This cannot possibly be the ‘compromise’ that we as insurance regulators had in mind with regard to [Actuarial Guideline 38],” Mr. Lawsky wrote, referring to a guideline that covers reserves for universal life with secondary guarantees. He said that as of Sept. 13, New York no longer will permit companies based there to use these modified principles-based reserving methods.
“To stay on the present track, and to disregard clear evidence that demonstrates that even a modified PBR framework can yield industry-favorable results that are entirely unexpected by regulators, is a recipe for disaster — not only for policyholders but for the broader system of state-based insurance regulation,” Mr. Lawsky wrote in his letter.
Analysts at Moody’s described Mr. Lawsky’s missive as credit-positive because with lower reserves, carriers are likely to take excess capital and use it to purchase stock, raise dividends or make acquisitions, noted Scott Robinson, senior vice president at Moody’s.
“As a result, the total capital and reserve cushion available in times of stress would decrease,” he wrote in an analysis Monday. At the same time, however, reserving standards that are too stringent also could have negative implications for insurers. Companies might end up looking for complex and opaque solutions to fund their reserves instead, Mr. Robinson noted.
“Compared with banks, insurers generally fared well during the financial crisis, in large part because statutory reserves were conservative,” he wrote. “It is less likely that the same level of reserve cushion would be present in the next stress environment under principles-based reserving.”