Eric R. Dinallo

The New York insurance superintendent takes a fresh look at variable annuities

Feb 22, 2009 @ 12:01 am

By Darla Mercado

As this year's returning chairman of the NAIC's Life Insurance and Annuities (A) Committee, Eric R. Dinallo's priorities are making sure that consumers are protected while helping carriers steer a course through choppy economic waters. This year, the New York state insurance superintendent will lead a revamping of the Kansas City, Mo.-based National Association of Insurance Commissioners' regulatory approach to variable annuities in the wake of the financial crisis. Q. What is the next big issue for the insurance industry? A. It will involve adjusting the balance between term life and annuity sales. A lot of people have a misperception that life insurance companies just sell life insurance, when increasingly, they're selling annuities. The committee has to understand this better and help manage the regulations with that in mind.

Regulations on variable annuities and guaranteed life benefits are nascent. It's a new world, and we need to learn more. At the same time, the economic crisis [provides us with] a teachable moment and a chance to think about the future.

This year, I have to focus on a better concept of appropriate guarantees. Under the law, guarantees have certain floors. We need to review those laws and regulations to see if we can tune up the world of annuity sales. People think of insurance companies as selling a liability to promise a payment against a certain event, but actually, that's not quite accurate. With annuities, you're selling a product in the old-fashioned way that you would sell a widget. It's a different approach from term life.

Q. How so?

A. With an annuity, you're buying a piece of an asset management pie, and you better have the right asset managers who can take in the proceeds and guarantee a certain yield. The last time I checked, that's a fairly sophisticated and difficult undertaking, especially when you go through one of those once-in-10,000-year events that apparently happen more frequently than that. Look at the 2001 crash and the 1987 crash, for example.

When you have guaranteed products, you have to hire the right asset management talent. But regulators must become equally sophisticated. The reason my predecessor, Neil D. Levin, established a capital markets bureau is because he understood that more insurers were doing capital markets work, and not just life insurance work.

We need to acknowledge that aspect of the industry in order to be up on our game, so as to be a partner with these companies.

Q. A prolonged bear market would continue to stress the VA business. Are you addressing the issue, and how would you handle a crisis?

A. I can't give specific solutions, because we have to be presented with individual problems first. But certainly, if one of the carriers is having a bad runway problem and needs the runway lengthened, we can talk about that. We might give them greater credit for reinsurance, for instance.

There are also certain assumptions of how many people will trigger their vesting in a given time. Those numbers are high, but generally, we can adjust them. There may also be some short-term relief you can give on reserving if you believe that the asset class the insurance companies are holding is experiencing liquidity impairment, as opposed to true value impairment. Then we can decide we won't necessarily require an increase in reserving, because the market over time will come back to some reasonable level.

You have 30- and 40-year commitments with life insurance companies, so these are things you can do with a life insurer that you can't do with a property/casualty insurer that has to pay up or shut up when a catastrophe occurs.

Q. What are the biggest obstacles for VA carriers?

A. The biggest thing to fear is that the market continues its overall slow slide. The carriers' hedging is based on a certain amount of volatility. If they don't get that volatility, it's hard for them to hedge. I can't help them with that. But one thing we can talk about is slowing down sales. We require a higher reserve for bringing in new customers. So one way we can help is to enhance the current conditions, to slow the sales down so that you don't have to keep taking outsized reserves based on new sales. On term life, that's certainly the case.

The other thing that everyone agrees on is that you'll see slightly less rich products. Insurers were guaranteeing things that were attractive, but in this economy, the new annuitants may have to accept a slightly less rich guarantee. All that would make a difference, but I'm not the expert. I'm a superintendent, and I can sit with my people and [the insurers'] people, and authorize some permitted practices if one of them is in distress.

In my mind, that's pro-consumer. Even Bob Hunter [director of insurance for the Consumer Federation of America in Washington] agrees that one-on-ones can be very pro-consumer. Nobody wants to see a life insurer in terminal distress.

Q. Last month, the NAIC vetoed a package of capital and surplus relief proposals from the American Council of Life Insurers of Washington, citing the public's negative perception of the proposals, as well as the fact that no single insurer had approached the NAIC claiming to need relief. What would it take for a carrier to receive relief?

A. The companies would have to demonstrate that they can't raise capital and can't slow sales down anymore. There are a lot of steps [to take] before you get to a change in reserving and capital treatment. There are ways to tweak the insurer and help them get through stressed periods. One is to demand that they raise capital. The equity side won't like that, but that's not what we're here for. We're really here for policyholder protection.

The insurers came to us for a bailout, marginally off the policyholders' backs. It's not a bailout in the sense of money being injected, but it's an injection of money from policyholders' protection. So a core requirement for assistance would be demonstrated proof that they absolutely can't raise capital — not that it's too expensive, or that it's a bad time, or that they don't really want to do it. "Can't"that's the operative word. Coupled with sales reductions or changes in prices and benefits, those are other ways for them to start before we give them capital relief.

There might be some companies where we'll swoop in and do some focused, localized relief work. That would be very pro-consumer. We did it with the mono-lines, and we'll do it again if it comes up with life insurance. But I thought that [passage of the ACLI proposals] wasn't a very good idea.

I was unconvinced. Nobody could say, "We need it."

Maybe now there will be companies that will call us, and we'll have one-off conversations with them.

E-mail Darla Mercado at


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