As rules change, a watchdog growls

New accounting rules and underpriced universal life insurance are just a couple of the issues keeping Joseph M. Belth up at night. The life insurance industry watchdog and editor of The Insurance Forum, an influential newsletter, is particularly concerned about the National Association of Insurance Commissioners' decision to eliminate the role of major credit rating agencies in assessing how much capital life carriers need to keep on their books to back up residential-mortgage-backed securities. “This could be short term, but I wonder if we're going to have more weakening of the accounting rules,” Mr. Belth said. “I don't know where this is going to lead, but it makes me very nervous.” The change was made after the American Council of Life Insurers argued successfully that ratings agencies had unfairly downgraded the bundled mortgages, based on the likelihood of a loss but not on the potential magnitude of the loss. As a result, carriers have had to hold more capital against the securities. The NAIC chose Pacific Investment Management Co. LLC to assess the potential losses in each security to get a better idea of how much capital carriers need to hold. The decision to bump the ratings agencies made Mr. Belth worried about whether other investments might get special treatment down the line.
“[I'm against] this idea of setting up a special system just for this one type of security,” he said. “Will there be a similar move next year for commercial-mortgage-backed securities and other exotic instruments?” Mr. Belth also predicts trouble with universal life, which he said has been significantly underpriced and could fail in the secondary market. Flexible-payment plans tempt consumers to pay less. If cost and fees associated with the policy aren't covered, the cash value will dwindle, and inevitably, insurers will raise premiums. That and a lack of cash value make it impossible to borrow from the policy, making it attractive to sell it on the life settlement market. “The investors need to pay [on] these policies until the insureds die off,” Mr. Belth said. “When the insurers have to raise premiums substantially, will the speculators still be willing to pay?”