On January 27, at a public hearing held in Washington, D.C., by the National Association of Insurance Commissioners (NAIC) Capital and Surplus Relief Working Group, insurance regulators breathed new life into an industry proposal that would provide capital and surplus relief for insurers. The industry trade group, American Council of Life Insurers (ACLI), initially submitted the proposal for consideration by the NAIC in November 2008. While not all of the proposed changes to current minimum reserve and capital requirements were approved at the Washington meeting, the surviving rule changes would permit insurers to paint what proponents argue is a more accurate picture of an insurer’s financial health.
The public hearing addressing these proposals continues the intense spotlight faced by all financial institutions, including insurance companies. Unlike U.S. banking institutions, insurance companies have not generally been eligible for financial assistance under the U.S. Treasury’s Troubled Assets Relief Program (TARP). Some insurers are now in the process of purchasing banks or thrifts and becoming federally-regulated bank or thrift holding companies to obtain access to TARP funds and other federal funding sources.1 For the majority of insurers that will not receive federal funding, however, the proposed changes to industry minimum capital and surplus rules may provide some significant relief from financial pressures. Proponents of the changes believe that such relief will also result in improved information about each company’s financial condition that more closely aligns with the company’s true underlying economics and is consistent with a principles-based regulatory approach.
Proposed Changes to Minimum Capital and Surplus Rules
The ACLI proposal initially encompassed nine specific items that would involve changes to reserving, risk-based capital, reinsurance collateral and accounting requirements. As noted, the NAIC Capital and Surplus Relief Working Group (organized to consider the ACLI proposal) — after hearing testimony from industry proponents as well as from consumer and other groups opposing the ACLI proposal — decided to recommend that the full NAIC membership adopt only some of the proposals. Importantly, one of the surviving proposals would accelerate the effective date of certain revisions to variable annuity actuarial guidelines that, while already adopted by the NAIC, are not scheduled to become effective until year-end 2009. These revisions would eliminate a standalone asset adequacy test requirement that may overstate the aggregate liability associated with an insurer’s variable annuity contracts and require the insurer to maintain unnecessarily high reserves and risk-based capital.
The public hearing in Washington was notable in that it highlighted two diametrically opposed and strongly held views concerning the proposed rule changes. Proponents argued that current minimum reserve and capital requirements are overly conservative, in some cases even redundant, and paint an inaccurate picture of the financial health of the insurance industry at the very time that consumers, worried about the impact of the global financial crisis on all financial institutions, are making important decisions about where to allocate their money. The argument follows that ultra conservative or inaccurate financial reporting may lead insurers to take actions not in the best long-term interests of any of its stakeholders, possibly resulting in actions such as selling assets into depressed markets, employee layoffs or even divestitures.2 Opponents of the rule changes argued that during this time of unprecedented economic upheaval, existing state regulatory requirements have helped insurers remain solvent when other financial institutions are failing. The proposal’s timing, opponents noted, could not be worse in light of the economic crisis and could create the appearance that consumer protection is being relaxed when the rest of the world is calling for more regulatory oversight. The proposed rule changes could even fuel “federal intrusion” into insurance regulation by sending a message that state insurance commissioners are not standing firm against industry “strong-arming.”3
We understand that the full NAIC membership will vote on the final rule proposals in the near future. As with any NAIC rule adoption, individual insurers generally would not experience relief unless and until individual states adopt the revisions. However, several states reportedly have already begun considering similar changes to their reserve and capital requirements, and the NAIC’s adoption of the ACLI’s proposals would assist in promoting consistency as states begin this deliberative process.