In an indication that some regulators and professionals are still thinking clearly, the NAIC a few weeks back decided against the ALIC and other life companies that were petitioning for relaxation of reserve requirements on certain lines of variable annuity business and financial guarantees those annuities provide.
What was at stake and was a desire by the life companies to stop having to reserve so heavily for future annuity payment and market guarantees offered in a popular line of variable annuity contracts that offer either market loss protection or guaranteed future income increases tied to the better of market returns or certain contractual minimums. With the collapse of the US equity market the cost of these guarantees and the reserve requirements exploded upwards at the life markets as they were required by NAIC standards to move substantial amounts of money into reserve at the very time where it was exceptionally expensive for life companies to raise capital or maintain capital requirements.
By rejecting this request the NAIC stood firmly on the side of protecting policyholders, which is part of their job.
However, I also believe they protected these life insurance companies from themselves by preventing them from making a short term decision that could have haddisastrous long term consequences. While I believe the life companies would have stayed stable, properly reserved and secure if the requested changes had gone through, the PR disaster of of the life markets appearing to makepolicy holders and annuity owners LESS secure in order to prop up credit ratings and please stockholders would have been a train wreck that could have cost them far more then the temporary cost of reserving more fund.
A reminder to all, being forced to reserve funds and be conservative is a VERY good thing for the life companies which have avoided the panic and closures of banks, brokers and fraudulent investment houses and hedge funds like Bernie Madoff, Stanford and others. In this new world our stability, safety and sobriety is going to be our biggest selling point and the NAIC decision kept several of these firms from their own worst impulses.
Check out this weeks edition of Speaking of Settlements, let me know your thoughts and join me again next week for additional news and commentary on the structured settlement and settlement planning professions.