Maybe Not.
Corporations make profits in many ways. Most invest. Many Life Insurance Companies invested in risky securitized financial products, like credit default swaps. Ironically, they invested Life Insurance Premiums paid to them by their own Policyholders. These same Life Insurance Companies want to subject those same Policyholders to an increased Risk of not being paid the full value of Claims made on their Life Insurance Policies. (The bad influence of CDSs on Risk Management Practices has been the subject of more than one past post in this space.) Now, it is reported that these Life Insurance Companies want to change the rules of the game. See Andrew Frye, "Regulators May Ease Reserve Rules as insurers' Options Dwindle" (Bloomberg.com, Friday, December 19, 2008).
Here is a timely example of how Life Insurance Companies invested in financial arrangements "backed" by CDSs, and lost Millions. It is reported that Hoosier Energy Rural Electric Cooperative in Indiana agreed to a $300 Million loan from -- read, investment by -- John Hancock Life Insurance Company. The deal reportedly included two credit-default swaps from an Insurance Company that would guarantee payments by Hoosier to John Hancock Life. The Insurance Company which agreed to enter into the CDSs, i.e., to guaranty Hoosier's payments to John Hancock, was Ambac Assurance Corporation. The hitch to that guaranty was that Ambac would have to receive a certain rating from Credit Rating corporations at all times, or Hoosier would have to find a new Insurance Company with acceptable ratings to take over the CDSs. Ambac lost its acceptable ratings in June. Hoosier nonetheless made its payments. As Hoosier reportedly was about to make a deal with an acceptable substitute for Ambac -- reportedly, Berkshire Hathaway -- John Hancock Life Insurance Company notified Hoosier that the loan was in default on the loan agreement and demanded that Hoosier pay a fee of $120 Million to John Hancock, within one (1) week. See Gretchen Morgenson, "Fair Game/Just Call it Hoosier Baroque" p. 1, col. 2 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, December 21, 2008).
Life Insurance Companies are required to post Reserves at levels that are sufficient to pay Life Insurance Claims. However, the performance failures of CDSs and other risky securitized investments has left Life Insurance Companies financially shaky. The failures have hurt the bottom line of these Life Insurance Companies. Their proposed rules change would lower the amount of their required Reserves, at least beginning with so-called variable annuities. This would have the effect of reducing the likelihood that claims on these variable annuities now would be fully paid, and possibly also reducing the likelihood that claims later on Life Insurance Policies will also be in doubt if and when Reserves requirements for those Policies are similarly weakened.
In addition, the Life Insurance Companies in question want the loosened model regulations to take effect sooner than later, in early 2009. The period for comments to this proposed change ends the day after Christmas -- December 26, 2008 -- a breathtakingly short period of time within which people can effectively oppose this proposal.
People interested in opposing any reduction in Reserves requirements on so-called "variable annuities" for these Life Insurance Companies can leave their comments with the National Insurance Commissioners web site online, although which NAIC model law is at issue, exactly, is not as clear as where to leave comments online.
Post your comments to the National Association of Insurance Commissioners through www.naic.org. It is uncertain, but it appears that a likely candidate for the linked newspaper report's description of the NAIC model regulation about to be loosened for Life Insurance Companies' Reserves is the NAIC Standard Valuation Law, here: .Download NAIC LIFE INS COMMITTEE DRAFT 12.05.08 REVISIONS TO MODEL ACT 820.VALUATION LAW.
Postscript of Monday, January 12, 2009:
The NAIC must have listened.Reportedly, late on Friday, January 9, 2009 the NAIC "rejected an industry request to approve changes by Jan. 16 and plans to hold a hearing at the end of the month to seek input from consumer groups before taking a vote". Andrew Frye, "Hartford Falls As Plea For Speedier Reform Rebuffed (Update 4)" (Bloomberg.com, Monday, January 12, 2009).
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