Claims And Issues

Replacing Cancelled Homeowners and Other Property Insurance Policies in Florida.

   Many Homeowners and some Commercial Property owners are receiving cancellation notices from their Homeowners and Property Insurance Carriers in Florida.  Mr. Tim Shaw, owner of Tim Shaw Insurance in Fort Myers, is quoted in a newspaper report providing this potentially sage advice:

   He said when looking for a new policy, a consumer should find out how much of a surplus a company has to pay claims and how many "events," such as hurricanes, its reinsurance policy will cover in a year.

Laura Layden, "State Farm Sheds 125,000 Florida Homeowner Policies, Some in Collier, Lee" (naplesnews.com, published Sunday, July 25, 2010).

   If I learn of any other way to find these things out, in addition to simply asking an insurance agent to tell me, I will post that information here, but right now I do not know of any other way to find out (1) how much surplus (reserves) is or are available to a given Homeowners or other Property Insurer, and (2) what the terms are of their Reinsurance Policies.

Dennis Wall is Co-Author of the leading book on Insurance Coverage for Catastrophe Claims, "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters" (West Publishing Company 2008; 2010 Supplement in process).  Mr. Wall will speak on a panel at the American Conference Institute's Bad Faith Litigation Conference in Orlando, Florida on November 30, 2010 on "Dealing With Catastrophic Disasters:  How to Properly Investigate and Handle Overwhelming Claims".

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Life Insurance CEO Says Insurance Companies Are Not Financial Companies, ...

... and They Deserve Their Own Federal Regulator, No More State Regulation of Insurance Companies, he says.

   The CEO of MetLilfe told the Financial Times this past week that Insurance Companies should not be lumped in with Financial Companies subject to legislation pending in the U.S. Congress.  He singled out in particular Capital requirements and Derivatives which, he said, should be treated differently for Insurance Companies than for Financial Companies.  Francesco Guerrera and Tom Braithwaite, "MetLife Chief Slams US Financial Reforms" (ft.com, Thursday, June 17, 2010).

   He also repeated a long-standing industry position in asserting that Insurance Companies should be regulated by one Federal Regulator, and not by the States.  Id.

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Credit Default Swaps Continued ... Unregulated, Unreserved, The Uninsurance?

   Credit Default Swaps are Insurance.  For a long time, readers and I have been examining what you might call "the three R's":  Regulation, Reserves, and Insurable Interest.  (Okay, that is really Two R's and Two I's.)  The problem with Credit Default Swaps, at least for you and for me, is that they do not have any of them:  No Regulation, No Reserves, and no Insurable Interest.

   Now, Floyd Norris of the New York Times has written an excellent column in which he points out that these three defects were defective by design, again, at least defective for you and for me:

   Credit-default swaps are, in reality, insurance.  The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations.  The seller of the swap gets a continuing payment from the buyer until the insurance expires.  Sort of like an insurance premium, you might say.

   But the people who dreamed up credit-default swaps did not like the word insurance.  It smacked of regulation and of reserves that insurance companies must set aside in case there were claims.  So they called the new thing a swap.

Floyd Norris, "Naked Truth on Default Swaps" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Friday, May 21, 2010).  [Emphasis added.]

    Mr. Norris also points out in his column that Credit Default Swaps were designed to be sold without requiring that the buyer have a recognized, Insurable Interest in the credit payment or default, one way or the other.  Except that the buyer of a Credit Default Swap benefits from default on the extended credit in question, and does not profit so much -- if at all --from repayment of the loan.  See id.

   This scheme resulted in many funds and financiers profiting from credit defaults even though they had no interest in the outcome greater than the desire to make money.  Hmmm.  Sounds like an accurate general description of a cause of the Great Collapse through which we are now living.

   For previous posts here on this subject, please see the Category, "Credit Insurance" on this Blog.  In particular, please see the previous posts on March 19, 2010 addressing the issue of requiring Reserves  for Insurance-like financial products, and on March 4, 2010, which addresses other Regulatory requirements of Insurance that might be applicable to Insurance-like financial products in addition to Reserves, and which has many links going back to posts in March, 2009.

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When Banks Act Like Insurers, They Should Reserve, Like Insurers.

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  Not simply issue unfunded indemnity obligations like Credit Default Swaps.

"Unified capital requirements for banks and insurers would be wrong."  Nikolaus von Bomhard, Chief Executive Officer of Munich Re, quoted by Oliver Suess, "Insurers do Need 'Suitable' Supervision, Munich Re Chief Says" (Bloomberg.com, Wednesday, March 3, 2010).

   There are those in the Banking sector who argue forcefully against Regulation including requiring Reserves for Credit Insurance known as Credit Default Swaps.  They may point to comments like those in the above quotation from the CEO of Munich Re to bolster their case that Banks and Insurance Companies are different and should be treated differently.  They miss the mark.

   What the man was saying is that Insurance Companies are better capitalized than Banks.   Id.  A major reason that Insurance Companies are better capitalized than Banks is that Insurance Companies must post Reserves to handle Claims against the Policies they issue.  Whenever Banks act like Insurance Companies, they should be regulated like Insurance Companies.  That includes the requirement that they post Reserves -- or set aside Capital -- to pay their liabilities, such as the otherwise unfunded liabilities of Credit Default Swap obligations.

   The animal may have four legs and a tail, and a sign around its neck that proclaims it to be a "Horse," but if it has an udder it is still a cow.

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Excess Insurance, Risk Management, and Reserves.

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   Excess Insurance incepts, or begins its Coverage, over and above Primary and other underlying Insurance.  In an interesting article, Robert S. Schimek, Chief Financial Officer of Chartis (formerly known as AIG's Property and Casualty lines of business, according to the article), is quoted as saying that Excess lines are "among the most complex lines of business to reserve for."  Robert S. Schimek, quoted by Mary Williams Walsh, "A.I.G. Posts Loss of $11 Billion on Higher Claims" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Saturday, February 27, 2010).

   Mr. Schimek observed that two (2) lines of Insurance accounted for some 90% of the additional monies which AIG posted to its Reserves on Friday, February 26, 2010:  Excess Worker's Compensation and Excess Casualty.  Id.

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Required Reserves for Credit Insurance Considered by European Union.

   **Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.** 

   Credit Default Swaps, or "CDS's," are a form of Credit Insurance.  They have been the subject of many posts here including on February 18, 2010, "Credit Default Swaps:  Unregulated, Certainly.  Insurance?  You Bet," and March 18, 2009,  "New York Times Concurs:  Credit Default Swaps Are Unregulated Credit Insurance," and related posts here in the Category of "Credit Insurance".  See also the posts of December 24, 2009 and February 10, 2010 on Insurance Claims Bad Faith Law Blog.

  Recognizing that all regulated Insurance requires Reserves to be held by the Insurer to pay Claims on the Insurance, the European Union is responding to the impending default of Greece.  That entire nation is finding it hard to obtain credit to pay its debts because Credit Default Swaps have been issued by Banks to many "counterparties" who have bet that they will make money if and when Greece defaults on its obligations.

   One measure under consideration in the European Union is "'strengthening the capital requirements for counterparty credit-risk exposures.'"  Michel Barnier, Financial Services Commissioner of the European Union, quoted by Ben Moshinsky, "Banks Face Tighter Capital Rules for Credit Derivatives in EU" (Bloomberg.com, Friday, February 26, 2010).

   In a word:  Reserves.

   In the Insurance Industry, when Reserves are not set high enough to pay Claims, then Reserves are supplemented with money from earnings.  Mary Williams Walsh, "A.I.G. Posts Loss of $11 Billion on Higher Claims" p. B1, col. 5 (New York Times Nat'l ed., "Business Day " Section, Saturday, February 27, 2010).  That is exactly what the EU seems to be saying is what should be done about the current Claims on the heretofore Unregulated Credit Insurance known as Credit Default Swaps.

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Attorney's Fees, Using Reserves Without Disclosure, and Good Faith.

   The Directors who serve on the Boards of Condominium Associations and Homeowners' Associations have certain duties.  In many jurisdictions (check your local laws), these duties include duties of Good Faith in how if at all they use the Association's Reserves:

The association board's duties include performing due diligence and acting in good faith when it comes to preparing a budget and anticipating increases in assessments. 

Stephen Glassman and Donie Vanitzian, "Associations/Owners Feel Left in the Dark on Use of Reserves for Legal Bills" (Los Angeles Times Online, Sunday, January 31, 2010).   The linked newspaper column specifically addresses a question concerning what may be inadequately disclosed use of Reserves to pay Attorney's Fee Bills.

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Capital Requirements Hiked for Banks; Reserves Up/Down for Life?

   The Obama Administration plans to curb financial excess and failure by imposing higher Capital requirements on Financial Institutions.  See Download Treasury Secretary T.F. Geithner Written Testimony Before U.S. House Financial Services Committee 09.23.09.  This seems like a lesson learned from Reserves requirements imposed by the States on Insurance Companies.

   Another lesson learned from the States' Regulation of Insurance Companies is the concept of "insurable interest".  It is another part of the Administration Plan to require securities speculators to have an interest in things being insured by Credit Default Swaps for example.

   An old saying has it:  Everything is changing, but nothing is new.

   In a somewhat related note, it appears that while the Obama Administration is learning lessons from State Insurance Regulators, the State Regulators themselves may as a body be in the process of forgetting -- or ignoring -- those same lessons.  It is reported that a majority vote in the National Association of Insurance Commissioners has approved a model law which would move Life Insurance Companies away from their current Reserves requirements to something called "principles-based reserving".

   Another description of this method of setting Reserves has been offered:  "[A] 'trust me' approach to regulation."  David Hilzenrath, "Life Insurers Seek More Flexibility/Group Endorses a New System for Reserve Requirements" (Washington Post.com, Thursday, September 24, 2009), quoting New York Life Insurance Company Vice Chair Gary Wendlandt.  [Emphasis added.]

   It is unclear whether this approach to reserving and regulation will benefit people paying Premiums for Life Insurance Coverage.  Supporters of the change at the NAIC announced that the Reserves change would give "greater discretion" to Life Insurance Companies and make it "easier" for regulators.  Life Insurance Companies have been pushing the NAIC to turn to 'principles-based reserving' for the reason, they urge, that the current Reserves requirements are too high.  This would imply, of course, that the Life Insurance Company personnel think that the new kind of reserving and regulation will lower their Reserves requirements.  This is consistent with the position taken by the Commissioners who voted against the change.  The Wisconsin Insurance Commissioner, for example, is quoted in the linked article as observing:  "'I'm afraid that the consumer may not have the reserves there when we face a future financial crisis.'"

   There can be no doubt about this:  Time will most certainly tell if and after this change takes effect.

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Life Insurance Reserves Manipulations: Will State Regulators Reward Failures?

"We're not willing to answer your questions."  Stephen P. Horvat, Jr., Esquire, on behalf of Midland National Life Insurance Company, quoted by David S. Hilzenrath, "Politics Puts Insurance Regulators in a Bind" (Washington Post.com, Friday, June 12, 2009). 

    An assault on Life Insurance Companies' Reserves requirements began nearly five (5) years ago, in late 2004, it is reported by David S. Hilzenrath, "Politics Puts Insurance Regulators in a Bind" (Washington Post.com, Friday, June 12, 2009).  What is not reported in the linked article is that Life Insurance Companies' Reserves requirements were adopted and in effect for years before.

    On the eve of a meeting of the National Association of Insurance Commissioners to consider the latest steps in loosening Life Insurance Companies' Reserves requirements -- which directly affect the ability of Life Insurance Companies to pay Claims on their Life Insurance Policies -- the linked article reports these fairly recent developments in this story:

December, 2004:  The NAIC begins "to make the shift".

March, 2005:  Life Insurance Companies put together a lobbying operation they call the Affordable Life Insurance Alliance.

"Early 2005":  A newly elected Insurance Commissioner from North Dakota, sympathetic to relaxing Life Insurance Companies' Reserves requirements, becomes Chair of the NAIC Life Insurance Committee.

May, 2005:  The Alliance holds either a "fundraiser" or a "reception," depending in part on who provides the description, for the subject North Dakota Insurance Commissioner.

July, 2005:  The Chair of the NAIC Life Insurance Committee, who is the same North Dakota Insurance Commissioner, reportedly announces that he is changing the agenda of an upcoming meeting to devote it entirely to Reserves requirements.

August, 2005:  The NAIC Life Insurance Committee Chair/North Dakota Insurance Commissioner holds a Hearing "at which members of the [Life] insurance industry pressed their case."

Other events occur in the interim, detailed somewhat in the linked newspaper report, until 2007, when the North Dakota Insurance Commissioner resigns, "and became an insurance industry consultant".  In 2009, reportedly "he has served as spokesman for a coalition of [Life] insurers arguing that the Securities and Exchange Commission should leave regulation of certain annuities to the states."  Id.

    Although not mentioned in the linked newspaper report, it was posted here previously that in the Spring of 2009, the National Association of Insurance Commissioners voted to relax long-standing Reserves requirements established by the NAIC for Life Insurance Companies.

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Hartford Changes Accounting, Announces Transformed Financials.

    Before The Hartford and other corporations changed their mark-to-market accounting values, The Hartford in particular was headed for a huge loss.  The large loss would have followed these recent developments:

    1.  The National Association of Insurance Commissioners repealed a requirement that certain Insurance Companies maintain a high level of Reserves sufficient to meet claims.  The repeal of the Reserves requirement was particularly sought by Life Insurance Companies.  The Hartford got about $1,000,000,000.00 or $1 Billion "of regulatory relief from capital and reserve requirements meant to protect policyholders" in this way.  See David S. Hilzenrath, "Accounting Changes Boost Hartford's Books" (Washington Post Online, Friday, May 1, 2009).  

   2.  The Hartford reportedly is looking at corporations within its group which it can sell to raise capital.  Id.

  3.  In addition, The Hartford recently announced that it will not issue new business either in Japan or in the U.K.  Id.

  After many large corporations changed to mark-to-management accounting values instead, they were able to release rosier reports on their financial condition.  See Joe Nocera, "Talking Business/Same Data, Conflicting Forecasts" (New York Times Online, Saturday, May 2, 2009).  This included The Hartford, which reported "a pre-tax gain of $550 million" partly due to the change in accounting values.  Even with these changes, it reported a loss for 1Q 2009 of $1.2 Billion.  David S. Hilzenrath, supra. 

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N.Y. Times Concurs: Credit Default Swaps Are Unregulated "Credit Insurance".

    In an insightful piece of reporting by Gretchen Morgenson, "A.I.G.'s Bailout Priorities Are in Critics' Cross Hairs/Covering Foreign Institutions Further Upsets Some in U.S." p. B1, col. 2 (New York Times Nat'l Ed., Wed., March 18, 2009), the venerable New York Times and its highly respected Business Day columnist, Ms. Gretchen Morgenson, describe AIG's Credit Default Swaps.  The New York Times article never uses that term, however.  Instead, AIG's failed CDS's are described exactly as what they are:  Credit Insurance.  (One exception:  The CDS terminology is used in a box of "Credit Default Swap" information provided by AIG.)

    In previous posts here, I have carefully reviewed the evidence for and against Credit Default Swaps and they are clearly Unregulated Credit Insurance by another name.  For example, under the Category of "Credit Insurance" see posts on 12.15.08, 12.24.08, 01.07.09, 01.26.09, and 02.20.09.  (One or more of these posts may no longer be available in the typepad archives.)

    This makes a huge impact.  Credit Insurance is or should be regulated by the State Insurance Commissioners.  For example, the New York Insurance Superintendent was poised to regulate CDS's in New York that perform like Credit Insurance, as of the first of 2009.  If CDS's could have been regulated as Insurance, but were not and are still not regulated as Insurance, why not?  Good question.

Please Read The Disclaimer.

 

    

Credit Default Swaps: Who Will Survive Them?

    AIG continues to lead.  They are the fastest-falling "Insurance Company" in the current world of finance.

    Reportedly, AIG faces a deadline of February 28, 2009 or thereabouts -- tomorrow.  The reason for the deadline is left unstated.  Mary Williams Walsh and Michael J. de la Merced, "As A.I.G.'s Losses Grow, Its Survival Options Shrink" p. B5, col. 1 (New York Times Nat'l Ed., Business Day Section, Wed., February 25, 2009).

    Among AIG's alternative choices before tomorrow's deadline are to continue trying to raise capital by selling some of its subsidiaries, or to continue trying to raise capital by asking for more Federal Taxpayer Money in exchange for a Federal Taxpayer share of its business.

    The first alternative, to continue to try to raise capital by selling some of the AIG subsidiaries, is not going as well as AIG might have hoped.  AIG is reportedly not receiving the size of bids that it anticipated.  Its subsidiary, American Life Insurance Company or "Alico," for example, would seem to be an attractive investment in untapped markets of consumers who have not yet been exposed to Life Insurance products.  Alico has operations in some 55 countries.  However, the bids that AIG has received to date, including from MetLife and AXA, are so small in AIG's estimation that AIG reportedly may take the "for sale" sign down from Alico. 

    That would leave the alternative of asking for more Federal Taxpayer Money.

    The unannounced reason, touched upon in the linked newspaper report, for these hard choices for AIG?  AIG issued many Credit Default Swaps.  As a standard part of all CDS arrangements, the issuer agrees to uphold a certain Credit Rating.  If AIG, for example, fails to maintain the specified Credit Rating, it will face a collateral call under these CDS's to immediately post the full amount of each of these CDS's.  (The people indemnified by these guarantees are among the few who still find any credibility in what Credit Ratings Companies have to report.)  That is more money than AIG probably ever had, and it is certainly more money than AIG has on hand now.

    Credit Default Swaps.  Unregulated at the Federal level, unregulated at the State level.  How are they going?

Postscript on Saturday, February 28, 2009:

See generally Lauren Silva Laughlin and Richard Beales, "BreakingViews.com, Spreading Pain In A.I.G.'s Bailout" p. B2, col. 1 (New York Times Nat'l Ed., Business Day Section, Friday, February 27, 2009).

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You CAN Teach Alan Greenspan New Tricks.

    In a speech to the New York Economics Club on Tuesday, February 17, 2009, Mr. Alan Greenspan pointed out that there is a need for sufficient Capital to back lending and investments.  This is one reason, the former Chair of the Federal Reserve System said, that financial institutions and the rest of the world are confronted now with a huge Credit Collapse:  Not enough Capital to support lending.  See Download Alan Greenspan, Speech to the New York Economics Club, Tuesday, February 17, 2009.

    In the parlance of Insurance, a specialized sector of the financial system, Capital means Reserves.  Lowering Reserves requirements means lowering the capability of Insurance Companies to pay Claims, in general terms.  That too is a lesson to learn from the Credit Collapse.

Please Read The Disclaimer.

Credit Default Swaps Without Capital Reserves: Making Money Without Money.

    The profiteers from Credit Default Swaps never wanted them regulated.  In particular, they did not want the issuance of CDS's to be regulated like Insurance was regulated.  Even when the CDS's were the moral equivalent of Insurance and cried out for Regulation.  "The most critical role for regulation is to make sure that the sellers of risk have the capital to support thier bets."  Michael Lewis and David Einhorn, "The End of the Financial World As We Know It" p. 9, col. 1 (Sunday New York Times, "Week in Review" Section, January 4, 2009). 

    The results are clear.  The profiteers from Credit Default Swaps did not have the capital, the Reserves, to support their bets.

Please Read The Disclaimer.

"They Bet Your Life Insurance Reserves. And You Lost?": UPDATE 2

   MAYBE IN SOME STATES?

    This post updates a couple of previous posts here.  The post of December 21, 2008, "They Bet Your Life Insurance Reserves.  And You Lost?", contains a postscript added on January 12, 2009 reporting that the National Association of Insurance Commissioners scheduled a Hearing for the end of January, 2009 on "emergency" measures proposed by several Life Insurance Companies requesting an expedited process from the NAIC to adopt their proposals.  The issue behind all of the proposed measures was whether to immediately loosen the Reserves requirements imposed by the States on Life Insurance Companies.  The change would have allowed the Life Insurance Companies to operate immediately, and to report their impending results from 2008, with fewer Reserves than were previously required (and are still required, now).

    On February 2, 2009, a second post reported here that the National Association of Insurance Commissioners executive committee scotched this idea.  In an NAIC Hearing held on Thursday, January 29, 2009 the linked proposals were all voted down in a "nearly unanimous vote" of the NAIC executive committee; only one (1) State Insurance Commissioner voted in favor of the Life Insurance Companies' proposals.  The evidence to support this proposal either did not exist or was not presented by the Life Insurers, according to Commissioners.

    Now certain Life Insurance Companies are taking their case, if not evidence, to individual State Insurance Commissioners who they perceive may be more sympathetic to their request.  See Andrew Frye and Erik Holm, "Insurers in Illinois, Iowa [and Kansas] Seek Relief From States (Update 3)" (Bloomberg.com, Friday, January 30, 2009).

    The risks, rewards and consequences to Policyholders, consumers, Life Insurance Companies and their lobbyists are explored in detail in this linked report well worth a look:  David S. Hilzenrath and Nancy Trejos, "The Risks of Life Insurance/Anxiety About Industry Complicates Consumer Choices" (Washington Post.com, Sunday, February 1, 2009).

Please Read The Disclaimer.  

"They Bet Your Life Insurance Reserves. And You Lost?": UPDATE.

MAYBE NOT.

    This post updates a previous post here on December 21, 2008, "They Bet Your Life Insurance Reserves.  And You Lost?"  A postscript added to that post on January 12, 2009 reported that the National Association of Insurance Commissioners scheduled a Hearing for the end of January, 2009 on "emergency" measures proposed by several Life Insurance Companies requesting an expedited process from the NAIC to adopt their proposals.  The issue behind all of the proposed measures was whether to immediately loosen the Reserves requirements imposed by the States on Life Insurance Companies.  The change would have allowed the Life Insurance Companies to operate immediately, and to report their impending results from 2008, with fewer Reserves than were previously required (and are still required, now).

    The National Association of Insurance Commissioners executive committee reportedly scotched this idea.  In an NAIC Hearing held on Thursday, January 29, 2009 the linked proposals were all voted down in a "nearly unanimous vote" of the NAIC executive committee; only one (1) State Insurance Commissioner voted in favor of the Life Insurance Companies' proposals.  The majority of State Insurance Commissioners included the New Hampshire Insurance Commissioner, who issued this statement after the NAIC executive committee vote:

Simply put, the [Life Insurance] industry has not made a credible case for why we need to make changes on an emergency basis, and why those changes should be limited to the specific proposals made by the industry.

    One newspaper described the Life Insurance Company's defeated proposals "as a cashless bailout.  They would have changed the way companies and regulators measure life insurers' financial strength, making them look healthier than they otherwise would appear."  David S. Hilzenrath, "Relief Denied For Life Insurers/Industry Must Keep Financial Cushion" (Washington Post.com, Friday, January 30, 2009).

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If Insurance Trades Like a Security, Regulate Like a Security?

        Apparently the new Administration in Washington has made a decision that the Federal Government should have the power to regulate Credit Default Swaps as securities.  This means that the States would perhaps completely lose any power to regulate CDS's that act like Insurance, as the Credit Insurance they really are.

    One option is frequently found in Federal Statutes:   Provide an exemption in favor of State Regulation where State Regulation exists; otherwise, Federal Regulation will occupy the vacuum.  In this instance, whenever CDS's function like Insurance and are regulated by the States, which after all have been regulating Insurance of various kinds long enough to be fully experienced at it, then the Regulation of those particular kinds of CDS's can and should be "exempted" from Federal Regulation in favor of the existing State Regulation.  In an earlier post here, it was reported that New York State for one example will begin regulating Insurance-like Credit Default Swaps this month.   See also posts of December 24, 2008 and January 7, 2009 archived in the Categories of Credit Insurance, Market Performance, Regulation, Reserves, and Risk Management. 

    "Tradeability" seems to be the determinative test used by the Obama Administration for Federal Regulation of CDS's at this early date.  If a CDS cannot be traded "on exchanges or through clearinghouses" then the Obama Adminstration reportedly will not try to regulate them.  If on the other hand a CDS can be traded, then regardless of other characteristics -- such as the distinction between Insurance in which the purchasing party has an Insurable Interest should a nonparty "default," vs. wagers or bets in which the purchasing party has no dog in the fight but instead is only placing a bet or wager that the nonparty will (or will not) default -- then the fact that the given CDS can be traded like a security is all that will count in the Federal Government attempting to regulate it like a security, rather than treating a qualifying CDS like Insurance.  (Insurance has for many years been regulated by the States.)  See generally Stephen Labaton, "Obama Plans Fast Action to Tighten Financial Rules/New Scrutiny for Hedge Funds, Derivatives Market and Credit Rating Agencies" p. 1, col. 5 (New York Times Nat'l Ed., Sunday, January 25, 2009).

    Happily, the Obama Administration reportedly would or "could" include new requirements for Reserves in its attempts to fashion regulatory schemes for Credit Default Swaps:  "The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments."  Id.

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Sector Snapshot: Insurance -- Lagging Life Insurers.

    News posted here on December 21, 2008 and updated most recently last night, "They Bet Your Life Insurance Reserves.  And You Lost?  Maybe Not," posted in the categories of Life Insurance, Market Performance, and Reserves, is reflected in the news of today.   Life Insurance Companies are leading the laggards or lagging behind much of the rest of the Insurance Sector in share price in this latest New York Times Sector Snapshot:  Insurance (New York Times Nat'l Ed., Business Section, Tuesday, January 13, 2009).  (Go to the "Categories" box on the snapshot and select "Financials".  On the dropdown bar that appears when you click on "Financials," select "Insurance".)

    Yesterday the National Association of Insurance Commissioners denied a very recent request made by many Life Insurance Companies, which have lost large amounts of money betting on Credit Default Swaps and other securitization "products," to immediately reduce the amount of Reserves they must carry.  See Andrew Frye, "Hartford Falls As Plea For Speedier Reform Rebuffed (Update 4)" (Bloomberg.com, Monday, January 12, 2009).   The consistent lag in share price of these Life Insurance Companies in question reflects the stock market's response to their financial decisions over the past year as well as over the past week.

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CDS Unregulated "Insurance": Regulation and Risk Management Mean Capital Reserves.

    A previous post exposed the little-known fact that there are several different kinds of Credit Default Securities or CDSs.  See "CDS Unregulated 'Insurance':  How the AK-47 Chewed Up Wall Street," December 24, 2008.  See also "CDS Unregulated 'Insurance':  The AK-47 Loose on Wall Street," December 15, 2008.

    Some CDSs function like Insurance.  Other CDSs function like wagers or bets.  Few CDSs are regulated.

    There is general agreement that the lack of regulation of CDSs must change.  There is disagreement, though, over many specifics of how the different types of CDSs can most efficiently be regulated.  There is no disagreement, however, that CDSs require Reserves:

The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Michael Lewis and David Einhorn, "The End Of The Financial World As We Know It" p. 9, col. 1 (New York Times Nat'l Ed., Week in Review Section, Sunday, January 4, 2009).

Please Read The Disclaimer.

CDS Unregulated "Insurance": How the AK-47 Chewed Up Wall Street.

      There are at least two (2) types of Credit Default Swaps (CDS's) that were loose on Wall Street.  One is akin to Insurance:  It provides a contracted payoff in the event of a default on a transaction, often involving an insurable interest in the transaction held by the one buying the CDS.

    Another kind of CDS is like a bet.  No insurable interest is required.  Nor for that matter is a transaction required.  The bet-like CDS can be purchased to pay off if a stated event occurs, such as the lowering of interest rates by the Fed for example, otherwise the bettor-purchaser loses the bet if the stated event does not occur.

    The different types of CDS's have been lumped together, although they are different.  Perhaps that is because they have not recently been regulated.  The first group, which is like Insurance, has always been susceptible to Regulation by the States as Insurance.  Few State Insurance Commissioners have attempted to regulate any CDS's, in the past.  Effective next month, however, the New York Department of Insurance for example will begin regulating some forms of CDS's.  (See previous posts on this issue in this space.)

    The kinds of CDS's that are like bets have also been unregulated.  Since they are not Insurance or sufficiently like Insurance to attract the attention of State Insurance regulators, they were and are left alone by them.  Eight (8) years ago, in an apparent display of caution, CDS's in general were preempted from Regulation by the States as "bets".  This was enacted in the Commodity Futures Modernization Act of 2000.  Why the CFMA and why the link to financial devices used in agriculture?  Because "futures" trading of agricultural commodities has involved various kinds of "futures contracts" which, in essence, have come to include CDS's and other derivatives.

    The background of CDS's, and their role in de-Regulation efforts and in financial failures, are all examined in this extremely informative, riveting CBS 60 Minutes Video on Credit Default Swaps.

    Today "Regulation" of some or all CDS's is something of a turf war among and between Federal agencies.  Whether they will leave any role for State Insurance Departments to do what they do best, which is to Regulate "Insurance" products and devices, is unknown.  The Federal Securities and Exchange Commission just announced that it was authorizing a "central clearinghouse for transactions involving credit-default swaps" in order to attempt to "bring transparency to the market, posssibly reducing risks to the financial system." Marcy Gordon, "SEC Moves to Bring Transparency to Market for Credit-Default Swaps" (Washington Post.com, Associated Press Copyrighted Story, Wed., December 24, 2008).

    On the same day, the Commodity Futures Trading Commission and the Federal Reserve Bank of New York -- home of the Treasury Secretary-nominee in the incoming new Administration -- authorized instead two (2) other clearing houses for credit-default swaps, ostensibly for the same purpose.  Hal Weitzman, "Citadel and CME Win CDS Clearing Consent" (Financial Times.com, Wed., December 24, 2008).

    In the meantime, CDS's continue to take their toll, whether they are more like losing "bets" or more like "Insurance" which is not backed by Reserves.

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They Bet Your Life Insurance Reserves. And You Lost?

  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). 

Please Read The Disclaimer.

CDS Unregulated "Insurance": The AK-47 Loose on Wall Street.

This is the beginning, the first post in a pressing occasional series takng a look at the biggest unregulated form of Insurance in the World, the "Credit Default Swap" or "CDS".

    The current credit crisis is a financial failure.  It is not the result of unavoidable events like lightning and thunder.  It is not the result of negligence alone, either.  It is instead the result of a combination of unrecognized ignorance and recklessness.

    The most horrifying thing about this currently cascading failure, aside from the fact that it seems to continually get only worse, not better, is that it is being addressed with the same combination of ignorance and recklessness that brought failure in the first place.

    Through ignorance or intentional disregard of Risk, Reserves and Accounting Regulations some people profited enormously for a short time from Credit Default Swaps or CDS's.  These people did not correctly calculate nor manage the Risk of CDS's.  They intentionally rejected the need for Reserves to back up the obligation of any CDS.  And they manipulated Accounting Regulations after the risk taken on CDS's was transferred to third parties in theory, though not in reality.

    This is the first post in a series that will take a hard look at CDS's and their role as the biggest unregulated "Insurance" in the world since they were made for the first time in 1994.  See also Matthew Philips, "The Monster That Ate Wall Street/How 'Credit Default Swaps'--An Insurance Against Bad Loans--Turned From A Smart Bet Into A Killer" (Newsweek, October 6, 2008); "Securitization," encyclopedia entry on Wikipedia.org.

Please Read The Disclaimer.    

Allstate Third Quarter 2007 Results Weakened by Past Catastrophe Estimates.

     Here is a link to Allstate's own Third Quarter Results Press Release.  Here are some interesting results revealed in its 33 pages.

     First, it is good to know independently that there were few if any Catastrophe Claims in the Third Quarter 2007.  Certainly, none were identified by Allstate that occurred during that time.  However, the Allstate Press Release attributes its Third Quarter 2007 economic results in part to the increased cost of catastrophe reinsurance.  See page 3 of the Allstate Third Quarter Results Press Release.

     Second, Allstate made a mistake in estimating reserves for CatClaims in past years.  Its Press Release does not actually say that it made that mistake, of course.  However, Allstate "restates" the reserves for CatClaims in past years, and inputs them as a deficit against its performance in the Third Quarter 2007.  Thus, Allstate's results for the quarter just past in 2007, are made less by Allstate's mistaken estimates in past years, including as far back at least as 2005.  See id. page 4.

     2005 was the year of Katrina and Rita.  So, in Allstate's own words, its "increased claim expense reserves for 2005 events", i.e., its increased claim expense reserves for Hurricanes Katrina and Rita and other Catastrophes in 2005, were the "primary" cause of Allstate's own "prior year reserve reestimates" in The Third Quarter of 2007.  See id. at 5.  This does not mean that anything wrong was done here; in fact, all of this accounting may be in accordance with Generally Accepted Accounting Principles or "GAAP" and thoroughly lawful.  This does mean, however, that it is not accurate for anyone to read or report based on these numbers that Allstate's reported results in the Third Quarter of 2007 are principally caused instead by Catastrophes this year.

     Third,  it is interesting that Allstate has a list of what it calls "Hurricane Exposure States," and that Allstate breaks them out not only for Homeowner's Premiums, as might be expected, but that Allstate also breaks out the same "Hurricane Exposure States" for Standard Auto Premiums:  Alabama, Connecticut, Delaware, Florida, Georgia, Louisiana, Maine, Maryland, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, and Washington, D.C.  (Each of these States on the Eastern Seaboard has a coastline, of course, but how does that affect Standard Auto Premiums?  Remembering that this breakout of certain locales is for a report on economic results by a large and successful corporation, perhaps this breakout reflects not just the results but some of the thinking that shapes the reporting of those results.  In this instance, it is known that it is more lucrative for Agents to write both Homeowner's Insurance Coverage  and other Coverages offered by Allstate, too, perhaps the biggest line by far and thus the line of greatest interest among those other Coverages being Standard Auto.)

Postscript on Sunday, October 21, 2007:  Orlando Sentinel Reporter Anika Myers Palm has this to say, after reading the above Third Quarter Results Press Release:  "Allstate's results for the quarter, which include all its lines of business, stand in contrast to the results of the property-insurance industry."   Anika Myers Palm, "Allstate OK With 16% Drop in Profits" P.C1, Col. 5 (Orlando Sentinel Central Florida Business, Thurs., October 18, 2007).

Please Read The Disclaimer.   

New York Regulators Receive Raves, Reservations Re Hurricane "Reserves".

     New York State insurance regulators  have received favorable  reactions  from  some Insurance Companies about a new plan for Hurricane "Reserves".   New York has not had a major Hurricane since 1985.  Still, in  some areas of New York State, 25% of the premium for all kinds of CatClaims Coverages is due to the prospect of Hurricanes.  In years like last year, when there are no Hurricanes, that amount is profit.

    Under the plan proposed in New York, Insurance Companies would be asked to set aside a special Hurricane "Reserve" representing the amount of premium attributable to Hurricane Risk.   The CEO of The Travelers, for one, is quoted as hoping that this is the positive beginning of a model for the United States.

     Lower-level representatives of other Insurance Companies are quoted as not necessarily being so enthusiastic, however.  These people point to the effects of Federal taxation and the hard facts of business:  The money set aside in Hurricane "Reserves" under a plan like New York's, would not be deductible immediately as a business expense under Federal tax laws, and like all reserves, it could not be used to earn a profit for these Insurance Companies so long as the money was in "reserve".

     These and other raves, reservations and interesting issues involved in New York's proposed Hurricane "Reserve" are thoughtfully and insightfully explored by Joseph B. Treaster, "Special Fund Proposed for Hurricane Insurance/Industry Expected to Revisit New York Plan" Page C4, Col. 5 (New York Times Nat'l Ed., Tuesday, October 9, 2007).

                                            Please Read The Disclaimer.