A sign that US insurance regulation needs to change September 16, 2013 at 7:30 am

The captive reinsurer problem is kicking up, thanks mostly to Benjamin Lawsky, NY state insurance commissioner. Lawsky is withdrawing from the new National framework on captives, saying that it did not work and was, in fact, making the “gamesmanship and abuses” in the industry even worse.

Now, I haven’t studied this issue in detail, but Metlife’s comment that captives are a

“cost-effective way of addressing overly conservative reserving requirements… Alternative means of financing such reserves have drawbacks. Using equity could reduce returns to levels below those required by investors”

does not read well. When a regulated firm is focussed on ‘the returns required by investors’ rather than a safe level of capital for its risks, one might reasonably infer the wrong attitude to capitalisation. If nothing else, Lawsky’s crusade against shadow insurance should provide good spectator sport.

2 Responses to “A sign that US insurance regulation needs to change”

  1. Indeed, having seen reg arbitrage via cap subs in Bermuda, Cayman and elsewhere, it is interesting to note that the current protests from the life side mirror what was said by the non-life folks in the 90s. AIG was the most obvious with its reserve shifting schemes that would have made an 1880’s harlot blush. All the while, Mr. Greenberg pilloried any and all who questioned AIG’s slight of hand.

    Nevertheless, reserve requirements are one of the most blunt instruments in the reg quiver. Unfortunately, time is the only true test of the pudding. MetLife is no AIG, however, they will have to bear the cost of this until they can prove, to the test of time, that they are correct. It is equally interesting to note that New York, in it’s infinite wisdom, has deemed that Actuarial Guideline 38 (AG38) governing Universal Life reserves, which they first embraced, is now not sufficient. Simplified, AG38 allows insurers to use their own experience to drive the reserve requirement for their UL books of business “Principle Based Reserving or PBR”. This may sound familiar to aficionados of bank loan loss reserve setting under Basel II…..

    The test used by New York appears to be simply that reserve requirements under the new AG38 PBR did not increase reserves “enough”. The New York regulator has stated “PBR represents an unwise move away from reserve requirements that are established by formulas and diligently policed by insurance regulators in favor of internal models developed by insurance companies themselves….”

    Hmm… “formulas”,”diligent”,”policed”,”regulators”… sounds like a formula used before that failed. Unfortunately, where I currently reside, PBR refers to a cheap, thin beer whose formula was acquired out of a liquidation proceeding. Let’s see what happens.

  2. Thank you – most insightful. I will mull on this a little; there is probably a post to be written on the issues in assessing solvency of businesses like life insurance where there is no reliable way of PV’ing assets and liabilities…