Chicago — Bob MacDonald, former CEO of Allianz Life of North America and financial services maverick, warns state insurance regulators that greater supervision is needed to protect insurance companies from themselves.
Writing in his blog, MacDonald notes that the focus of state insurance department regulation has historically been to protect the consumer from the actions of insurance companies. As it turns out, the regulators have been concerned about the wrong issue, he says. The objective of these regulations should have been aimed at protecting the insurance companies from themselves.
MacDonald says that state insurance departments are responsible for making sure that insurance products are in compliance with current state insurance law. Regulations insure that, among other things, the products are easily understandable by the consumer, that marketing efforts are consistent with what the policy promises, and they are in compliance with approved marketing practices.
What's missing, says MacDonald, is a requirement that insurance companies are capable of delivering on the promises made in the policy. State insurance departments, according to MacDonald, assume that insurances companies are managed by legions of sophisticated, intelligent accounting, investment and actuarial people who know what they are doing. That assumption, he charges, has proven to be a fallacy.
"The problem is that if the insurance companies are unable to live up to the promises they make in the policies—no matter how compliant the policies are with state law—the policyholder will be the ultimate loser," says MacDonald. "This is not a criticism of state insurance departments because they have only been charged with the compliance of a product, not the financial credibility of the company offering the product. And, the departments have never been staffed with individuals who could properly analyze the capability of insurance companies to meet the risks they have assumed.
"The current financial crisis has revealed that a number of insurance industry giants—f not the entire industry—may be unable to meet the guarantees and promises they have made in their policies," added MacDonald. "It has been estimated that companies such as The Hartford, Prudential, MetLife and a number of others have made policy guarantees that have put the companies in the hole by at least $50 billion and growing. (This number is for variable annuities only and does not take into account liabilities that may be buried in fixed or indexed annuities.) This is why these companies have been in such a mad dash to raise additional capital and restructure themselves as banks in an effort to participate in some of the federal bailout funds. The irony is that all of the policies responsible for creating this unanticipated liability and threatening the very viability of the companies were fully compliant and approved in the states where they were sold."
MacDonald claims that the failure of insurance companies has arisen due to the press of competition and the desire for growth and short-term profits, including increased bonuses. When insurance companies assume the risks of others or haphazardly make unreasonable promises in a rush to increase sales - as many companies have done—they violate the very definition of insurance. In doing so they put in doubt both the future of the company and the policyholder.
A Workable Model Already Exists
MacDonald urges state insurance departments to enact Sarbanes-Oxley (SOX) type regulation in order to create complete transparency as to the type and amount of risk being taken by insurance companies and how they plan to manage those risks.
Sarbanes-Oxley was implemented in an effort to counter abuses and even fraud that had plagued the financial reporting of many companies. While it appeared to be onerous and complicated, SOX had a simple objective of transparency in reporting financial numbers. It boiled down to three points: 1) The companies had to warrant that the numbers presented were correct, 2) The companies had to prove that controls were in place to assure the numbers were correct, and 3) The numbers needed to be available to everyone on a level playing field.
Regulation for the insurance industry should follow the same path with transparency of risk being the primary objective. In addition to demonstrating that the policies designed, sold and issued are in compliance with law, MacDonald insists the following should be required:
1) Insurance companies will clearly define the risks being assumed in the policy
2) Demonstrate an understanding of the potential size of the risk
3) Disclose a specific plan for the management and mitigation of the risks, and
4) Company board of directors and audit committee members must be held personally accountable for the veracity of the numbers being presented. This accountability is both financial and legal, meaning directors can be sued and even prosecuted if incorrect numbers are reported.
MacDonald believes the insurance industry has the potential to provide safe and secure financial products needed by the consumer and can gain a leading role in the financial services industry. However, this can not be fulfilled unless and until insurance companies once again demonstrate that they understand and respect risk and this will allow the companies to once again regain the confidence of the consumer.
The reality, says MacDonald, is that as difficult and intrusive as this type of regulation may be, it is the best thing that can happen to the insurance companies.
Source: PR Web
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