NAIC Debates Capital Requirements

The controversy over the loosening reserve requirements for insurers was aired in public today at a hearing where regulators heard testimony from industry representatives and consumer groups.

The National Association of Insurance Commissioners (NAIC) Capital and Surplus Relief Working Group met in the wake of complaints from consumer groups that the issue of how to treat statutory capital and surplus requirements in the NAIC solvency framework was being conducted behind close doors.

NAIC began to study the issue at the behest of representatives of the life insurance industry, who contend existing requirements are too conservative and hamstring insurers. Opponents of changing the current requirements charged state regulators were doing the bidding of an industry they are supposed to regulate.

American Council of Life Insurers (ACLI) Chairman Pat Baird told the panel that the current capital and reserve requirements are too constrictive. These overly conservative standards have forced insurers to hold more capital than is necessary to absorb losses and pay claims, Baird testified, adding that changes proposed by ACLI free up this capital and provide a more accurate picture of a company’s financial health.

“These requested reforms do not weaken or strengthen a company’s ability to pay claims,” he said. “No cash gets transferred in or out of a company as a result of the proposal.”

Bradley Smith chairman of Milliman Inc., a Seattle-based provider of actuarial consulting services to the life insurance industry, testified that current requirements impair the industry's ability to access the capital markets in tough times.

“The requirement to hold excessive amounts of reserves and capital and surplus reduces the return on capital produced by the industry,” he said. “This makes investment in the industry less appealing to investors. Historically, many insolvencies have been caused by the temporary illiquidity of a particular asset class. Access to the capital markets can help a company weather such a storm.”

Yet, J. Robert Hunter, director of insurance for the Consumer Federation of America, said the current economic condition does not warrant a sudden remaking of reserve requirements.

“Throughout the sub-prime and financial crises, state regulators and the NAIC have claimed that insurance companies are strong, and that state-based regulation has protected insurance consumers as federal regulators have failed to do,” he testified. “Given these claims, why has the industry sought and regulators conceded emergency and rushed treatment of these proposals?”

At the hearing NAIC President and New Hampshire Insurance Commissioner Roger Sevigny stressed no changes were immediately forthcoming.

“During these perilous times for our nation’s financial sector, insurance regulators are faced with some challenging decisions, but our foremost priority must be to protect America’s insurance consumers,” he said. “Many of the proposals before the Working Group have been discussed for years as part of our continuing efforts to modernize our solvency regime, and we are being extremely cautious as we proceed with consideration of any changes.”

These assurances did not mollify Hunter, who termed the public hearing a sham orchestrated to give the impression of openness.

“We note that the Capital and Surplus Relief Working Group has already adopted its recommendations—discussed and agreed to in secret meetings—and that various working groups and taskforces have already prepared the documents to implement the Working Group’s recommendations,” he said. “The fact that the full membership of the NAIC is scheduled to consider adopting these recommendations in two days indicates that the NAIC leadership expects no changes from the current recommendations. We cannot help but believe that the decisions have already been made and the public hearing is for show.”