They're at it Again

These guys never give up! You know -- the insurance guys. Today was a close call because word on the street was that this afternoon, insurance regulators were going to loosen financial oversight of the life insurance industry. To the surprise of many, it didn't happen.

Lately, the one bright spot on the regulatory scene has been that state regulation of insurance has worked. Every company in America is impacted by the downward economy and crisis in the financial markets. But, in general, the insurance industry has maintained its financial integrity. The AIG holding company tumbled due to unregulated credit default swaps. But AIG's regulated insurance subsidiaries are whole and healthy, no small thanks to the job state regulators are doing to protect policyholders.

No matter. On October 24, the insurance industry and the Financial Services Roundtable took a run at Henry Paulsen and tried to get some bailout money for the insurance industry. No luck.

Now, they're at it again. Led by the American Council of Life Insurers (ACLI), the life insurance industry has been trying to persuade state insurance regulators to ease their regulatory oversight by reducing the capital and surplus requirements for life insurance companies. The industry proposed nine complex changes in statutory accounting rules. What it amounts to is an accounting treatment change that would allow insurance companies to improve the bottom line through sleight of hand bookkeeping. In essence, it loosens the way certain assets can be handled for the benefit of the company. The ostensible benefit: it enables the insurance companies to better access the capital markets and artificially maintain healthy-looking numbers in their 2008 annual statements (soon to be filed with state regulators). The big downside: it's bad for consumers because the companies are given the benefit of less stringent regulation to help their bottom lines, but with no resulting benefit to policyholders. These changes increase the risk that insurers may not have adequate reserves down the line to cover their commitments to policyholders, and weaken the ability of regulators to spot problems before they get out of control or a meltdown ensues.

This proposal has been kicking around for about two years. Over the last couple of months, the life insurance industry tried to use the financial crisis to create a false sense of urgency, lobbying the leadership of the National Association of Insurance Commissioners (NAIC) to adopt the changes on a fast track, with limited public scrutiny.

This afternoon, though, the public interest prevailed...for now. The nation's insurance regulators, through the NAIC, voted resoundingly to reject any weakening of regulation of the insurance industry. It seems the regulators heeded the concerns raised by independent analysts like Joseph Belth, the most venerable insurance professor in the nation. Belth recently testified that: "The program is being adopted without evidence that relief is in the best interest of the insurance-buying public, that the relief is needed and that the relief will be meaningful." Prof. Belth went on to say: " the midst of the current financial crisis, it is unseemly even to contemplate the weakening of the conservative statutory accounting rules that have long been in place for life insurance companies." Prof. Belth then assailed the "secretive" nature of the process that produced this change. Finally, Prof. Belth called the proposal meaningless. He asked one of the nation's leading bond and credit rating firms, A.M. Best, if the ostensible change in a life insurance company's financial condition would be viewed favorably by the rating agencies. A.M. Best said changes "would not be viewed by A.M. Best as improving a company's financial condition for rating purposes."

Echoing Prof. Belth, the National Conference of Insurance Legislators (the lawmakers that chair the various state legislative insurance committees), urged the insurance commissioners to step back and reconsider the need for this "so-called emergency proposal." The state legislators pointed out: "The proposal's timing could not be worse in light of the present economic decline, as it leaves the appearance that standards are being relaxed when the rest of the world is calling for more oversight." The legislators also expressed "grave concern" about what has been characterized as a "secretive effort."

As a former Insurance Commissioner, I admire and respect my fellow regulators for their prudent actions. They have held the line in troubled economic times. The definite movement by the new administration will be toward strengthening regulation. The NAIC recognized that the last thing we need is to unilaterally give away an important regulatory tool to monitor and address the health of the life insurance industry.

Today, I think there's a pretty good argument to make to let insurance regulators oversee our peanut butter.