ICS adopted, but US to keep it at arms length while its approach gets 5 years to show similar results

–Updated with Treasury’s negative reaction to the ICS and industry response.

The International Capital Standard for insurers is making its long-awaited debut on the global stage but the U.S. will not be using it as-is: the International Association of Insurance Supervisors has voted in its annual meeting in Abu Dhabi Nov. 14 for the ICS to go into play with a five year monitoring period.

Key to the vote, though, is an agreement to include the U.S.-based methodology for computing capital standards in the same monitoring period rather than waiting five years — and then considering it then.

This assessment, backed by the U.S., will take place according to the same ICS timeline. After this period, if the aggregation method “is deemed to provide comparable outcomes to the ICS, it will be considered an outcome-equivalent approach for implementation,” the IAIS stated in a release.

Both insurance group participation in the monitoring and the results of this monitoring period are still fluid, though, as political, regulatory and industry sector pressure have coalesced against any solvency system that does not conform to the balance sheets of U.S. insurers.

The purpose of the ICS is to form a “common language” of capital to discuss and assess systemic risk and insurance company solvency across borders, to keep both companies and global markets out of trouble.

“Team USA” — state insurance regulators, the Federal Insurance Office at the Treasury Department and the Federal Reserve Board — is claiming partial victory for advancing its cause in the pursuit of a framework that works for all jurisdictions in promoting global financial stability. The National Association of Insurance Commissioners was fervent in stressing, though, that is not committed to using this or another iteration of the ICS, now or in the future, if the computation methodology does not meet its needs. 

“While U.S. state regulators will not be implementing the ICS, we remain committed to an approach to group capital analysis which can and should be viewed as comparable to the outcomes achieved by the ICS,” stated Eric Cioppa, NAIC president and superintendent of the Maine Bureau of Insurance, in a Nov. 14 press release.

The U.S. aggregation methodology is currently under development at the NAIC, although the Federal Reserve has created a similarly-derived approach based on state insurance regulation for the insurers it regulates as thrift holding companies.

The U.S. has long held that its approach to capital cushions  works for the insurance industry it oversees.Swiveling to the IAIS strict quantitative model with its dependence on more volatile market-adjusted valuations would be detrimental to U.S. industry and regulatory interests, state regulators have argued, pointing to the long-tail investments on balance sheets here in the U.S. from products like indexed annuities and universal life products with return guarantees.

The NAIC suggested it did approve of the advancement of the ICS in the formal vote without committing to using it  in any formulation it deems unfit for its purposes. The voting by various jurisdictions is confidential so the votes are not publicly available.

However, Treasury made its displeasure clearly known.  “U.S. insurers should not face pressure to participate in a reference ICS that is not expected to apply in the United States and does not fit our markets. The current form of the ICS could also risk limiting U.S. consumers’ access to important long-term saving products,” a readout from Treasury stated.

It did  nod to the U.S. stakeholder  teamwork and negotiations that led to its decision.

For their part, U.S. state regulators “will continue to assess future progress to ensure the ICS and the approach to comparability develops in a way that does not run counter to U.S. interests,” the NAIC stated cautiously.

However, as one source noted, the devil is in the details and it is too soon to say whether there has been an agreement that will hold, given the subjective nature of comparable outcomes or equivalence.  The IAIS said in a press release Nov. 14 that it had agreed on a definition of comparable outcomes for the ICS. This means it will develop a system or tools to judge whether the U.S. aggregation method, although different, will produce comparable or substantially the same results as the newly-adopted ICS.

In doing so, though, IAIS could potentially still use its market-adjusted valuation ((MAV) approach to test for equivalence, for example, which would run contrary to the Team USA approach.

ICS Version 2.0’s  five-year monitoring period starts in January 2020. During this period,  internationally active insurance groups will submit data and undergo testing. The NAIC made clear though that the IAIS  “cannot mandate participation and ultimate decision-making rests with state group-wide supervisors.”

The NAIC noted that state regulators only supported the ICS vote in Abu Dhabi “after the IAIS agreed to significant changes resulting in an achievable definition and approach to assessment of comparable outcomes, providing a clear path for the Aggregation Method.”

The IAIS agreed to make other modifications the U.S. had sought, including ICS modifications, an economic impact assessment and operational and timeline enhancements.

“Members of Team USA have been clear that the pathway provided today ensures the Aggregation Method, as one part of a comprehensive U.S. regulatory framework, will be viewed through outcomes it provides and not simply a quantitative lens,” the NAIC stated in a press release.

Team USA appears to be sticking together.

“In coordination with the Federal Reserve and Treasury, we are committed to remaining actively engaged at the IAIS in the ICS project and all other work streams and are committed to advocate for, and only accept, those proposals that are in the best interest of U.S. consumers and insurers,” stated Massachusetts Insurance Commissioner Gary Anderson, who chair the NAIC’s International Insurance Relations Committee.  

The ICS has been at least five years in the making.

During the coming monitoring period, the ICS won’t trigger any supervisory action, the IAIS assured although U.S. rating agencies’ staff have been eager to find out how it would affect insurers’ credit ratings, industry executives have said.

Team USA left with “a scrap of paper and a promise to come to an agreement on ICS down the road… probably the best deal that was available but still just an illusory promise to agree to something down the road..,” one U.S. insurance industry participant said.

Team USA technical members are now pouring over the documents to figure out what exactly was decided and how certain financial terms are defined and applied.

Results during this period are meant to be confidential, as they have been during the development and testing phase.

 

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‘Dire situation’ in life/annuity sales materials warrants ‘Halloween’ warning: insurance consumer rep

A longtime consumer advocate in the oversight of the insurance industry told regulators that  investment disclosures for life insurance and annuity disclosures and performance are failing consumers and  even charged that has some hard-wired policy directives that can lead to deceptive and misleading advertising. 

In an Oct. 31 letter expressing an unusual urgency, Birny Birnbaum, who heads the Center for Ecomonic Justice, pushed for an overhaul of regulatory work to create a consistent and overarching framework for life insurance and annuity disclosures. He wrote he views the current workstreams as contradictory and fractured, leading to harm for purchasers of the products. 

The non-profit CEJ “also recommends – and cannot stress enough the urgency of – a working group to address the sorry state of life insurance and annuity illustrations and the related harm to consumers,” Birnbaum wrote. 

He noted that the his  purpose “is to better describe the work of the current Life Illustrations working group and, described the current state of life insurance and annuity illustration disclosures for consumers a “dire situation.”

Birnbaum is referring to working groups of the National Association of Insurance Commissioners.

He reminded regulators that one of “the three legs of the NAIC Retirement Security Initiative is consumer education.” However, he alleged that the current NAIC model regulations involving industry product investment  illustrations and advertising  allow and even” in some cases, require – misleading, confusing and/or deceptive information be provided to consumers in the form of illustrations.”

The letter comes as the NAIC is getting ready to decide on the 2020 policy charges for its life insurance and annuity committees.

The charges are now in draft form but they will be considered as early as Nov. 4 in a conference call meeting, according to the meeting agenda.

The Texas-based consumer advocate is recommending an overhaul of the various working groups working on model regulations and guidance for life insurance and annuity product advertising, disclosures the use of indexes for products tied to stock market or other indexes. He is calling for comparative shopping guide so that consumers can see side-by-side the format, operations and design of these products. After that, the idea is that consumers could adjust their expectations and costs more accurately, he suggested.

 Birnbaum noted that the overall  NAIC parent committee, the so-called Life Insurance  and Annuity Committee, often called A Committee, has four work streams involving life and annuity disclosures and illustrations as well as an annuity suitability group and model law that are working narrowly or at cross purposes with each other, using lawed models and neglecting to take on the entirety of what he says needs to be foe on behalf of consumers so they can understand what they are buying. 

Birnbaum pointed to life and annuity products that use indexes to show potential performance as part of the problem. 

In some cases, “insurers turn to bespoke indexes created by investment banks by data-mining historical experience to falsely present potential future earnings,” he charged. But for some products, such as fixed indexed annuities, the use of bespoke indices has created huge conflicts of interest, Birnbaum said. That’s because the investment banks behind the specially tailored indexes could also be hedging to the insurers using the index.

In addition, changes made to help consumers such as a 2015 actuarial guideline that was created to show more realistic accumulation values in indexed universal life products, for instance, has resulted in insurers who now “game” the system by creating new features that add downside risk and have higher expenses. These new features are referred to as multipliers and bonuses .

“The insurers have taken a product that purports to eliminate downside risk and added that very downside risk with asset charges,” Birnbaum charged. The actuarial guideline referenced is known as AG 49. The NAIC states that AG 49, was developed to bring uniformity to life insurance product illustrations when the investments rely on an external index or indices. This works by making “a reasonable cap on the illustrated credited rate.”

The disparities between what life insurance advertising models show versus  what annuity illustrations show isn’t helpful to consumers because some of these products  require certain disclosures and others lack such requirements, he wrote, using as an example differing requirements across products for disclosures on a sequence of return risk.

In pushing for a holistic framework for disclosures and illustrations for all life investment insurance products, Birnbaum praised the regulators work in multiple instances but pushed for changes that bypass the industry’s wishes so the policy work will not be “undermined.” 

The life insurance industry responded swiftly but briefly in a Nov. 1 letter to Doug Ommen, Iowa insurance commissioner and chair of the theNAIC Life Insurance & Annuities Committee and Richard Wicka, the Wisconsin’s insurance regulator’s chief legal counsel and chair of Committee’s Life Insurance Illustrations Issues Working Group and other regulatory officials 

 The letter from American Council of Life Insurers Vice President Michael Lovendusky references the “Halloween Proposed Changes to NAIC (Committee Draft 2020 Charges” in asking regulators to table the proposed charges until the NAIC’s fall national meeting. The meeting is scheduled for Dec. 7-10.

Lovendusky pointed out in his letter that ACLI members had received these proposed substantive changes just moments ago. He lobbied for an opportunity for all interested parties to have a chance to respond to Birnbaum’s proposals before the fall meeting, to be held in Austin, Texas.

“Relevant considerations are underway by the Life Insurance Illustrations Issues Working Group,” Lovendusky, also a long-time industry participant, explained to regulators. He noted that comments are due by Nov. 15. When the working group is has all of the feedback requested, only then should it act, he suggested. 

Upshot: expect many more comments and discussion but Birnbaum has been helping shape insurance regulatory policy for decades. 

3Q LTC result glimpse shows effects of heavier claims & lower interest rates, but states granting rate hikes

Third quarter 2019 results for U.S. long-term care insurance reveal that new, higher claims activity combined with lower interest rates are weighing down the carriers’ balance sheets for this book of business.

However, there is some relief for these beleaguered blocks: policy rate increases of variable amounts granted by state regulators are reducing some of the adverse developments in claims and interest rates. 

Genworth Financial’s risk-based capital ratio for its life insurance companies pulled itself out of a sub-200% slump range in the third quarter despite a need to boost capital to support lower interest rates and new LTC claims growth.

Genworth is locked in a three-year-long merger agreement with China Oceanwide Holdings Group Co., Ltd., which stated that it remains committed to the transaction with Genworth, as well as the $1.5 billion contribution to Genworth over time following the consummation of the transaction, proceeds which would help the legacy LTC unit as it tries to start a new kind of LTC business.

Performance was hampered by a growth in new claims, the Richmond-Based company said in its Oct. 29 earnings release. Genworth’s life insurance companies’ consolidated RBC rose from 191% in the second quarter to 200% by the end of September, buoyed by in-force statutory earnings, it said. The RBC had been slipping before the slight rise. In the year-ago 2018 quarter, the RBC stood at 268%. 

Genworth’s LTC reported adjusted operating income was $21 million, compared with adjusted operating income of $37 million in the second quarter and an adjusted operating loss of $24 million in the year-ago quarter, it stated. These numbers reflect higher earnings from in-force rate actions, Genworth said. 

Meanwhile, MetLife is giving its LTC a loss recognition testing margin of $1.8 billion, an amount that, while down from last year, is a product of reduced future interest rates, according to an Oct. 31 analyst research noted from Evercore ISI. 

Unum posted an after-tax reserve increase of $593.1 million in the LTC product line of its closed block business in its third-quarter earnings. Back in the third quarter of 2018, its reserve increase was a bit larger —  $750.8 million. Unum acknowledged it had a favorable claim recovery experience in the group long-term disability product line for the quarter. 

Like Genworth, Unum reported that some declines in LTC performance had been offset by premium rate increases for the book of business. LTC insurers like Genworth and Unum have been actively and consistently seeking rate increases on their policies across the country. 

Unum reported heftier claims activity, as well. It stated that its interest adjusted loss ratio for the LTC line of business was 89.8 % in the third quarter of 2019, a bit higher than in the year-ago quarter, a result “primarily driven by higher claims incidence.”

Overall, Unum said that premium income for the closed block fell 3.9% in the third quarter from the year-ago third quarter mostly from policy terminations and maturities but that this had been  offset by  the police increases it was getting on certain in-force LTC business.

In its third quarter, General Electric Co. took a $1 billion pre-tax charge on its run-off insurance block, which holds its now closely-watched LTC insurance portfolio. GE attributed this charge chiefly to lower interest rates cutting into margins. Offsetting the negative economics of the business were projected premium rate increases of $300 million from state insurance regulators, according to the third quarter call transcript with investors and analysts.

Otherwise, GE’s LTC hit would have been $1.3 billion.