POSTPONED: NAIC Meeting On Private Equity, Hedge Funds’ Renewed Interest in Life Insurance and Annuities Industry
May 23, 2013
UPDATE: The NAIC Financial Condition (E) Committee meeting scheduled for today, May 23, 2013, has been postponed and is expected to be rescheduled in early June. Colodny Fass& Webb will provide an update on the new date.
The National Association of Insurance Commissioners’ (“NAIC”) Financial Condition (E) Committee (“Committee”) will meet via conference call tomorrow, May 23, 2013 at 12:00 p.m. (ET) to receive a referral from the Financial Analysis Working Group (“FAWG”) on a proposed new working group that would develop best practices and possible policy position changes relating to increased interest in the life insurance industry by private equity interest and hedge fund managers.
As part of its agenda, the Committee will also consider adoption of a proposal regarding Life Insurance Company Risk-Based Capital C-1 for Commercial Mortgages, which was adopted by the NAIC Capital Adequacy Task Force on April 30. To view the meeting materials, click here.
To register for the call, click here. (You must be registered as an interested party with Chorus Call prior to the call. To register as an interested party, call 800-967-4633 or use the following link: https://services.choruscall.com/naic/forms/registerip)
In its referral to the Committee, the FAWG explains that the low interest rate environment is considered to be a key risk to the life insurance industry. It requires both expertise in hedging and an ability to retain investment yields at a rate that is adequate to cover the long-term benefits under such policies. Some life insurers appear to be interested in limiting this risk by either reinsuring the business or by selling such operations.
While investors naturally have an interest in managing this risk, it is believed to be critical that these interests be aligned with those of annuitants and beneficiaries. More specifically, these products and individuals require a long-term view when investing their funds to meet the future policy benefits. Therefore, prudence must be used by an insurer in managing such funds, as well as any other entities within the holding company structure in order to limit any unnecessary risk to the policyholders. However, some members of the FAWG believe that this use of prudence is inconsistent with the business model of private equity firms and therefore creates inherent risks, thereby leading to the primary issue for regulators to consider.
As a possible solution, the FAWG recently discussed various practices and procedures regulators can use when considering ways to mitigate or monitor these risks, most of which are not currently codified.
The following list contains these recommendations, all of which could ultimately be considered for inclusion in the NAIC’s Financial Condition Examiners Handbook and Financial Analysis Handbook:
Possible Best Practices
- Change in Control Form A Considerations: The FAWG believes this is one of the primary areas where best practices should be utilized when considering ways to address the above inherent risks. Acquiring entities would be required to demonstrate that a policyholder is fundamentally more secure with the proposed acquisition of control.
- Perform an annual targeted examination of an insurer and its affiliates to ensure that the investment strategy continues to provide a prudent approach for investing policyholder funds;
- Perform targeted examination procedures on non-affiliated insurers where the direct writer has ceded a material portion of its annuity risk to the private equity-controlled insurer;
- Coordinate outside of the examination with international regulators or others where either another non-U.S. insurer is involved, other financial institutions are involved, or where the ultimate controlling entity is not based in the United States; and
- Continue monitoring macro-level events through the NAIC Capital Markets Bureau.
Possible New Procedures
- Change in the Credit for Reinsurance Model Law: To provide regulators additional authority to require approval of transactions with non-affiliates;
- Change in state investment laws: To provide regulators additional authority in limiting risks; and
- Change in Risk-Based Capital Formula: To capture any risk not otherwise already addressed.
Should you have any questions or comments, please contact Colodny Fass& Webb.
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