This article was originally published 23 February, 2009
Due to the unprecedented nature of the current financial crisis, certain sectors of the insurance industry have faced significant challenges concerning their surplus and risk-based capital levels. Not only have investment losses exerted pressure on the asset side of insurers' balance sheets, but certain products offered by insurers (such as term life, universal life with secondary guarantees and variable annuities) have led to difficulties on the liability side of insurers' balance sheets. Notwithstanding these challenges, an assortment of capital relief opportunities and strategies, including those summarized below, may be available to certain segments of the insurance industry.
State Regulatory Relief
In late 2008, the American Council of Life Insurers (the "ACLI") requested that the National Association of Insurance Commissioners (the "NAIC") consider several proposals to provide insurance companies relief from surplus strain exacerbated by the financial crisis. Among other items, these proposals included increased flexibility in determining reserves related to term life, universal life and variable annuity products and the ability, under certain circumstances, to recognize a larger deferred tax asset on its statutory financial statements. On January 29, 2009, the NAIC's Executive Committee voted to reject current implementation of the ACLI proposals.
Following the NAIC decision, a few state insurance regulators have expressed a willingness to consider, and, on a case-by-case basis, have permitted, certain insurance companies to adopt practices similar to some of the ACLI proposals.
- The Connecticut Insurance Department and the Illinois Division of Insurance have approved the use of two permitted practices: the first, allows the modification of the recognition of deferred tax assets from one year to three years and the increase of the asset recognition limit from 10% to 15% of adjusted statutory capital and surplus, and the second allows a stand-alone asset adequacy test to reflect all benefit expenses and charges associated with variable annuity contracts with guaranteed living benefit riders, not just those associated with the riders.
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