• As a liability-driven business, insurance often has long-term cash-flow patterns compared to shorter-term activities at banks.
  • Consequently, current law fails, I believe, to adequately account for the business model and risk profile of insurance companies, and that should concern us all.  (p1)

-- Senator Richard Shelby (R-AL)

The State of the Insurance Industry and Insurance Regulation - [PDF-56p

  • If the companies offering Universal Life were to respond by investing long-term, they could expose themselves to problems of disintermediatlon and market value adjustments even worse than under traditional policies.

--  Kenneth T. Clark

1981 - SOA - The Future of Permanent Life Insurance (rsa81v7n36), Society of Actuaries - 22p

  • Moreover, given the long-term nature of life insurers’ obligations to their policy holders, they are exposed to substantial risk based on market fluctuations and turns in the economic cycle.
  • Thus, it could be easily argued that they need more, not less, capital than banks based on the long tail of their liability structure.  (p5)

2014 0310 - Sheila C. Bair to Sherrod Brown - 6p

  • 199X - GOV - Dole??
  • Summing up, it seems to me that reasonable assumptions for annual premium policies must recognize the long-term commitments in question, and thus should consist of a realistic current mortality table with projection into future years, together with an interest rate not higher than 3% and preferably somewhat lower.

--  Wilmer A. Jenkins

1961 - SOA - Ordinary Insurance Premiums, Society of Actuaries - 3p

Dale R. Gustafson ...nominees for the hard questions are:

  • Are short-term new money investments appropriate for a product designed to meet life-long insurance needs?

1981 11 - SOA - More on Universal LIfe, The Actuary, Society of Actuaries - 3p

  • (p63) - Spencer BACHUS (R-AL). - Mr. Liddy, mark-to-market, I think, is good in concept, but insurance and banking CEOs are telling me that it is not working well in a distressed market.
    • I would like your comments on modifications others have proposed, and general modifications, and how it might help AIG to increase the likelihood of the taxpayers being fully reimbursed.
  • Ed LIDDY. (AIG-CEO) - Yes, sir. I think mark-to-market is a good concept, run amok.
    • On balance, knowing what something is worth every day is a good thing, but it presumes that there’s a market.
    • It presumes that there’s a willing buyer and a willing seller.
    • When liquidity completely dries up, there’s not a willing buyer, so you have to keep marking the value of the assets down to an unwilling buyer level.
    • In insurance companies, we have a long liability.
    • We will insure your life.
    • And we will match it with a long dated asset.
    • Those long dated assets, like commercial mortgage-backed securities and residential mortgage-backed securities, because they’re long-dated, they are not liquid right now, and they have been buffeted in value, unlike anything most of us have ever seen.
    • So as a result of that, AIG and many other insurance companies have had to write the value of those assets down, and it has caused great stress on the liquidity.  

2009 0318 - GOV (House) - American International Group’s Impact On The Global Economy: Before, During, And After Federal Intervention - [PDF-380p,  

  • (p22) - Although these products generally are considered to be long-term liabilities and a number of these products include provisions that are designed to disincentivize withdrawals, such as penalties and loss of guarantee accumulation, these disincentives could serve as less of a deterrent if MetLife’s ability to meet its obligations were in doubt. 
  • (p24) - Further, the imposition of a suspension of insurance policy and annuity product surrender or withdrawal options could cause uncertainty to spread to the customers of other insurance companies offering similar products and could undermine confidence in the broader life insurance industry.
    • If such a situation were to occur during a period of overall stress in the financial services industry and in a weak macroeconomic environment, surrenders at other life insurers could increase, particularly if MetLife’s material financial distress were related to a broader economic shock or market event, such as an interest rate spike or impairments in a widely held asset class. 

2014 1218 - FSOC/MetLife - Basis For The Financial Stability Oversight Council’s Final Determination Regarding Metlife, Inc - 31p

  • But many of the risks we take are associated with long-term liabilities, things like life insurance.
  • That is a mortality risk.
  • The evidence as to whether that mortality risk was appropriately taken or not will be very far into the future.

-- Robert M. Falzon, Executive Vice President and Chief Financial Officer, Prudential Financial, on behalf of the American Council of Life Insurers (ACLI) and the American Insurance Association 

Examining Insurance Capital Rules and FSOC Process - Examining the Federal Reserve's Implementation of the Collins Amendment to Tailor Capital Rules for Insurers on FSOC's Designation Process for Nonbank SIFIs and for International Capital Developments for Insurers - [PDF-70p

For another, life insurance companies suffered large losses on a mark-to-market basis during the crisis from the decline in equity prices, as well as falling prices of mortgage and other fixed income securities that were being sold by others facing immediate cash needs.

  • As a result, in early 2009, some had negative tangible equity value on a mark-to-market basis.
  • This was reflected in the price of their shares, which, on average, dropped 75% over the course of the crises.
  • A few applied for TARP assistance for additional capital.
  • But they faced little or no financial distress because their liabilities, principally obligations to make payment on policies, were long term.
  • They could and did wait for markets to return to more normal levels.  (p30)

2013 10 - Five Years Later: Lessons from the Financial Crisis, Jeffrey R. Shafer, Former bank executive and Senior Treasury official - 67p

  • ...universal life and investment-type products (collectively, investment-oriented products)..... (p53)

Update of Actuarial Assumptions

  • The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter.
  • Assumption setting standards vary between investment-oriented products and traditional long-duration products. (p123)

2018 - AIG Annual Report - 372p U.S. GAAP Example - Valuation of life and other long-term insurance liabilities

  • 234. For insurance liabilities that are measured under U.S. GAAP as the net present value of cash flows using current or updated assumptions, the valuation of these items should be based on the Volunteer IAIG’s reported U.S. GAAP valuations.
  • 235. For insurance liabilities that are valued using historical, locked-in assumptions (e.g. long-term insurance contracts measured according to ASC 944-30-7, formerly SFAS 60) or valued under a retrospective deposit method approach (e.g. universal life insurance contracts measured according to ASC 944-30-16, formerly SFAS 97) it will be necessary to adjust the liability utilizing the Gross Premium Valuation (GPV) approach as defined in loss recognition (premium deficiency) testing under U.S. GAAP ASC Topic 944-60.
  • 236. The GPV is calculated by estimating the present value of future payments for benefits and related settlement and maintenance expenses less the present value of future gross premiums based on actual and anticipated experience. Projections may be based on a single best estimate scenario and may also include the impact of management actions, e.g., the current estimate of future premium rate increases (see section 6.3.12 on management actions). Any overhead
    expenses would be excluded. The discount rate applied would be based on a current portfolio yield and expected reinvestment asset yields and cash flows. Gross rates would be reduced for expected defaults and investment expenses.

2015 - IAIS -  Field Testing - Public Technical Specifications Page 54 of 230

7.5.2 Feedback from field testing

252. There is support from Volunteer Groups for an extension of management actions to include limited premium increases for certain business and product types, including Health business. 

  • Examples provided of other instances where the recognition of premium adjustments should be considered included yearly renewable term (YRT) premiums in certain long-term life reinsurance agreements, cost of insurance (COI) charges in certain long-term life insurance contracts, including universal life, and adjustable premiums on adjustable premium term life insurance.
  • It was noted, though, that premium increase could lead to other policyholder actions such as increased lapses and possibly reputational risk.

IAIS - Risk-based Global Insurance Capital Standard Version 2.0 Public Consultation, 31 July 2018 – 30 October 2018 Page 69 of 158