Ratings Updates

Entries for September 2011

There were several news worthy events this month affecting life insurance.

·         Rating group Fitch issued a statement indicating that life insurance operating margins are under pressure due to declining investment yields, competitive pricing and the soft economy, which is affecting revenue and sales growth.

o   Personal opinion – the greatest challenge the industry faces is a continued period of very low interest rates.  Companies are dependent on spreads in their investment portfolios to fund operations and provide margin for profit.  Many products, especially older policies, have interest rate guarantees that create significant spread compression.  We will watch to see how companies react over time.  Mutual companies may have an advantage over the stock companies since they are not publicly owned with the demand for shareowner dividends.

·         The Obama administration is targeting COLI as a source of revenue in their proposals.  The proposal would affect policies issued after December 12, 2012.  There are also provisions taking the estate tax exemption to $3,000,000 with a maximum rate of 45% which could encourage second-to-die policy sales.

·         California is targeting restricting the use of Retained Asset Accounts.  RAA’s, instruments used by many life insurance companies allowing death benefits to be retained at the company at interest rather than paying the lump sum immediately, have come under fire recently, criticized for inadequate explanation and disclosure and some questions about the propriety of interest crediting strategies.

·         The Delaware Supreme Court has ruled on two life settlement cases.  They concluded that settlements are perfectly legal if there is an insurable interest at the time of purchase, provided that the purchase was not part of a straw purchase agreement to resell to an investor and that the procurement is not part of an illegal wager where a third party directly or indirectly pays the premiums.  While supporting life settlements as legal this ruling clearly outlaws the STOLI (stranger-owned life insurance) programs.  The decision indicated claims by insurers on insurable interest can be brought at any time, even after the contestability period, as was the situation in one of the decisions.