New York To Insurers: Tell Us How You Really Did

By Allison Bell
Bloomberg News
November 3, 2009


The New York State Insurance Department is ordering life insurers in the state to adjust assumptions about investment portfolio calls, prepayments and defaults to reflect the true state of the economy.

The department has spelled out detailed rules for reporting Dec. 31, 2009, reserves "and other solvency" issues in a letter to carriers.

When the economy was strong, life insurers often could rely on rough, standard estimates of factors such as how often the home owners responsible for the mortgages supporting residential mortgage-backed securities might pay off loans early.

Today, however, "examples cited by regulation may no longer be appropriate as safe harbors," New York department officials write in the letter. "Assumptions should be commensurate with the underlying economics."

Similarly, when insurers are feeding securities default rate assumptions into forecasting formulas, "examples cited by regulation may no longer be appropriate as safe harbors," officials warn. "Expected defaults should be commensurate with the current market values for investments of like kind and quality. "

When life insurers are describing their MBS portfolios, "subprime exposure must be explicitly addressed, including the continued appropriateness of any default provisions carried over from the prior year’s analysis," officials write.

Officials describe special reporting requirements for insurers that have more than $500 million in account value related to variable annuity guaranteed living benefits, if the total VAGLB-related account value is greater than 2% of those insurers’ total statutory reserves.

Even if those insurers have reinsured the benefits obligations, they must give the New York department the present values of the cash flows they expect to get from contracts that offer GLB and guaranteed minimum death benefit features, as of Sept. 30, 2009, or Dec. 31, 2009.

All affected insurers are supposed to compute contract cash-flow present values for a scenario involving a "20% immediate drop" in investment values, with a "5% annual recovery starting at beginning of second year."

If an affected insurer has used ratchet designs, or reset designs, then the insurer also should compute present values for a scenario in which investment values start out increasing 20% per year for 5 years, followed by a "15% annual drop for 5 years, followed by a 3% annual recovery."

Copyright © 2009 FBIC (www.badfaithinsurance.org)


Click here to return to FBIC homepage