I sat down this evening, thinking that I would finish the series this evening, and realized that I had left out some significant things. As such, I expect this series to have two more parts after this one.
Traveling to Annapolis
When you are an actuary, and a good one, you have elements of being a jack-of-all-trades. Knowing the math is not enough, you have to understand the business processes that the math summarizes. That also requires some knowledge of the law. From early in my career, I realized that the insurance company lawyers would not help me with reserving, investing, contract provisions, and other legal questions, so I had to go to the law library and answer the questions myself. Not fun, but I ended up learning a lot.
While working on another project one day, I made a copy of the Maryland life insurance investment code. I took it back with me, saying to myself: “It’s only eight pages, written in 1955. Don’t you think you should know the details of what your local regulator allows?”
Dangerous question, and it led to the following: under a strict interpretation of the law, we were in violation of the law. Here is the key question: are asset-backed securities bonds? They trade like bonds, but by the old Maryland statute, they are not bonds — they don’t fit any categories of permitted investments, and as such could only be held if we had sufficient surplus, which we did not, and probably most life insurers in Maryland did not.
Thus the problem. I discussed it with my boss, and we had a conference call with the legal department, who confirmed my view of things. A few days later we had a chat with the Maryland regulators. That was a tough call, because at minimum we wanted them to accept asset-backed securities as bonds, which the the law did not admit. We suggested, “Why don’t we adopt the NAIC [National Association of Insurance Commissioners] Model Investment law?” The response was curt, “Oh, you mean the Illinois Investment Law?”
True, Illinois was the only state that adopted it verbatim, but several other major states had adopted >90% of it. I said, “Tell me what you’d like to take out of the Model Investment Law.” The main thing the Maryland department wanted was to avoid speculation through derivatives. So I happily cut that out of my proposed law; I thought that was a good idea. There were a few other minor things that they wanted, and I trimmed/added those as well.
After a lot of work between the lawyers and me, we sent the proposed bill to the Department of Insurance. Then the conference call — would they go for it? As it was they went for it. They found it reasonable, and it codified what insurers were doing, and provided structure, such that present practices were approved, but bad extensions beyond that were forbidden.
But then we asked, “Are you not opposing us, or are you supporting us?” They replied, “We are supporting you. We know we need to modernize, but this statute meets our needs and yours. Well done.”
(Note: all quotes here are summaries of what was said. Most of it was not exactly the way I wrote it here.)
So, we hired an expert attorney who was skilled in getting bills through Annapolis. He told us what we would need to do to get the bill passed.
So, a few weeks later, we were there in Annapolis, before the Assembly Finance Committee. I can’t remember why, but I was not at the table before the Assembly Committee. I sat a few feet behind my boss, our internal lawyer and our expert attorney.
The Assembly Finance Committee had a hard time with the bill. Part of it was that there was no one to oppose the bill. Opposition sharpens the minds of legislators. As a result, the Committee remanded the bill to a study session, so that they could better understand the implications of the bill.
A week or so later, we appeared before the Senate Finance Committee, and I was on the panel this time. Instead of the disorganized questions of the assembly, they asked three “simple” questions:
- How will this law prevent Procter & Gamble?
- How will this law prevent Orange County?
- How will this law prevent Long Term Capital Management?
This was the reverse of the Assembly, because I answered all of the questions, and my partners were silent. I could not have expected that.
As it was, I explained that P&G could not happen because the statute forbids using derivatives for speculation. With Orange County, I explained that existing law required cash flow testing, so that we can’t invest in volatile mortgage derivatives or else we will fail our asset-liability management tests.
As for LTCM, I explained that the risk-based capital regulations would never allow us to take on that degree of leverage, and that the forbade speculation through derivatives.
And then, after a mercifully brief session, they let us go. (Note: I had to sit through a couple sessions where we might be called, but weren’t. Dull, but I brought work to do. Also, I learned that Johns Hopkins, my Alma Mater, owns the state of Maryland. Anything they ask for, they get.)
That left one more hurdle. So on one early morning we met with the Assembly Finance Committee. It was just my boss and I, because they were trying to understand what the bill meant. (Technical subjects are tough for many state legislators.) We met with them for two hours, and finally we convinced the Chairman of the committee that this was a good and honest deal. (We both did good work here, and the absence of the lawyers was a plus.)
That left the final voting, which was unanimous in both chambers. And then, two months later, the signing ceremony with the governor, dressed like a Mafia Don, with a dark suit, and black shirt with thin white stripes.
So what did I accomplish here? I reshaped Maryland’s Life insurance investment laws to be among the best in the nation. I did it while working with many parties that had different goals. I calmed and instructed many legislators that it was a good bill. Finally, I set the company that I served on firm legal ground. What could be better?