When I was 20+ years younger the new chief actuary of a subsidiary I was in came and told me his tale of woe.? At a prior company he had worked for, the company had terminated the defined benefit pension plan, and went to a low-credit quality insurer to purchase annuities to match the terminated benefits.
His complaint was that he had no say in the matter.? With ordinary debt agreements, the debtor has no right to assign his debt to another debtor, without the assent of the creditor.
In the same way, those that buy policies from insurance companies run the risk that their policies could be sold to a weaker insurance company.
20+ years ago, my friend said there was a simple solution, and I agree with it.? When a financial company takes over the liabilities of another financial company, those who have lent to the original company should have the right to receive their assets back at full value, with no deductions for surrender charges, etc.
This is basic.? Debtors should not be able to assign debts to another party, without the assent of the creditor.
I have seen the same thing recently in this article, as aggressive life insurers buy up policies of less aggressive life insurers.? Those insured should have a way out, as the creditworthiness of the insurer has gone down.
I am arguing that life insurers should not be able to sell their liabilities without the insured having an option to cash out at full value.? I realize that this would limit valuations among life insurers, but so what?? The basics of what is fair in debtor/creditor relations should prevail.? Big insurance companies should not have a different set of rules than would be common to other debtor/creditor relationships.
Most formulas for distributing income from an endowment or a a savings/investment fund are too liberal.? If you want the purchasing power to last, distribute less.
When any firm becomes the dominant provider of a good or service, it should ask whether it has mispriced.? A veiled critique of JPM’s whale trade in the credit markets.
Dynamic hedging only has the potential of working on deep markets.
Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against.? The process cannot work in reverse, except by accident
When politicians don?t have answers, they blame speculators, financiers (Wall Street), or foreigners.? They do anything to take the spotlight off their culpability or ineptitude.
In most scandals, not enough attention is paid to those who should have been questioning the situation and did not.? There were parties angling for higher LIBOR and lower LIBOR.? Anytime you borrow or lend using an index, you assent to the method of the index.? What, you didn’t analyze it?
The government has almost no control over prosperity, and yet it tries to take credit for it, and ends up ruining prosperity through deficits and loose monetary policy.
This piece generated a lot of heat, but I still stand behind it.? The concentrated interest of a profit motive is a good thing, and all of the government services do not affect what you have done at all.? The entrepreneur is a hero, whether in business, government, or elsewhere.
If an asset-backed security can produce a book return less than zero for reasons other than default, that asset-backed security should not be permitted as a reserve investment.
Compared to most of my rules, this one is a little more esoteric, so let me explain.? Reserve investments are investments used to back the promises made by a financial institution to its clients.? As such, they should be very certain to pay off.? In my opinion, that means they should have a fixed claim on principal repayment, with risk-based capital factors high enough to take away the incentive invest too much in non-investment grade fixed income claims.
Other assets are called surplus assets.? There is freedom to invest in anything there, but only up to the limits of a company’s surplus.? After all, surplus assets are the company’s share of the assets, right?
If I were rewriting regulation, I would change it to read that only “free surplus” is available to be invested in assets that do not guarantee principal repayment.? Free surplus is the surplus not needed to provide a risk buffer against default on the reserve assets.
But back to the rule.? I think the reason I wrote it out 10+ years ago was my objection to interest only securities that received high ratings, despite the possibility of a negative book yield if prepayments accelerated, and they were rated AAA, and could be used as reserve assets with minimal capital charges.? Buying an asset that can lose money on a book basis for a non-default reason is inadequate to support reserves.? (This leaves aside the ratings’ arbitrage of interest only securities, where defaults hit the yield.? Many have negative yields at levels that would impair related junk rated securities)
This can be applied to other assets as well.? Reverse convertibles that under certain circumstances can be forcibly converted to a weak preferred stock or common stock should only be allowed as surplus assets.? Risk based capital formulas should consider the greater possible risk and adjust required capital up.
Now, maybe this is a rule for another era.? Maybe there aren’t as many games being played with assets today, but games will be played again — having some sort of rule that stress-tests securities to see that they will at least repay principal (leaving aside default), would prevent a certain amount of mischief the next time Wall Street gets creative, putting other financial companies at risk in the process.
When I was running cashflow tests for life insurers, there was one scenario that was among the best for most insurers (life or otherwise).? The optimal scenario was a slow protracted rise in interest rates, say 1/2% per year for 10 years, or flat (no change).? Yes, with the slow rise, there will be unrealized capital losses, most of which will evaporate with time.? But excess cash flows will be invested at higher rates, raising the value of the firm.
I remember talking about this with people in the finance areas of other life insurers, and there was agreement — a slow rise in rates would benefit the industry as a whole.? Maybe annuity floor guaranties played into that as well.
But there are a number of parties that could not bear with the slow persistent rise.? Most governments of the world, including the US would find their budgets severely inverted if interest rates slowly rose and stuck.? As such, governments will do what they can to avoid such a scenario.? They don’t want to end up like Greece. That said, if they do end up there, expect that the governments hand losses off to bondholders, pensioners and/or medical care recipients.? The prime motive of a secular government is to survive, even if core goals are not achieved.
Thus at present, what is optimal for governments is to keep rates low for a long time.? Let savers get clipped, that government programs get paid for.? The risk here is that the bond market rebels and rates rise whether the government likes it or not.? But should that happen, and the government cannot pay on all promises made, it will force losses onto all long-term recipients of cash flows.
Perhaps policy will relax the strain on those in the private sector who have made long-term promises to pay, like pensions.? I would not count on that.? The government will be content with its own survival.
People forget how crises happen after the events have passed, and begin to believe comforting fictions thereafter.? Companies typically fail when they can’t meet a call for cash to be paid.? With financial companies, it typically means that the company financed long-term, illiquid assets, with liabilities that would have to be rolled over regularly.
If you have to roll over your financing too regularly, you leave yourself open to the market environment where financing is not available.? Those environments happen more often when a lot of people are trying to finance long assets with short debt.? Eventually something fails, and all of the short-term lending markets tighten, leading to more failures, and falling asset prices, rinse, lather, repeat, etc., until finally, there are no unquestionable short debts.
Now I write this for several reasons: one is that Prudential is considered to be systemically risky by the FSOC [Financial Stability Oversight Council].? But Prudential has a long liability structure, and is not subject to runs on their company, unlike banks that play in the repo markets, or have to post a lot of margin for futures, or derivatives.
Further, solvency for insurers is governed by the states and does not consider transitory variations in asset prices to be a factor in solvency.? Solvency is a question of how asset cash flows will cover liability cash flows over numerous scenarios over the life of existing business, without new sales.? (I.e. they don’t consider the possibility that the company could sell its way out of? insolvency.? That has happened in practice infrequently, but you can’t rely on it.)
Only companies that borrow short are at risk in a crisis situation, because they have to produce cash NOW.? That is not true of Prudential.
Then there is this article at Bloomberg.? I agree with it for the most part, but many commercial and investment banks not only took liquidity risk, but credit risk as well.? There is need for rules that drive the amount of capital that a financial institution should have, and it should reflect credit risk, illiquidity, and the degree that liquidity need to be renewed regularly.? Elizabeth Warren’s proposals are well-intentioned, but too simplistic.
Better to try to emulate the good regulation of insurance by the states.? I know it is radical, but banks would be better regulated if regulation were given back to the states, and interstate branching ended.? This would end “too big to fail” in an instant. Get the Federal government out of banking regulation.? One regulator is easy to control; fifty are hard to control.? That’s on big reason why insurers are far better regulated than banks.
Now all that said, it is possible for a financial company with a long liability structure to die.? An insurer underwrites long-tailed coverages badly, but the claims aren’t coming for a long time.? Year-by-year, they raise their claim estimates, bit-by-bit.? A company that only writes the bad insurance will meet its end, but it will take claim development in excess of resources to do so, and that will take years.
Banks have around a year to react to? a growing loss of liquidity, insurers have far more time, leaving aside clauses that allow for the agreement to be canceled after a credit downgrade.
One final note: Wall Street may be learning to co-operate with its regulators.? I would encourage them to again, look at the insurance industry.? Actuaries, who have a serious ethics code, are usually on every serious study committee together with regulators.? The actuaries, while not fully neutral, get treated honest dealers as industry issues get discussed.? Part of the reason here, is that so many different state regulators have to be convinced in order for anything uniform to be proposed to the state legislatures, that it takes a while for the discussions to complete, with some state regulators with a little more savvy making the case to those with less.
Fifty heads are better than one.? To the degree possible, hand financial regulation over to the states.? It is far harder to co-opt fifty state regulators than one in DC.? If that ‘s not possible, Wall Street should adopt the idea of using ethics-bound professionals like Actuaries of CFA Charterholders to interact with regulators to craft regulations that are fair for companies and the Public at large.
I’ve said this before, but it bears repeating: be careful in any transaction where the other parties know the deal better than you do.? In most insurance transactions, the company knows more about the transaction than the individuals or firms seeking coverage.? There are exceptions, though, when the model for policyholder claims behavior is not well-understood.? This exists in life and annuity coverages in small ways, and in health, disability, and long-term care coverages in greater ways.
The main advantage that a potential life/disability/health insurance buyer has is that he knows the details of his health far better than the insurer does.? Underwriting standards vary across companies, and not all companies are as thorough at checking the health of the insured as the others do.
With life and annuity coverages, outside of life settlements, this risk to the insurance companies is small, because the actuaries expect the potential losses from the hidden knowledge of the insureds, and build it into pricing.? Death is a tough way to make money, and those using it to make money off insurers must pay a heavy price to do so.? When death stares you in the face, it seems kind of callous to say, “How can I make money off this for my heirs?”? Most people realize that there is something more serious going on than making money, when death is near.
But when we deal with health matters, things get more murky, particularly the older we get.? Again, insurers will attempt to determine those that have the greater probability of making significant claims, but the ability to do so is more limited, because people know when they are not well beyond when they have sought medical help in the past.
(This is one reason why Obamacare (PPACA) will end up increasing costs for most healthy people.? By attempting to cover everyone, and limiting the ratio of premiums from the sick to the healthy to a factor of three, those who are healthy will pay a lot more, or find some clever way to drop out.)
As an aside, before the modern health insurers found their footing around 1988, cumulative profits for the industry as a whole was negative.? Since then, they got better at discriminating on what groups/individuals they would cover, and those they would not.
But with long-term care insurance, the insurance industry has not made money to date. Why?? Insurers have consistently underestimated the willingness of people to file claims on their policies.? Thee is no incentive not to do so, unlike death.
Thus the insurers have been in a battle involving raising premiums on new and old business, with healthier business leaving.? The model doesn’t work, I don’t care what the largest writer Genworth thinks, when the article says:
Genworth Financial Inc., with about a 33% market share of long-term-care policies sold to individuals, said in May that it is seeking premium increases averaging more than 50% to stave off more losses in its oldest policies.
Genworth also halted sales June 1 through AARP, the older-Americans’ group with a huge pool of potential customers.
“We’ve learned a lot over the last 30 years, and we now believe we have a better ability and more knowledge” to issue policies that “provide significant financial protection to Genworth,” Genworth Chief Executive Thomas McInerney said in an interview.
The insurer started requiring blood tests and other medical screening, which the industry generally hadn’t done before. And it is charging women who apply individually more than men for the first time because women tend to live longer and require more years of care.
That brings me to this summary: don’t own companies that are deep into long term care, like Genworth.? Think of Penn Treaty, and other companies that went bankrupt as a result of long term care.? Long-term care? is not insurable; those insured have too much control over when they make claims.
As for those with long-term care policies, if they are old, keep paying on them, you will likely do well on them when you finally need to draw on the policies.? You have benefits that benefits that can no longer be purchased.? Enjoy the exclusive club you are in.
In my career as an asset manager, and as a manager of financial risk, I have learned that all good risk management is done upfront, before the first purchase is made or product is sold.? Secondarily, good risk management relies on the concept of feedback, i. e., are the results expected at inception happening?? If not, are they happening in a way that makes us doubt the margin of safety that we thought we had?
I’ll give you some examples:
1) There are two ways to offer disability insurance (this applies to high-end P&C products for the wealthy, and other financial products):
Rigorous underwriting that does not cover groups & individuals that could be high risk.
Underwrite freely, and then attempt to deny claims that happen with higher than expected frequency.
2) After designing a living benefit for an annuity, you notice that one option is being chosen by policyholders, and the rest not.? Do you:
Retest the option being chosen, to see that you are not giving away the store?
Do nothing.? After all, it’s the only product of its class selling, and marketing is off your back for now.? Why spoil the party?
3) You discover that you are the only company willing to offer a certain type of reinsurance, or a certain type of coverage.? Do you:
Try to analyze why? your competitors don’t do it.? If there’s no special and durable barrier to entry that you possess, make the pricing jump through harder hoops.
Congratulate yourself for your unique perspective, and willing to take risks that others won’t.
4) On your new insurance product, the claims area sends you early claims data, showing you reasons for the claims.? They reasons aren’t what you would have expected from the quality of the clientele that you thought you were marketing to.? Do you:
Begin analyzing marketing data, to see if the product is being offered more to those less intended.? Analyze what agencies are doing who sell a disproportionate amount of the product.
Attribute the claims to the “Law of Small Numbers.”? Hey, it’s a weird world, and odd stuff happens.
5) You’re part of a team of value investors.? A news event hits, showing that the company will be less profitable than expected by a wide margin.? Do you:
Analyze what the company is worth presently.? If it is no longer safe or cheap, sell.? If the market has over-reacted, buy.? Oh, and feed back the lessons from this episode into the process for evaluating new investments.
Automatically sell, because it has breached your loss limits.
Just hang on, because we have more than enough capital versus investable ideas.
Complain about the event, the potential dishonesty of management, and the analyst that recommended purchase.? Ask why we didn’t sell this last week.? Decide to go activist on the company, because it obviously the assets would be managed better in hands that you select.
6) The credit cycle has gotten long in the tooth, and securities that offer a decent yield versus risks undertaken have become few.? You manage money for income seeking investors.? Do you:
Edge away from risky bonds, slowly upgrade quality, and pare yields.? Communicate to clients why you are doing this, even if it means you might see assets walk.
Stay fully invested in the best quality bonds you can find, subject to a given yield hurdle.
Just facilitate the demands of clients, and invest as if you faced normal yield tradeoffs for risks undertaken.? After all, they want you to take risks.? If clients lose, that is their problem.
7) As a value manager, you have been underperforming for clients.? Though you have tested and re-tested your processes, you can’t? find anything wrong.? You think there is a speculative mania going on.? Several other managers that do things your way have been fired.? Do you:
Stick to your guns.? Safe and cheap will eventually win out.? Communicate that to clients.
Tweak your portfolios to make them more index-like.
Switch to growth or momentum investing.? If you can’t beat them, join them.
There will be a part 2 to this piece.? I will finish up and summarize there.
I am biased on AIG.? It was never as good as proponents of its past have said.? But it was not as bad as current detractors allege.
AIG went through several eras, some of which are barely covered by this book.? There was the secular growth era, which existed from the beginning until the late 1980s.? It was easy to continue to grow in P&C businesses in the US until then.? After that growth would have to come from other ideas:
Life insurance in the US and abroad.
Foreign P&C insurance
Aircraft leasing
Asset management
And so, AIG moved from being primarily a US P&C insurance company to being a behemoth, big in life and P&C everywhere, as well as aircraft leasing and asset management.
Other Books on AIG
If you are reading this book, you ought to also read Fallen Giant. and Fatal Risk.? Excellent books both, but they cover different aspects of AIG.? Fallen Giant focuses more on the development of AIG by the founder Cornelius Vander Starr.? It spends relatively little time on the fast growth era which was the start of Greenberg tenure as CEO.
Fatal Risk focuses on the diversification era under Greenberg’s era, when AIG was so big in US P&C insurance that they began diversifying into risks that had more capital markets exposure — Life, annuities, derivatives, airline leasing, commodities, and asset management.
All three of the books spend disproportionate time on the failure of AIG, which is kind of a shame, because the failure was the simplest part of the story.
No risk controls because Greenberg was ousted.? That said, risk control should be institutionalized, not personalized.? That was Greenberg’s fault.? No one man should be in charge of risk for a whole company.
Too much subprime and other mortgage risk spread through the whole organization. (Investments in the life companies, securities lending, derivatives, direct lending, mortgage insurance, etc.)
True leverage was understated on the GAAP financials.
Notable Information
One aspect of AIG that The AIG Story tells is how AIG became a single company.? There were many minority interests, and when Greenberg was a new CEO he bought all of them in.? That decision allowed the company to focus, and not be concerned with minority interests.
In two breezy pages (122-123) we get Greenberg’s take on how he built his life insurance business, buying SunAmerica (1998) and American General (2001).? An aggressive company buys two more aggressive companies, overpaying in the process.? There should be no surprise why AIG’s stock price was basically flat from 1999 to 2007.? Greenberg overpaid for life insurance companies he did not understand.? He was a P&C guy, and did not get how life insurance companies worked.? He saw two aggressive companies willing to sell at exorbitant prices, and paid up.? Culturally, they fit, but buying overpriced assets always takes its toll.
Not mentioned is the debacle that was the attempt to take over The Equitable in 1991.? AIG assumed that a New York company would have a distinct advantage versus AXA, a French company that was the eventual buyer.? AIG made the following errors:
Scared Equitable’s management team into the arms of AXA, who would treat them well.? Yes, Equitable’s management team was incompetent, and needed to be shown the door, but you didn’t have to tell them that directly.
Assumed that the Real Estate portfolio would not rebound.
AIG offered to buy The Equitable for very little, while AXA offered $1 billion of funny money, surplus notes and convertible debt.? Strange, but the funny money was worth more than almost nothing.
Unlike the purchases of SunAmerica and American General, the purchase of The Equitable would have been cheap.? Very cheap.? And AIG missed it, and also under-rated the abilities of AXA.? I was there; I know.
This brings me to a significant point over what was included, and what was excluded… this is the story as Greenberg wants it to be told.? He excludes his errors, and focuses on his achievements.? He was not as good of a CEO as often credited in the 1990s.
On page 127, Greenberg talks about leaving markets where AIG could not earn an underwriting profit, but by the 1990s, AIG was so big that that flexibility was gone.
Closed Culture
AIG’s culture bound employee? fortunes to the stock price of AIG.? Options, participation in C.V. Starr, and a number of other programs created significant incentives for people to stay, and trust in the continual increase in the price of AIG shares.? That created a culture of “lifers” if if survived long enough.
Also, in the 1980s and 1990s the board of AIG had more insiders than most, but when corporate governance rules changed, by 2005, the AIG board was populated by enough incompetent businesspeople, that there was no way that they could control the risks inside AIG.? They tossed out Greenberg at the behest of Spitzer, and then could not supply the moxie that Greenberg had.
The Financial Crisis
The post-2008 Greenberg understands the financial crisis.? Let me quote:
A financial crisis was brewing due to a combination a including: (1) U.S. policy overstimulated appetites for home ownership and kept interest rates low for too long, (2) regulation of institutions was poor, as commercial banks fed the appetite for home ownership with generous mortgages while investment banks demand with complex financial products and increasing leverage; (3) rating agencies failed to analyze many financial products adequately, and the lack of trading in such products on organized markets made them difficult to value; and (4) regulators at the SEC failed to monitor the leverage of many financial institutions, whose debt levels rose to as much as 30 to 40 times capital and, in AIG’s case, regulators at the? Office of Thrift Supervision, which had authority because AIG owned a savings and loan association, simply ignored any signs of trouble.
Hindsight is 20/20… there were many mortgages insured by AIG before Greenberg left, and many mortgage bonds purchased by his life subsidiaries as well.
Greenberg tries to make out the problems of AIG as a liquidity crisis, and not a solvency crisis.? I’m sorry, but in a panic, there is no difference.? If you can’t produce cash when needed, you are insolvent.? It’s that simple.? AIG had enough incremental demands for cash in the crisis, that it should have gone into chapter 11.? Maybe the Fed should have rescued the derivatives counterparty, and charged it back to AIG, but beyond that, it should not have acted.? Much as Greenberg complains, AIG was insolvent, and should have been reorganized.? He would have gotten far less as a result.
He also takes umbrage against Ed Liddy, a good man who attempted to do what the stupid government wanted — liquidate in a hurry, but Greenberg does not recognize that he set much of this process (though not all of it) in motion himself.
Greenberg won the suits against himself.? He personally did nothing materially wrong.? But the mismanagement of AIG in the Greenberg era and the time thereafter did deserve to be punished with chapter 11, not coddled with a bailout and tax incentives.
Quibbles
The book is worth reading, but what you are getting here is court history — the history as approved by the King.? It has elements of history in it, and it is mostly true, but you have to consider the source.? A lot of true history was purposely omitted.
Who would benefit from this book: If you are an AIG buff, you can’t get the full picture without knowing what Greenberg purports.? If you want to, you can buy it here: The AIG Story.
Full disclosure: The publisher sent me a copy of the book for free.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
Sometimes, when I see an insurance article that could be big, relevant, and tough to explain, I say to myself, “Dave, you’re going to have to write about that.”? But now, I get requests via email to write about it.
I write this as one that in general admires the New York Department of Insurance.? They are the toughest regulator of insurance in the US.? If I could have my way, I would replace the Federal Insurance Office (?FIO?) with the?New York Department of Insurance, and let New York regulate the country.? But that can’t happen.? Insurance is regulated by the states.? As a result, if some states are liberal with respect to reserving practices, companies can set up reinsurers there, and shed reserves to a state that allow the reserves to be lower.
Now, why does this happen with respect to life insurance, and not other insurance?? There are complexities in the regulatory [“statutory”] reserving where the statutory reserving does its estimates such that every advantage a policyholder has versus an insurer gets used against the insurer.? That makes the reserve high.? But on average, policyholders aren’t that smart; the reserves should be lower.? Should they be as low as the GAAP reserve, which is supposed to be conservative and realistic?? That seems to be the goal of many insurers.
Life insurance is long in duration, which means small differences in assumptions can make relatively large differences in the reserves.? That’s why you only see it in life insurance.? This happens with long-dated term insurance, universal life, and any product that guarantees that are not core to the product, and are hard to calculate reserves as a result.
But what about mutual versus stock companies?? First, let’s take a step back.? Why does statutory accounting matter?? It matters because it affects the ability of regulated insurance companies to dividend money to their holding companies.? The lower statutory reserves are, and the lower risk-based capital requirements are, the more that can be dividended, and the greater the flexibility of the enterprise.
Mutual life companies typically have more capital than they need, and they do not have a claimant on the excess (unless it is management, and that is quiet, slow, through the pension plan, the hidden plans, etc. Shh.)
Stock Life companies have to optimize their capital to compete against everyone else.? Sorry, but that is the way it is.? Let’s move to the recommendations of the NY Insurance Department:
Given the troubling findings uncovered during its investigation, DFS [Department of Financial Services] is taking immediate action and making several recommendations to address the potential risks and lack of transparency surrounding shadow insurance:
Through its authority under New York Insurance Law, DFS will require detailed disclosure of shadow insurance transactions by New York-based insurers and their affiliates.
In the interest of national uniformity, the National Association of Insurance Commissioners (?NAIC?) should develop enhanced disclosure requirements for shadow insurance across the country.
The Federal Insurance Office (?FIO?), Office of Financial Research (?OFR?), the NAIC, and other state insurance commissioners should conduct similar investigations to document a more complete picture of the full extent of shadow insurance written nationwide.
State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.
Number 1 is a given.? New York can do that on its own.? New York could unilaterally refuse to give reserve credit to any reinsurance agreement they think is not creditworthy.? But that comes with a cost: native New York insurers might leave, and leave behind a small New York only “pup” insurer.? (Imagine Metlife decamping to New Jersey, and AXA’s American subsidiary also.)? That’s what most insurers do, because New York is a tough state for insurance.? If the size of the New York insurance industry shrinks, so will the New York Insurance Department.
Number 2 is not a given.? There are a number of states that benefit from looser regulation.? The NAIC only advises & proposes; it does not create law.
Number 3 could be done, but will they do it?? There are many other issues that press.? The states that benefit from captive insurers will not want to cooperate.
And for the same reasons as 2 & 3, 4 will not likely succeed.? Not everyone has the same incentives here.? New York is engaging in bluster.
What Would I Do?
I would take the risk, and disallow reserve credits from companies in locales that don’t regulate insurance well.
I would disallow the use of surplus notes for stock companies.? With stock companies, it is just a hidden form of leverage.
I would eliminate all surplus relief from reinsurance treaties that do not rely on “diversifiable risks.”? If it is merely shifting a nondiversifiable risk, offer no reserve credit.? The company should bear that itself.
Insurance CEOs can be glad I am not their regulator; they would have a tough time under me.? There is nothing that they know that I don’t.? That said, the New York Department of Insurance will have a a hard time making their ideas work, unless all the states agree with them, and that is not likely.
