Two prominent consumer groups, the Consumer Federation of America and the Center for Economic Justice, are extremely concerned about the proposal that will reduce the amount of money life insurers have to put aside to pay future claims. According to the American Council of Life Insurance, the proposal would reduce the total number of money insurers need to keep in their reserves by about $25 billion, or about 7% of the industry’s net worth. While life insurers believe this is a good proposal because policies had been overly conservative and inflexible, the consumer groups say these changes will give insurers even more of a reason to not pay all of its obligations under life insurance policies and annuity contracts.
The industry’s attempt to modify the rules has the support of regulators, who believe these revisions will not harm policyholders. The president of the National Association of Insurance Commissioners, the organization that supports state insurance regulators, says it would be irresponsible for his organization to support anything that would make products riskier. Because all states force insurers to comply with accounting rules set by this association, the organization can change capital requirements without the legislation passed by Congress; individual state regulators also have no direct say in the process.
Insurers invest the money they set aside, so due to last year’s sharp price declines for stocks and many types of bonds, the industry’s capital levels have declined too. This may create unneeded stress on the companies’ ability to continue with normal business procedures. Insurance companies do not have as great a safety net as the federal government in case of failure; if there is coverage, the coverage limits are not very high. Also, the Federal Deposit Insurance Corp. pays back depositors within a day of bank failure; however, insurance companies usually take several years to payoff policyholders.
If you would like to learn more about the guarantee policies in your state, please go to the National Organization of Life and Health Insurance Guaranty Assns. website at www.nolhga.com, which has links to each state’s guarantee laws.