Life Insurers in Trouble, NAIC is Going to Make It Worse!

In this low-to-no interest rate environment (pathetic monetary policy), life insurers are having a tough time not only finding profit, but understanding what true risk is about. Now Life Insurers are trying to disregard risk in the hopes of finding more profit.

North American Life Insurers "Accidentally" Pile Up Massive Distressed Debt Holdings | Zero Hedge

Talks about how insurers are trying to get into riskier bond trades to eek out a profit. How Metlife and Prudential racked up losses related to the oil trade that blew up when Oil plummeted to below $50 a barrel. Now in order to help insurers find more ways to profit from Junk bonds the NAIC is considering allowing insurance companies to have a larger part of their portfolio that they can dedicate to riskier junk bond trades.

North American life insurers have accidentally doubled their distressed-debt holdings in just six months. In the future, they are poised to build on that mound by design.
Companies including Prudential Financial Inc. and MetLife Inc. held $1.32 billion of bonds that were in default, or close to it, at the end of the second quarter, their highest level since the middle of 2011, according to Bloomberg Intelligence data.
They did not intend to buy distressed debt: In many cases they bought investment-grade bonds from energy drillers and retailers that ended up heading south. Insurance companies’ trouble with these bonds underscores how even conservative investors have been hurt by plunging oil prices.


So what are regulators deciding to do? Ramp up the losses and double down on stupid.

But don't worry about the rising risk of bond portfolios at the insurers. Regulators are already working on a plan to relax capital requirements to accommodate increasing risk appetites at America's insurers. Guess moving down the quality curve is one way to combat a low-interest rate environment.
Even if distressed holdings are largely accidental now, regulators are considering proposals that could ease the amount of capital life insurers can use to fund junk bonds, which makes it more profitable for the companies to increase their investment risk. Life insurance companies are seeking more income as low bond yields globally corrode their investment returns.
Under current rules from the National Association of Insurance Commissioners, which sets standards for the U.S. industry, a bond with a rating four steps below junk needs to be funded with capital equal to at least 10 percent of the bond’s value before taxes. The NAIC is considering a proposal to lower that to around 6 percent.


Not sure how we as insurance agents could move to tell the NAIC they are making a mistake with this, anyone have any ideas?
 
The State Insurance Commissioners are often in the back pocket of the insurers.
And the NAIC is made up of all these "in the back pocket" commissioners.
As one of our prominent politicians said recently. .. ."everything is rigged."
Don't expect anything to change. It'll just be kicked down the road. The inability to meet claims will end up being shared by all participating companies making all of them weaker.
 
I have been thinking the same thing. With the Brexit, chances of higher interest rates in the near term is very low. It is no wonder some insurance companies are increasing their allocation to high yield to compensate for loss of income.
 
Has anyone heard anything about how this is affecting annuities and possible regulation of new requirements where the agent has to sign a form saying that the annuity they sold has the absolute lowest surrender charges and highest interest rates that they can offer?
 
Has anyone heard anything about how this is affecting annuities and possible regulation of new requirements where the agent has to sign a form saying that the annuity they sold has the absolute lowest surrender charges and highest interest rates that they can offer?

Not to get off track, but that is not what the new regulations state. "Best Interest" goes beyond just Surrender Charges and Indexing Rates.


To respond to your question; I would say that the ones offering the loftiest gains at the moment might be the ones with the highest exposure to the lower quality (higher yielding) debt. So is that indeed in the clients best interest? That would depend on their risk tolerance...
 
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