Wolf Richter: New Rules For Life Insurers

Future Generations Have To Deal With The Financial Carnage – Published on naked capitalism, by Yves Smith, DECEMBER 4, 2012.

Yves here. Most people don’t think much about the life insurance industry, precisely because it has managed to be what financial services should be: boring and safe. Insurance is particularly prone to abuse, since customers pay money up front and submit claims (or in the case of investment products, get payouts) much later.
As Wolf Richter warns us, the insurance industry just approved new rules which will allow them to keep lower reserves, which is that industry’s analogue to bank capital. 

And the aim of this change is to allow insurers to engage in more speculation. Nothing like choosing to rely on the playbook that gave us the global financial crisis, now is there?

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

During the off-hours on Sunday, when few people were willing to ruin whatever remained of their weekend, when even astute observers weren’t supposed to pay attention, the National Association of Insurance Commissioners approved new rules that would allow life insurance companies to lower their reserves for future claims.

Executives claimed that they could put that capital to “more productive uses,” such as blowing it on stock buybacks and acquisitions or plowing it into subprime-based CDOs or Greek sovereign debt, or whatever, to goose their paper returns—having already forgotten all about the financial crisis … //

… But it’s not yet a done deal. The National Association of Insurance Commissioners, which is composed of state regulators, sets solvency standards that states may then adopt in regulating insurers. The idea is to come up with a common set of standards for all 50 states. However, states don’t have to follow the decision. And it’s unlikely that all of them will. Of the 56 members, 43 voted to approve this change. Regulators in California and New York voted against it. And in states where lawmakers refuse to adopt the new reserving requirements, life insurers would establish subsidiaries whose reserves would conform to the rules of that state.

While some life insurers might continue to be conservative under the new rules, others will venture out towards the thin end of the limb to chase paper profits from quarter to quarter. And they’re doing it just when the industry is staring at an unprecedented and brutal demographic reality: insured baby boomers aren’t going to live forever, and life-insurance payouts are going to jump to historic records.

The temptation is huge to tweak the math of the “black-box models”—as California Insurance Commissioner Dave Jones called it—to bury that reality until the bitter end. It took Wall Street less than a decade to explode, counting from the repeal of the Glass-Steagall Act. Home many years will it take the life-insurance industry after the new rules go into effect? One thing we know already: when it explodes, no one will be held responsible. Because everyone followed the rules.

Every country in the Eurozone has its own set of big fat lies that politicians and eurocrats have served up to make the euro and subsequent bailouts or austerity measures less unappetizing. Like in 1999: “Can Germany be held liable for the debts of other countries? A very clear No!” said the CDU, the party of Chancellor Angela Merkel. Read Ten Big Fat Lies To Keep The Euro Dream Alive.
(full text).

Links:

Insurers Add Reserve Power: Vote by State Commissioners Ultimately May Help Life Companies Boost Returns, on Wall Street Journal, by LESLIE SCISM, Dec. 2, 2012;

Is There a Case for Optimism About the Eurozone?, on naked capitalism, by Yves Smith, Dec. 3, 2012;

Griechenland mit fließendem Geld sanieren und den Euro als fließendes Geld retten? auf Neues Geld.net, von Wolfgang Berger, Sept. 29, 2011: Alle – auch die, die Santorini, Kreta oder Rhodos in traumhafter Erinnerung haben – reden über Griechenland. Auch wer nicht darüber redet sorgt sich: Wie machen wir es richtig? … weiter alle 4 Kapitel zusammen, oder via Neues Geld GmbH/Newsletter (scroll down).

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