Investment oversight has kept insurers strong, regulator says

Life insurers are still strong in the wake of the financial crisis, insurance experts said yesterday at a life settlement industry conference.
“The insurance industry, generally speaking, is better off than the banking industry,” said Illinois insurance director Michael T. McRaith, who was a panelist at the Life Insurance Settlement Association’s 15th annual conference in New York.
“We regulate closely what they can invest in and how much they can invest.”
Mr. McRaith noted that though insurance companies held some very sophisticated financial products, regulators were aware of them and were sure that the instruments weren’t challenging the viability of any particular insurer.
Although insured individuals are protected in the event of insolvency, there are limits to what state guaranty funds can provide, said panelist Kenneth R. Wylie, a partner at Sidley Austin LLP. Most states pay out up to $300,000 per insured life, while others, such as New York, pay out up to $500,000.
In cases when a policy’s death benefit exceeds the guaranty coverage limit, investors can make a claim against the insolvent insurer’s assets.
“Hypothetically, you have a $1 million policy and you collect your $300,000, you now have a claim in the estate for the remainder,” Mr. Wylie said.
Further, if an insurer is under rehabilitation — when a regulator oversees an insurer and determines its viability — insurance products can be adjusted to discourage a “run on the bank,” he said.
When Executive Life Insurance Co. went under in 1991, crediting rates on some deferred annuities were reduced.
And when Mutual Benefit Life Insurance Co. was liquidated in 1993, some beneficiaries of large policies had to prove hardship to collect their death benefit, Mr. Wylie said.
Nevertheless, outright insurer insolvency through liquidation is a rare event.
“Typically, you don’t get to that point,” Mr. Wylie said. “Insolvencies typically go into rehabilitation, and that’s because the individual books of business have value and the premiums keep being paid.”