While banking regulations have roiled that industry in the aftermath of the 2008 economic crisis, insurance regulators have been doing a little updating of their own.
Insurance companies, widely known as a conservative industry, were just starting to stretch into bolder investment strategies in the months leading up to the market tailspin of that year, according to a Conning & Co. study on the topic. But, says Greg Smith, analyst with Hartford-based Conning, companies generally made wise moves in the wake of the crisis, looking to protect their balance sheets overall instead of just their income.
“Some very smart choices were made at the industry level,” he said.
That being said, investments are still smarting in a very real way, Smith said, saying the industry was on track to see about $20 billion in realized losses for 2009. Overall, Conning estimates the industry to have turned a $16 billion profit this year.
A Tighter Grip
While insurance is in better shape than other areas of the financial sector, its regulators are looking to change investment ratings and capital requirements – and, some analysts say, they’d also like to re-assert their control over the industry to combat those who are agitating for a complete overhaul of the regulatory system.
Regulators in insurance, like regulators elsewhere, have something of an image problem to contend with; AIG nearly failed because of business segments that didn’t fall under state regulators’ control, not because of traditional insurance. But that notable failure drew insurance more clearly into the economic morass, said David Bradford, executive vice president of Advisen research and information service.
And because plenty of insurers have long lobbied overturning the state-by-state regulations in favor of federal ones, bodies such as the National Association of Insurance Commissioners have extra incentive to take strong action.
That includes, at the moment, a revision of investment ratings on residential mortgage-backed securities. The NAIC released a draft of the revisions, with industry support, on Nov. 25.
As it stands now, if such securities lose money – regardless of how much – they get downgraded, thus potentially downgrading the company that holds that bond and forcing it to sock away more capital as a safeguard against failure. But that fails to account for the amount of money lost, said Whit Cornman, spokesman for the American Council of Life Insurers; many securities are projected to experience only minor losses, so a downgrade disproportionately hurts those insurers which have securities that are only bruised, not dying.
This change would give a truer representation of the real health of a security, increasing investment transparency. Also, instead of forcing insurers to shore up more capital than necessary for such securities, he said, it allows them to keep using that capital – essentially, insurers won’t have to have as strong a capital cushion as they do now.
Further, a different third-party agency would be in charge of rating these securities, he said, removing that power from ratings agencies such as Fitch Ratings or Moody’s.
RMBS losses have been significant, Smith said. Commercial mortgage-backed securities have received more popular attention, with insurers industry-wide holding about 21 percent of investable assets in CMBS. But RMBS investments, which are mostly in bonds, round to about 15 percent of investable assets – nothing to sneeze at.
“Everybody’s worried about CMBS, but RMBS has been running ahead in terms of impairments,” he said, adding that insurers “stretched for yield [in the bond portfolios] and then got slapped back a little in 2008.”
And although the proposed changes would loosen restrictions on capital requirements, Smith notes that the industry quickly started stockpiling cash in 2008, more than doubling its allocation that year compared to 2007. Through the middle of this year, insurers were still hanging onto that cash, he said, possibly because they haven’t found any investment worthwhile enough to ease their grip on that money.
