Monday, April 20, 2015

No. 94: The New York Times Article About the Life Insurance Shell Game—Further Observations

In No. 93 posted April 17, I discussed the April 12 article in The New York Times entitled "Risky Moves in the Game of Life Insurance." I also mentioned my writings about efforts to weaken life insurance reserves, including my recent blog items about some of the transactions mentioned in the Times article. Here I present some further observations.

Comment from Athene
In No. 93 I said Athene, one of the companies named in the Times article, released a two-page comment expressing disappointment with the article and the reporter. I am concerned about Athene's suggestion that everything is fine because the Iowa Insurance Division reviews and approves all the transactions. My concern stems from my belief that Iowa will approve anything. I am also concerned by the assertion that Athene is "well capitalized" because it has $59 billion of assets. My concern stems from the fact that Athene said nothing about liabilities or about the quality of the assets. I offered a complimentary PDF of the Athene comment, and that item remains available.

Comment from Accordia
Accordia, another company mentioned in the Times article, released a one-page comment telling its "key partners" it is "well capitalized and managed to meet its long-term commitments to policyholders." It mentions, among other things, its $7.7 billion of assets, its financial strength ratings, and its risk-based capital ratio. It also says its arrangements are approved by state regulators, reviewed by rating agencies, and assessed by an actuarial firm. Accordia does not directly criticize the Times article or the reporter.

More on Anagrams
I said in No. 93 that one of the phony entities mentioned in my No. 73 (posted November 16, 2014) and in the Times article is a Delaware-based LLC named Tapioca View, and that I learned recently the name of the entity is an anagram of "Iowa captive." I also mentioned several entities named Cape Verity, said "yer captive" was the best anagram I was able to see, and asked for help from readers who are good with anagrams.

One reader came up with "rye captive," but I think that is not much of an improvement. Another reader, with quite a sense of humor, came up with "creepy vatic." My dictionary says "vatic" is an adjective meaning "prophetic" or "oracular." I question such an anagram, because I think it should consist of an adjective and a noun rather than two adjectives. I remain open to further suggestions.

The Words of a Life Insurance Veteran
A few hours after No. 93 was posted, comments arrived from a person connected with the life insurance business for about 40 years. He called his comments a "rant," but I found them interesting. Here are some of them, which I edited without his permission.
Tax laws enacted for one reason are being used for a very different reason. But I guess it is the business of tax lawyers and CPAs to find every lawful means of reducing their clients' tax burdens, even if it means getting their clients into dubious and otherwise unnecessary business activities.
Buried deep in this is the fact that genuine captives, if any still exist, have a legitimate role for firms which would be tempted to self insure but want a degree of financial discipline behind self insuring—possibly to address concerns raised by nervous board members and others. The expression "captive insurer" is being used to describe wildly different things, which cannot be of much comfort to those with legitimate captives that have financial reality to them.
You mentioned Spencer Kimball, who wrote the insurance codes of two or three states. His philosophy of regulation differed from that in New York, where everything is prohibited unless specifically permitted. Kimball felt everything should be permitted unless specifically prohibited. Behind Kimball's philosophy was the idea that insurance companies would never do something to harm their own long-term interests. That is why codes developed by Kimball do not include insurable interest provisions. He asked why any insurance company would ever want to issue insurance that lacked insurable interest, not because of public policy, but because of bad claims experience. So there is no insurable interest statute in those codes, just common law.
I think Kimball did not anticipate a world of insurance companies run by non-insurance people. They do not understand reserves because the lines of business they came from have no reserves. They have no conception of long-term contractual obligations because the lines of business they came from freely and without consequence go out of business, or merge, or morph, and cease doing or making the things that gave their companies their names. Annuities with the name of a piano company on them [Baldwin United] were one of the first examples, and we saw how that turned out. I also think Kimball did not anticipate the rise of a class of actuary who is as much a loophole chaser as any tax and estate lawyer.
Even insurance companies that retain their fine old names are now run by folks from the securities business (you can blame or credit the rise in variable products for that) and they take a totally different view of long-term obligations and how they are funded. Ironically (and this may offend you and your lifelong crusade for rigorous disclosure) the securities business has become accustomed to doing whatever it damn well pleases, because no law tells them otherwise, so long as it can be obscurely but "lawfully" disclosed. But if those reading and actually understanding the disclosure do not care or react (Iowa Insurance Division, anyone?), a disclosure regime such as that on which securities laws are based can permit very adverse activity to go unchecked.
Disclosure is fine, but the history of the insurance business shows that what it needs is some substantive regulatory control and direction. I think most "real" insurance people understand that, but it is not a friendly or familiar concept to the many insurance company top officers who did not come from jobs in the insurance business. I think any number of regulatory problems facing the life insurance business are impacted by the fact that in cold reality there are precious few insurance people, as I would use the expression, left in charge or even in a position to act or speak.
The people running too many insurance companies today would be offended by the very thought of product design that rewards old customers who are no longer buying more stuff. And while they issue policies that in theory are good for 120 years, they do not look fondly on those who keep them in force for 40 years. In short, the world of life insurance has been turned on its head from everything I learned starting 40 years ago.
Available Material
In No. 93 I offered the Athene comment and mentioned the items I offered in my earlier related blogs. Those items are still available.

At this time I am offering a complimentary PDF containing the Accordia comment. Send an e-mail to and ask for the Accordia response to the Times article.