New York Regulator Faults New Insurance Rules on Reserve Levels

New York State’s financial-services regulator said rules adopted by state watchdogs for some life insurance contracts failed to boost reserves to adequate levels in the industry.

Of sixteen companies that are major sellers of universal life policies with secondary guarantees, five increased reserves under the new standards, according to a letter sent by Department of Financial Services Superintendent Benjamin Lawsky to other state regulators. The agreement that established the rules prevented the companies from lowering reserves.

Lawsky said in the letter dated yesterday that the lack reserve boosting under the new rules calls into question a broader proposal to implement principles-based reserving for life insurers, which depart from formulas governing how much money must be set aside to back future payouts. He said New York will withdraw from the new rules for universal life policies tomorrow.

The results show the proposed regulations “will hardly quell the gamesmanship and abuses associated with the setting of reserves,” Lawsky said. The standards are “an unwise move away from reserve requirements that are established by formulas and diligently policed by insurance regulators.”

Lawsky said the rules would also fail to satisfy his concerns about reinsurance transactions that some life companies conduct with affiliates. He’s called the risk transfers “shadow insurance,” and said some companies are using them to make their reserves appear larger than they are.

MetLife Inc. (MET), the largest U.S. life insurer, said in May that it had stopped selling universal life insurance with lifetime secondary guarantees. The New York Times reported on Lawsky’s letter yesterday.

Universal life sales at Prudential Financial Inc. (PRU) surged to $281 million in the six months ended June 30 from $76 million a year earlier. Prudential, the second-largest U.S. life insurer, said in August that competitors exiting the business contributed to the jump, and that the company raised prices to limit sales.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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