On September 19, President Obama filed his debt reduction plan to the Joint Select Committee on Deficit Reduction. The Administration asserts that its plan will pay for the President’s jobs bill and produce net savings of more than $3 trillion over the next decade. The plan includes some of the same insurance-related tax reforms that have been included in every one of this Administration’s prior budget proposals (as discussed in previous LRAs). One such reform is to restrict the pro rata interest expense disallowance exception for COLI to only cover 20-percent owners.
Currently, the exception includes officers, directors and employees as well as 20-percent owners. A second proposal would modify dividends-received deduction (DRD) for life insurance companies’ separate accounts. The bipartisan Joint Committee will issue a formal recommendation to Congress and Congress is expected to vote on the recommendations before December 23, 2011.
The insurance industry has been very active and vocal in opposing both the COLI and DRD proposals. On September 21, the American Council of Life Insurers (ACLI) issued another press release opposing these proposals. Earlier this year, a bipartisan group of 31 representatives of the Ways and Means Committee wrote to Secretary Timothy Geithner expressing their disappointment that these proposals resurfaced despite a significant majority of the Committee stating serious concerns about the proposals in a 2010 letter.
According to Dodd-Frank, bank regulators have until October 18 to adopt rules to carry out the Volcker Rule. As of today, a proposed rule has not been issued and once it is issued, it will likely be open for public comment. Many expect the comment period to be open for 60 days which suggests a final rule is unlikely this year.
The Dodd-Frank Act provides for comprehensive regulations of swaps and includes definitions of key terms relating to such regulations. It also requires the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to jointly conduct a study to determine whether stable value contracts (SVCs) within defined contribution retirement plans (e.g., 401(k) plans) fall within the definition of a swap, and, if so, whether exempting such contracts from the swap definition is appropriate.
Commenters generally argued that SVCs should not fall within the definition of a swap and that if SVCs are not exempted from the over-the-counter regulatory regime, there would be significant ramifications. Namely, that the stricter requirements and higher costs of compliance would be so onerous that most providers would exit the business entirely or greatly reduce the returns of participants.
The National Association of Insurance Commissioners (NAIC) wrote that they believed Congress intended Title VII of Dodd-Frank to provide regulatory authority for over-the-counter derivatives, a historically unregulated financial market, and not to establish regulatory authority over SVCs or other insurance products sold by regulated insurance companies. Other commenters such as BlackRock and the Securities Industry and Financial Markets Association (SIFMA) made arguments that issuers of SVCs, whether an insurance company or a bank, are already subject to pervasive regulation.
On September 26, Roy Woodall was confirmed by the Senate to serve a 6-year term as the independent member of the Financial Stability Oversight Council (FSOC) with insurance expertise. Woodall served as a Treasury Department Senior Insurance Policy Analyst from 2002-2011. His previous experience included being chief counsel at the American Council of Life Insurers (ACLI) and a Kentucky Commissioner of Insurance.
The FSOC has three insurance representatives; however, Woodall is the only one with voting power. The two non-voting representatives on the FSOC are Missouri Insurance Director John Huff, who represents the National Association of Insurance Commissioners (NAIC), and Michael McRaith, the first director of the new Federal Insurance Office.
On September 13, the Federal Deposit Insurance Corporation (FDIC) approved a final rule to be issued jointly with the Federal Reserve Board to implement Section 165(d) of Dodd-Frank. This provision requires bank holding companies with assets of $50 billion or more and companies designated as systemic by the Financial Stability Oversight Council (FSOC) to periodically report to the FDIC and the Federal Reserve the company’s plan for its rapid and orderly resolution in the event of material distress or failure. The final rule is still under consideration by the Federal Reserve.
Separately, the FDIC adopted a complementary Interim Final Rule under the Federal Deposit Insurance Act requiring insured depository institutions with $50 billion or more in total assets to submit periodic contingency plans to the FDIC setting forth an orderly resolution in the event of their failure. The interim rule follows a Notice of Proposed Rulemaking issued by the FDIC in May 2010 and has been synchronized with the Dodd-Frank Final Rule. The interim rule is scheduled to take effect on January 1, 2012 and the comment period ends on November 21, 2011.
On September 20, the Delaware Supreme Court issued much anticipated rulings that will impact life settlements. The certified questions arose from two similar cases — PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust and Lincoln National Life Insurance Co. v. Joseph Schlanger 2006 Insurance Trust. In both cases, an insurer sought a judicial declaration that a life insurance policy that lacked an insurable interest was void as an illegal contract wagering on human life. The district court denied both motions to dismiss and certified three questions to the Supreme Court of Delaware concerning the incontestability provision required under 18 Del. C. § 2908 and the insurable interest requirement under 18 Del. C. § 2704.
The state supreme court ruled that a life insurance policy lacking an insurable interest is void as against public policy and thus never comes into force, making the incontestability provision inapplicable. If adopted more widely, removing the two-year window for challenging policies could make it more difficult for investors seeking payouts on older policies. The court also ruled that an insured’s subjective intent for procuring a life insurance policy is not relevant; instead, the relevant inquiry is who procured the policy and whether or not that person meets the insurable interest requirements.
Earlier this year, the National Association of Insurance Commissioners (NAIC) Life Actuarial (A) Task Force expressed concern over what it perceives as a growing trend by life insurers to include non-unit linked products within separate accounts. The task force created the LATF Separate Account Subgroup to further evaluate the issues. A draft report from that subgroup was made available this month which raised a number of questions for the task force to comment on before the subgroup makes recommendations. Some of the additional issues raised by the subgroup include: whether the current framework inappropriately allows for preferred classes to exist or be created within a separate account to the detriment of the general account; whether some separate accounts are truly insulated from the general account; a need to review the appropriate treatment of any general account assets that are needed to support the separate account and are transferred into the separate account; whether guarantees have a legitimate place in any separate account; and whether contracts sold as variable, but containing guarantees, are appropriately exempt from the nonforfeiture laws. The memo identifies and describes four prevalent classes of insurance products sold as hybrids; Modified Guaranteed Annuities (MGAs), Equity Indexed Annuities (EIAs), BOLI/COLI and Group Pension Products.
The National Association of Insurance Commissioners (NAIC) is evaluating adding a new disclosure requirement, based on the New York Liquidity and Severe Mortality Inquiry, which would require insurers to disclose stress liquidity exposures associated with “institutional business.” The task force believes that public disclosure of information about an insurers’ exposure to stress liquidity risk is a key component in imposing discipline on insurer practices. According to the definition included in the exposure draft, institutional business would not include any separate account business where the fund demand will not be required from an insurer’s general account. However, there would be a table for insurers to list their 10 largest holders of BOLI and COLI. At this time it is not completely clear if only the largest general account BOLI/COLI holders and withdrawal values would be included in the table or if the largest BOLI/COLI holders would be included without regard to funds being in a separate account.
On September 26, the McGraw-Hill Companies, owner of Standard & Poor’s (S&P), revealed in their Form 8-K with the Securities and Exchange Commission (SEC) that it received a “Wells Notice” from the SEC. The Wells Notice stated that the SEC staff is considering recommending that the SEC institute a civil injunction action against S&P, alleging violations of federal securities laws with respect to S&P’s ratings for a particular 2007 offering of collateralized debt obligations, known as “Delphinus CDO 2007-1.” In connection with the contemplated action, the SEC may seek civil money penalties, disgorgement of fees and other appropriate equitable relief. A Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows a company to address issues before any enforcement decisions are made. In a press release, McGraw-Hill said it is cooperating with the SEC and will continue to do so.
On September 1, the Independent Insurance Agents & Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) filed a formal appeal of a trial court ruling that upheld New York Insurance Regulation 194, which took effect in January. Regulation 194 requires agents and brokers to disclose to their clients how insurance companies are paying them. At a client’s request a producer would also be required to disclose additional information such as the differences in types and amounts of coverage, contrasts in policy terms and the pay the producer would have received had the client chosen a different policy. In a joint press release, the trade associations stated that they fully expect to prevail after the appellate court hears their arguments.
The New York State Banking Department and the New York State Insurance Department will soon merge to become the New York State Department of Financial Services (DFS). The change is the culmination of a directive from Governor Andrew Cuomo issued earlier in the year. The two departments are merging to reduce costs, achieve greater efficiency, and to modernize regulatory oversight of the financial services industry. While some trade associations have expressed concerns about the effect of the consolidation, others seem to think that the two departments will still largely operate separately, especially when it comes to examinations. The merger, which will include a new DFS website, will become effective on October 3, 2011.