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Insurers’ Hope: Lower Reserve Requirements for Annuities

M.P. McQueen from The Wall Street Journal recently reported on the insurance industry’s push for states to lower their required reserve amounts. While the states regulate insurance and annuity products, the recommendations of the National Association of Insurance Commissioners (NAIC) are typically adopted by most states. NAIC may make a decision as early as Friday.

The life insurance industry is adamant that the current reserve requirements are too conservative; as you would expect, that argument doesn’t fly with consumer groups such as the Center for Economic Justice and the Consumer Federation of America. Those groups believe that given the state of the financial markets (largely blamed on lax regulation in the mortgage and investment industries), nobody should even be considering loosening regulatory controls at this moment. Reserves are meant to protect the assets individuals have invested in life insurance policies, variable annuities and fixed annuities. The cash reserves can pay off certain guaranteed policies even during a stock market downturn.

However, having large reserves also reduces the flexibility of insurers. To pay minimum returns on financial products like variable annuities, providers may have two options for freeing up the needed cash: either face the daunting prospect of raising capital on terms unfavorable to the borrower, or selling off assets that are otherwise useful and stand the chance of future success.

The American Council of Life Insurers, an industry group, also contends that high reserve requirements are a waste of funds because replicate other safeguarding measures insurers have enacted. They claim that up to $28 billion would be freed up if the NAIC adopts their proposal for lowering the requirements.

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