Do GICs and annuities work today?

• Position: Includes related articles - Pension Fund Management

Issues confronting corporate sponsors of GICs and annuities are discussed by an insurance executive, a lawyer, and a pension consultant.

How reliable are guaranteed investment contracts and annuities in today's insurance industry environment? To put the question in perspective, GICs alone represent an asset class of between $150 and $200 billion.

Corporate pension managers see the answer revolving around two major insurance industry issues. The first is the liquidity of the insurance industry and the implications for corporate sponsors. The second is the pressure for increased regulation of the insurance industry at the federal level.

These two subjects were addressed by roundtable talks at the recent fall conference of FEI's Committee on the Investment of Employee Benefit Assets (CIEBA), held in Washington, DC. The following is an edited version of the participants' remarks, including a brief Q&A session.

THE KEY is SOUND REGULATION

James P. Corcoran

Partner

Wilson, Elser, Moskowitz, Edelman & Dicker

(Former Superintendent of Insurance, New York State)

Regulators usually try to keep the insurance industry boring and dull. But that wasn't such a good idea back in the 1980s. The pressures on the industry were substantial. Not least was a tremendous increase in policy loans in response to the high interest rates available in other financial markets.

When I became Superintendent of Insurance for New York State in 1983, the cry was to liberalize investment restraints so that consumers could fully participate in this new economic boom. Of course, by the time I left office in 1990, there had been a 180-degree turn.

During the 1980s, proactive insurance regulators weren't very popular. When I joined with a few other commissioners-from Arizona and Maryland-to put a 20-percent cap on the amount of its assets a fund could invest in junk bonds, the insurance industry in New York was supportive. But it was not a national movement. In fact, I still have press clippings-including one from The Wall Street Journal-calling me an economic Neanderthal for daring to slow down the 1980s' geniuses.

I'm convinced that if we had federal regulation of insurance in the 1980s to match the wild west regulation in other industries, we would have today an insurance crisis parallel to what has occurred in banking. But because some state regulators were more proactive than others, while we do have a problem now, we don't have a crisis. The insurance industry and regulators have been criticized, of course, and significant change is certain.

WHAT WILL REGULATORS DO?

Rating agencies-Many of the agencies rating insurance companies are relatively new to the business and, at least before Executive Life and Mutual Benefit, did not really understand the industry. They have been reluctant to make public the methodology they use in rating insurance companies. I don't agree with another regulator that regulators should rate the rating agencies, but I do think regulators need to put pressure on the agencies to reveal their rating methodology. I also support the move by regulators to require the rating agencies to analyze the risk-based capital of insurance companies, where they put their special reserves in light of their portfolios and the businesses they are in. Uniform regulation-When New York pushed for uniform regulation a few years ago, it was regarded as a conspiracy. We suggested that insurance regulatory bodies be certified, that they be audited to make certain they have enough capital and staff, and that essential solvency statutes have been enacted in those states. Consumers and companies doing business with insurance companies in states that are certified would know that they are being adequately regulated. States that don't support their regulatory bodies would lose premium income, because companies would move to certified states.

Guaranteed investment contractsGICs used to be regarded as long-term investments, and in New York we required the matching of assets and liabilities. In fact, because Equitable was forced to do this early in the game, it has been able to work out of its difficulties.

But when companies offer GICS-OR any long-term product, for that matter-that have ease of surrender, as they have been doing recently, they undermine the stability of the product. So regulators have to look at product design. If one product has an easy surrender, the odds are that others will also have it. And that's when a run on a bank becomes a real issue, which is what happened at Mutual Benefit. That's why you need state regulation that defines appropriate surrender provisions and that also requires the matching of assets and liabilities.

Financial guarantees-Financial guarantees running inside a holding company are difficult to understand, especially for someone outside rating the company. Regulators in the Mutual Benefit case did not adequately oversee the intra-company guarantees running the subsidiaries.

The life insurance...