A controversial model investment law that would severely restrict how insurance companies could invest their assets soon might be softened following months of hearings, testimony and industry pressure.
The proposed National Association of Insurance Commissioners investments law would supersede current state insurance investment statutes and would have a far-reaching impact on the insurance industry.
But the NAIC working group, a committee of state regulators responsible for developing the proposed law, indicated after a meeting in Dallas in January it might back off on some of the more restrictive components of the proposed rule. According to industry sources, the current draft may be rewritten and recirculated for additional comments.
The current draft would impose extensive asset limitations on insurance company investments, largely in response to a number of recent insurance company insolvencies, including the failures of Mutual Benefit Life Insurance and Executive Life Insurance Co.
For example, commercial mortgages would be limited to a maximum of 30% of a company's portfolio, while total real estate obligations would be limited to 50%. Low- and medium-grade bonds would be limited to 20% of the portfolio. Investments in foreign securities would be limited to 10%, with additional limits on each country regardless of asset category.
According to the American Council on Life Insurance, Washington, the average insurer's portfolio contains about 14.8% mortgages; 3.1% real estate; and 40% bonds, of which 7.7% is high yield. A comparison for foreign securities wasn't available. Some companies, of course, have far higher percentages, and all companies have the ability to go higher. Under the new law, they would lose that flexibility.
Insurance industry sources have been particularly critical of the proposed investment law's restrictions on commercial mortgages and foreign investments, claiming the NAIC is "micromanaging" insurance company portfolios.
The preliminary draft was released in February 1992 and since has been the subject of scorn by insurance company executives who prefer more flexible regulations, such as the "prudent man" rule. The model law was expected to be completed and sent to the various states later this year. The NAIC has not amended its schedule, and industry sources believe the project could be completed this year.
John Kummer, deputy insurance commissioner for the Florida Department of Insurance and chairman of the NAIC working group responsible for drafting the rule, acknowledged during the Dallas meeting a "continuing concern over the complexities" of the current draft and said those issues "need to be addressed."
A letter by Mary McGinn, vice president and assistant general counsel at Allstate Life Insurance Co., Northbrook, Ill., on behalf of the technical resource group assisting in drafting the rule, urged the NAIC to reconsider whether investment limitations are still necessary in view of the current regulatory environment.
"We have seen that if we attempt to have a model investment law that contains strict categories of pigeon-holes into which all investment must fit, the complexity of the investment world today and the continuing development of new investment products and practices requires an ever-increasing degree of complexity and a model investment law that will need continual modification," Ms. McGinn wrote in the letter.
The letter pointed out that "with the advent of risk-based capital, increased statement disclosure regarding investments and investment practices, the efforts of many other working groups ... it is no longer necessary to look to the investment laws as the only resource available to regulators to address such risks. We urge the working group to review the current regulatory environment and consider whether the degree of specificity that may have been felt to be appropriate when the project commenced is still necessary or desirable."
A spokesman for the American Council on Life Insurance said the working group "has apparently decided to simplify the draft and make some changes. We thought that was a positive development."
The ACLI spokesman said the NAIC apparently will redraft the law to liberalize investments or to grant more flexibility in making investments, and solicit additional industry comment.
"We are pleased that they are going to rethink the matter," said the ACLI spokesman. "There were too many complex and strict asset limitations (in the original draft), which encourages micromanagement of insurance assets," he said.
Paul L'Italien, senior investment policy officer at John Hancock Mutual Life Insurance Co., Boston, said, "we were told by Mr. Kummer that they recognize the problems and ... are working on simplification. They told us that they were considering removing the specific percentages (of asset categories) and may move to broader classes. We won't know or see the new draft for several more months."