New York Insurance Regulator Looks to Lower Life Insurance Rates

Financial Services Superintendent Benjamin M. Lawsky

States and life insurance companies have long been at odds over formulas used to calculate reserves, the money companies must set aside to make sure they have enough on hand to pay claims when they arise. Because insurance companies cannot use reserved money for investments, they must charge higher life insurance rates to make up the difference.

New York’s Department of Financial Services Superintendent Benjamin M. Lawsky thinks he has a way to help insurance companies lower their reserves without losing the transparency regulators seek.

Problems with the Reserve Formula

New York is the biggest life insurance market in the country, giving Lawsky heavy sway in how life insurance companies nationwide are regulated. In the past, Lawsky insisted on the use of traditional reserving formulas because they force life insurance companies to remain open about their reserves, making it easier for regulators to keep an eye on the financial strength of these companies.

Life insurers, however, have been pushing for a more accurate reserve system. The National Association of Insurance Commissioners (NAIC) has been negotiating on behalf of the life insurance industry, pushing for “Principles-Based Reserving” (PBR). Under this system, calculating reserves is adjusted to account for economic conditions and the specific losses experienced by the insurance company.

Related: $201M Life Insurance Policy Breaks Guinness World Records

A Compromise Solution

Lawsky and other regulators worry that PBR does not leave enough transparency. But Lawsky recognizes that overly conservative reserves can drive up life insurance rates.

On March 27, he issued a letter to regulators in other states and the NAIC, announcing a plan that would cut reserves for term life insurance policies by 30 to 35 percent, but in a “prudent way.” He plans to put the new reserving practices into place on Jan. 1, 2015, but has yet to release details on how it will work.

Photo credit: Department of Financial Services