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Old 12-04-2012, 01:15 PM
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Future Generations Have To Deal With The Financial Carnage

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During the off-hours on Sunday, when few people were willing to ruin whatever remained of their weekend and when even astute observers weren’t supposed to pay attention, the National Association of Insurance Commissioners approved new rules that would allow life insurance companies to lower their reserves for future claims.

Executives claimed that they could put that capital to “more productive uses,” such as blowing it on stock buybacks and acquisitions or plowing it into subprime-based CDOs or Greek sovereign debt, or whatever, to goose their paper returns—having already forgotten all about the financial crisis.

“The insurance industry weathered the financial crisis well precisely because of the careful reserving state regulators have historically required,” said Benjamin Lawsky, superintendent of the New York Department of Financial Services. “To ignore the lessons of the financial crisis and deregulate the industry, allowing them to keep less in reserves, is unwise.”

Others were less sanguine. Joseph Belth, Insurance Forum editor and professor emeritus of insurance at Indiana University, worried that “future generations of executives, regulators, and consumers will have to deal with the financial carnage.”

There are salient precedents. The Glass-Steagall Act, after decades of being reinterpreted and watered down—and finally gutted by Citibank’s foray into investment banking and insurance—was repealed in 1999. The business of finance boomed, banks ballooned, Wall Street printed paper profits, and bonuses skyrocketed. Less than a decade later, the financial crisis laid waste to the world economy. Before it, there was the S&L crisis, brought on by a series of challenges that culminated in the deeply troubled industry’s deregulation in the early 1980s. With disastrous consequences.

The Insurance industry had lobbied for the change for almost a decade. The existing rules used formulas that were “far too conservative,” life insurers maintained, according to the Wall Street Journal. Instead, the industry would implement a “principles-based” system that would use computer models—algos and “fat fingers” come to mind—to figure out how large the reserves would have to be; or rather, just how small they could be. Because rationalizing “lower reserves in the aggregate”—as Lawsky’s deputy Robert Easton called it—had after all been the goal of the lobbying campaign.
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