The National Association of Insurance Commissioners (NAIC)—a multistate standard-setting organization composed of insurance regulators from all 50 states, the District of Columbia, and U.S. territories—is arbitrarily increasing regulations on life insurance companies that invest in residual tranches and interests of asset-backed securities (ABS) (e.g., investment vehicles such as collateralized loan obligations, and securitizations of auto loans, student loans, and credit cards).[1] The implementation of the proposed regulations will disincentivize life insurance companies from investing in residual ABS tranches, which could reduce returns for American workers’ defined contribution (DC) plans (e.g., 401(k)s). ATR is deeply concerned that the Biden Administration and unions are coercing the NAIC to deter financial companies from making DC plans more attractive for retirees.
Third-party data and analysis provide evidence that NAIC’s proposed regulations go too far. On March 17, 2024, the NAIC convened[2] and determined that they would open a comment period to allow the public to opine on an Oliver Wyman (OW) report that contradicts NAIC’s proposed regulations.[3] The OW report finds that common stock losses are higher than losses on residual ABS tranches. The NAIC’s proposed equity capital increase from 30 percent to 45 percent for residual ABS tranches is not commensurate with the level of residual tranche risk observed within the OW report. Meanwhile, the common stock charge is 30 percent. The OW report offers support for a 30 percent capital charge, not a 45 percent charge.
The NAIC’s proposed regulations should be delayed by at least one year. If the NAIC fails to delay the implementation of the 45 percent capital charge, then the charge should remain at 30 percent. This is more than reasonable considering the NAIC has not conducted a comprehensive cost-benefit analysis for increasing the capital charge to 45 percent. Moreover, the OW report clearly shows the NAIC’s proposed regulations are gratuitous. To date, no substantive quantitative analysis has been conducted to justify the NAIC’s proposed regulations.
Additionally, NAIC’s proposed rules should not be implemented simply to create parity with federal regulators’ implementation of the Basel III Endgame bank capital requirements.[4] These bank rules were originally formed by unelected bureaucrats in Basel, Switzerland. The NAIC should not implement rules for life insurance companies that will align with heavy-handed European-based regulations.
The NAIC should not arbitrarily and capriciously increase the capital charge for residual ABS tranches without a proper quantitative analysis. Since insurance is primarily regulated at the state level, state regulators wield significant power over the insurance industry. Although the NAIC is not subject to the Administrative Procedure Act (APA),[5] as a matter of proper due process, the NAIC should consider abiding by the APA’s principles and allow for a structured notice-and-comment process that considers and analyzes hard data. Today, the NAIC possesses no hard evidence to suggest that raising the capital charge for residuals to 45 percent would provide any material benefits to life insurance companies or their clients.
NAIC’s proposed regulations will force annuity providers to hold significantly more cash on hand. Essentially, this will limit investment options for DC plans. This is especially harmful to Americans considering the guaranteed lifetime income that annuities provide.[6] Unions and the Biden Administration are pursuing these burdensome regulations to hamstring DC plans. Democrats and unions know that empowering individual investors in DC plans will significantly degrade their abilities to use shareholder activism to pursue left-wing political aims through defined benefit (DB) plans.
The hospitality union UNITE HERE is currently pressuring pension funds to avoid annuity products offered by insurance companies that are backed by private equity.[7] Unions are also suing[8] public companies for trying to switch to DC plans that offer annuity options through private equity-backed insurance companies.[9] One reason for this is clear: left-wing activists rely on union-controlled DB plans to force private companies to comply with their environmental, social, and governance (ESG) agenda.[10]
The Financial Stability Oversight Council (FSOC), Federal Insurance Office (FIO), and International Monetary Fund (IMF) are also pressuring NAIC to pursue these heavy-handed regulations. The FSOC[11] and IMF[12] both published reports highlighting their concerns with private equity’s exposure to life insurance. FIO, which is housed within the U.S. Treasury Department, is working with NAIC to collect climate risk data from insurers.[13] The FSOC[14] is run by President Biden’s Treasury Secretary and is composed of President Biden’s financial regulators. Additionally, the U.S. representative on the IMF’s Executive Board is a Biden nominee.[15]
The U.S. Department of Labor, which governs private employer-sponsored DC plans, is also making it harder for private companies to diversify their investment options.[16]
Congressional Democrats such as Sen. Sherrod Brown (D-Ohio) have also put pressure on NAIC to scrutinize private equity’s exposure to the insurance industry.[17] Republican insurance commissioners should not use Democrats’ talking points to increase burdensome regulations when there is absolutely no evidence to suggest that the regulations are commensurate with the observed investment risks.
The assault on DC plans is a product of partisan politics. Democrats and unions should not be allowed to hijack the NAIC to empower themselves and suppress American workers’ retirement savings.
[1] https://content.naic.org/about.
[2] https://content.naic.org/sites/default/files/national_meeting/rbcire-summary-0317.pdf.
[3] https://content.naic.org/sites/default/files/inline-files/Oliver%20Wyman%20Residual%20Tranche%20Report.pdf.
[4] https://docs.house.gov/meetings/BA/BA20/20240131/116775/HHRG-118-BA20-Wstate-BashurB-20240131.pdf.
[5] https://www.justice.gov/sites/default/files/jmd/legacy/2014/05/01/act-pl79-404.pdf.
[6] https://www.actuary.org/sites/default/files/2022-08/IB.SECUREact.8.22.pdf.
[7] https://www.ai-cio.com/news/union-warns-pension-funds-to-be-wary-of-private-equity-backed-prt-insurers/.
[8] https://www.planadviser.com/2nd-lawsuit-filed-att-prt-deal/.
[9] https://www.investmentnews.com/life-insurance-and-annuities/news/companies-transferred-billions-in-pension-assets-to-annuities-here-come-the-lawsuits-250826.
[10] https://nypost.com/2024/03/21/opinion/unions-using-esg-to-control-workers-and-drain-americans-retirement-savings/.
[11] https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.
[12] https://www.imf.org/en/Publications/global-financial-stability-notes/Issues/2023/12/13/Private-Equity-and-Life-Insurers-541437.
[13] https://home.treasury.gov/news/press-releases/jy2162.
[14] https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/financial-stability-oversight-council/about-fsoc/council-members.
[15] https://www.imf.org/en/About/executive-board/eds-voting-power.
[16] https://retirementincomejournal.com/article/of-private-equity-and-pension-risk-transfers/.
[17] https://www.brown.senate.gov/newsroom/press/release/sherrod-brown-continues-push-private-equity-firms-involvement-insurance-industry.
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Author: Bryan Bashur
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