State Regulators Deny Life Insurers’ Bid for Looser Capital Requirements

State insurance regulators voted against a proposal to loosen capital requirements for the battered life insurance industry, shooting down hopes for up to $30 billion in relief.

The National Association of Insurance Commissioners (NAIC), a group representing regulators in all U.S. states and territories, reached the decision Thursday after weighing the proposal over nearly three months. It did not rule out taking up the matter again in the future.

“You need to be conscious of the message this will send to consumers,” said NAIC president Roger Sevigny, ahead of the vote.

Many commissioners cited concerns that consumer rights could be eroded by the changes, and that it would be hasty to rush through such sweeping revisions at a time when financial regulation is already under a microscope given the global credit crisis.

“The headline still will be that we diluted capital systemwide,” said Eric Dinallo, New York insurance superintendent, warning there would be significant backlash from government, consumers and others.

Dinallo lobbied fellow state regulators to vote “no” on the proposal in a letter circulated earlier Thursday.

Regulators on NAIC’s executive committee from states including Alaska, New Jersey, New Mexico, Oklahoma, Pennsylvania, South Dakota, South Carolina, Tennessee, Utah, Wisconsin and Kansas voted against the proposal. A sole vote in favor was cast by Connecticut Insurance Commissioner Thomas Sullivan.

The matter looked like it had a good chance of approval just two days ago. On Tuesday, a group of regulators voted to recommend six of nine measures be approved, which could have given companies such as Prudential Financial, Hartford Financial and Lincoln National a boost at a time when credit is tight.

Stocks rebounded, with the Dow Jones U.S. life insurance index rising about 20 percent on Wednesday. On Thursday, the index, down throughout the day, extended losses after the vote to end down more than 11 percent.

State regulators impose capital requirements on insurers to make sure money is set aside when policyholders have claims.

Large investment losses in recent months have left life insurers badly battered, raising concerns about capital adequacy. In addition, there have been worries about shaky stock markets driving up costs for variable annuities, a popular retirement product.

But some insurance regulators expressed concern that a trade group, the American Council of Life Insurers, had overstated the industry’s need for capital relief.

The ACLI asked regulators to revamp life insurers’ regulatory capital requirements to eliminate redundancies in reserve requirements. The changes could have, based on ACLI’s estimate, freed up about $25 billion to $30 billion in capital, or up to 7 percent of life insurers total adjusted capital in 2007.

The group, in a statement on Thursday, said it was “disappointed with the failure of the NAIC to provide uniform guidance to the states on how to respond to rapidly changing and volatile economic conditions.”

However, some states have the ability to loosen rules for insurers that they regulate.

“We have not been confronted by an emergency,” said New York’s Dinallo, adding that there been no recent U.S. life insurance failures.

But if a New York-regulated insurer got into trouble he could step in. “Focused, tailored relief could be pro-consumer,” Dinallo told Reuters.

(Reporting by Lilla Zuill; Editing by Tim Dobbyn and Matthew Lewis)