Newspaper article The Christian Science Monitor
Insurance Industry Seeking Credibility
THE United States insurance industry failed to win approval this week for its plan to rescue the Executive Life Insurance Company. But a larger question remains: Can the industry rescue public confidence in its financial soundness?
Echoing the problems faced by the nation's commercial banks and savings and loan associations, many life insurance companies have seen investments go sour at a record pace. Two big insurers failed earlier this year: Mutual Benefit Life Insurance Company in New Jersey and Executive Life in California, which in April became the largest US insurer ever to fail.
"This is a peak year for insolvencies" in the life insurance industry, says Mark Puccia, senior vice president of Standard & Poor's Corporation, which rates companies' financial strength. But he says the industry as a whole remains sound.
Unlike banks and thrifts, insurance companies do not have a federal agency to rescue them if they get into trouble. The industry has been regulated at the state level since the 1800s. Some lawmakers in Washington are considering new federal standards to monitor industry solvency nationwide.
Insurance companies do have a safety net of sorts: They pay money into state funds that protect policyholders when companies go under. In the case of Executive Life, these funds put together an extraordinary plan to take over and manage the failed company. Twenty big firms, many from New England and New York, agreed to set up a $1 billion credit line to fund the takeover.
On Wednesday, however, California insurance commissioner John Garamendi said the industry's plan was unworkable, and that the state would turn Executive Life over to one of two private bidders to be named next week.
"While I appreciate the life insurance industry's unprecedented cooperative campaign to salvage Executive Life, their proposal falls short of guaranteeing policyholders the rock-solid protection they deserve," Mr. Garamendi said.
Garamendi had initially favored the industry plan over other bids, but he said the rescue plan was vulnerable in the event of a big drop in the value of Executive Life's junk bonds. …