Indiana Insurance

About a year ago, investors in bank stocks had to learn a new method of accounting of a bank’s capital, against the risks of loss or cushions. The new method was developed on the basis of an analysis of risk capital band and the amount of capital a bank was necessary for the risk of their investments.

Now, amid growing concern about the safety of life insurance companies and increased investment debts vis-à-vis insurers, insurance is considering a similar accounting.

The National Association of Insurance Commissioners, a national professional organization of insurance regulatory authorities, is awaiting a report at a later date this month by the Committee for Development “Risk-based capital rules.

Stephen Rocks, Senior Vice President of the New York Life Insurance Company and a steering group, the industry is to advise the committee, the hope is the development of new rules by December and for the insurers, they are in their annual accounts 1992.

In the case of insurance contracts by investors, new rules mean that all insurers ras immediately east of the capital selected, and the value of their share could increase. But companies briefly on invested capital is also selected. The risk for investors is therefore clear: if an insurer provides little capital, the insurer share prices break. Even worse, insurance companies may be more vulnerable to the scene, against the value of a Run on a bench, send us an insurer.

“If the data published naked without trial either in background is a risk lies in the fact that the public exaggeration,” said Rocks. “It is a major concern in the sector.”

But only agreed that all parties concerned, it is necessary that the venture capital rules. The State acquisitions in this year’s four major life insurers - Executive Life, the first capital of life, Monarch Life and mutual benefit of life - like the failure in recent years of several major damage and accidents , Have highlighted the need for a link between the capital base of an insurer on the risks of its heritage and, finally, there is a risk that insurance sold.

For example, it is generally recognized that the sale of insurance of pollution, exposure can be a liability insurer for decades in the future is much more risky than auto insurance, payment requests are normally within two years after the first of the policy are sold.

Risk-based capital “is an attempt to save the system logic, the insurer’s capital,” said Joseph M. Belth, a professor at Indiana University insurance.

Given that the rules of venture capital are not yet finalized, it is impossible to identify the company upon the acquisition of capital to play. But Townsend & Schupp, Hartford-based industry consultants, working with a provisional format, found that over all insurance companies, the economy represents only 86 per cent of capital should be the new standard .

Other analysts declined to speculate publicly on the reserve of the insurer would have had to sell, dispose of assets or any other way to the realization of the new regulation, but the names of public enterprises, which have seen their capital take as a consequence of the problems are well known: travellers, Aetna, Equitable (which is the process of Going Public) and others.

Although insurers are in principle free to maintain this level of capital they so wish, to a venture capital already exists. Some life insurers, for example, are already required to give a so-called Securities Valuation reserve, is the capital of land set aside to absorb losses on marketable securities.

In addition, the laws require, damage and accidents, certain amounts of liability, so-called reservations, their balance sheets, a policy if they are sold. But reserves are not capital, they are available means to absorb the expected losses, not unexpectedly.

Alice Cornish, an analyst at Northington Partners, an inventory of research undertaken at Avon, Connecticut, said he did not really an attempt reasonable, until now, for the capital adequacy of damage and reinsurance accidents.