When I was 20+ years younger the new chief actuary of a subsidiary I was in came and told me his tale of woe.  At a prior company he had worked for, the company had terminated the defined benefit pension plan, and went to a low-credit quality insurer to purchase annuities to match the terminated benefits.

life insurance

His complaint was that he had no say in the matter.  With ordinary debt agreements, the debtor has no right to assign his debt to another debtor, without the assent of the creditor.

In the same way, those that buy life insurance from insurance companies run the risk that their policies could be sold to a weaker insurance company.

20+ years ago, my friend said there was a simple solution, and I agree with it.  When a financial company takes over the liabilities of another financial company, those who have lent to the original company should have the right to receive their assets back at full value, with no deductions for surrender charges, etc.

This is basic.  Debtors should not be able to assign debts to another party, without the assent of the creditor.

I have seen the same thing recently in this article, as aggressive life insurers buy up policies of less aggressive life insurers.  Those insured should have a way out, as the creditworthiness of the insurer has gone down.

I am arguing that life insurers should not be able to sell their liabilities without the insured having an option to cash out at full value.  I realize that this would limit valuations among life insurers, but so what?  The basics of what is fair in debtor/creditor relations should prevail.  Big insurance companies should not have a different set of rules than would be common to other debtor/creditor relationships.

By David Merkel, CFA of Aleph Blog