When Your Life Insurance is Sold to Insurer with Bad Credit

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.

When Your Life Insurance is Sold to Insurer with Bad Credit

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



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.