Jill C. Anderson

Anthony J. Alt

Michael J-H. Smith

Russel Hasan

Abstract

This note critiques the July 2009 D.C. Circuit decision in American Equity Investment Life Insurance Co. v. SEC, in which the court rejected a challenge to SEC Rule 151A and held that the Securities Act of 1933 section 3(a)(8) exemption for insurance did not exclude fixed index annuities from SEC regulation. The note begins by examining in detail the case law interpreting the Act’s insurance exemption, then traces the rise of fixed index annuities and the economic theory underlying index investing—the investment strategy that created demand for such products. It proceeds to analyze contemporary case law addressing whether fixed index annuities fall within section 3(a)(8)’s exemption. The note argues substantively that fixed index annuities should be exempt as insurance because they transfer stock-picking risk from the insured to the insurer, and because the distinction between beta and non-beta risk in index investing theory supports regulating index annuities differently from variable annuities. According to the note, fixed index annuities present solvency and contract-interpretation challenges—core insurance regulatory concerns—but do not raise the disclosure issues that animate SEC oversight. The author contends that the D.C. Circuit fundamentally misunderstood the economics of fixed index annuities and concludes with policy arguments favoring state, rather than SEC, regulation of these products.

Esteban Carranza-Kopper

Abstract

During the past decades, numerous discussions have emerged regarding fronting arrangements. Generally, a fronting arrangement is considered an alternative risk transfer method in which an insurer licensed in a particular jurisdiction (the fronting insurer) issues a policy covering local risks, but cedes all or nearly all of those risks to an unlicensed reinsurer, which typically assumes responsibility for administering related claims. In exchange for its services, the fronting company usually receives a small percentage of the premium. Thus, while the fronting company appears to the world to be the insurer, it has in reality transferred most or all of the coverage risk and claim-handling obligations to the reinsurer. Debate surrounding this practice has focused on whether fronting arrangements serve as a means to circumvent state statutes, whether they are beneficial or detrimental from the perspectives of policyholders, regulators, or the industry, and whether the practice should be banned or further regulated. As examined in this article, the National Association of Insurance Commissioners (NAIC) has discussed potential regulatory responses, some jurisdictions have enacted statutory provisions addressing fronting, and courts have recently issued decisions worthy of consideration. In light of these issues, this article provides a thorough analysis of fronting arrangements, the motivations for companies to use them, their negative aspects and risks, and the regulatory actions, statutes, and case law that have emerged in response.

Ryan M. LoRusso

Abstract

A recent report to the United States Congress indicated that about 131 million Americans are currently enrolled in employee benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). Some plans are structured so that the plan administrator pays benefits out of the firm’s profits, creating the possibility that the administrator may be swayed to decide in the company’s favor to protect its financial health. In Metropolitan Life Insurance Co. v. Glenn, the Supreme Court addressed whether such an administrator operates under a conflict of interest and, if so, how that conflict should be considered on judicial review. Prior to Glenn, the circuit courts had adopted varying approaches to this apparent conflict. This note begins with an overview of trust law principles relevant to the Court’s reasoning, then reviews pre-Glenn case law, discusses the Glenn decision, and examines subsequent developments. It argues that the Supreme Court was correct to hold that this scenario constitutes a conflict of interest and to permit circuit courts to account for the conflict by weighing it alongside other relevant factors.

John Patrick Hunt

Abstract

Solvency regulation lies at the core of insurance regulation, and—for now—credit ratings lie at the core of solvency regulation. U.S. insurance regulators have long relied heavily on credit ratings to determine which investments insurers may make and to assess the riskiness of those investments. This dependence enabled insurers to invest in novel financial products so long as those products received high ratings. When downgrades and losses later occurred, insurers experienced consequences ranging from severe stress—such as the life insurance industry’s need to raise billions in additional capital—to catastrophic collapse, as seen with AIG and the bond insurance industry. These failures challenged the conventional wisdom that insurers do not pose systemic risk. Although eliminating credit ratings or analogous private credit assessments from insurance regulation entirely is politically and substantively difficult, this Article proposes an alternative: a “seasoning requirement” for credit ratings on novel products, under which such ratings would not receive regulatory effect for a set period, perhaps one full economic cycle. Because many novel financial products failed quickly during the recent downturn, a seasoning requirement would have avoided the most serious drawbacks of rating-dependent regulation while posing far fewer political, theoretical, and practical obstacles than proposals to eliminate reliance on ratings altogether.

Robert S. Bloink

Abstract

The long-dormant insurable interest doctrine is being revisited as banks and investment funds increasingly purchase life insurance policies. Some industry commentators object, accusing Wall Street of engaging in schemes that resemble impermissible gambling on the lives—and deaths—of others. In response, Wall Street financiers maintain that they comply with state insurable interest statutes and that their efforts to build a secondary market for life insurance expand consumer options and dismantle the longstanding monopsony of insurance companies. A workable compromise between the insurance industry and Wall Street must modernize the insurable interest doctrine in a way that preserves the free assignability of life insurance policies while preventing a revival of the long-condemned practice of wagering on lives. Developing such a proposal requires a comprehensive examination of the doctrine’s history, the modern context in which it operates, and the leading modernization proposals advanced to date.

Claire A. Hill

Abstract

People making decisions under uncertainty may need to justify those decisions to their reputational community. This Essay considers when and how the potential need for justification may lead a decision-maker to choose a methodology that is better suited to yielding a defensible choice rather than the best choice. When uncertainty is present, outcomes and probabilities are unknown, and broad consensus on what constitutes a “good” decision-making methodology may be lacking. Yet norms often emerge regarding acceptable methodologies—those that will be viewed as justifiable if justification becomes necessary. These norms develop considerable “stickiness,” as the easiest way to demonstrate that something is appropriately done is to show that others do it. This Essay identifies a particular pathology arising when decision-makers favor a justifiable decision over a genuinely good one and argues that this dynamic can produce significant negative consequences. The primary example examined is the volume of subprime securities purchased, with additional examples including how CEOs are selected and how contract terms are chosen in complex business agreements.

Paul Rose

Abstract

This essay, prepared for the “Regulating Risk” symposium of the Connecticut Insurance Law Journal, reviews the connection between risk and corporate governance and then examines the “Strengthening Corporate Governance” provisions of Subtitle G of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. These provisions, which address proxy access and the separation of the roles of CEO and board chairman, seem likely to have one of two effects. On one hand, they may be pernicious: by further enhancing shareholder power without a clear justification—particularly without demonstrating that increased shareholder power functions as an effective risk management device—they may undercut the risk-management goals of the broader statute. The provisions assume that enhanced shareholder authority will improve monitoring of managerial behavior and thereby help prevent future crises, but theory and evidence suggest that diversified shareholders often prefer levels of corporate risk-taking that other constituencies, including taxpayers, would not. On the other hand, Dodd–Frank’s governance reforms may have minimal impact on investor behavior or risk management. Recent increases in shareholder power, largely due to expanded federal regulation, have already made management more responsive—perhaps too responsive—to shareholder concerns about agency costs, and many of the proposed reforms have either already been adopted or were likely to be adopted by most public companies. If private ordering is functioning effectively, the essay asks, what is gained by imposing uniform governance structures across the entire market, particularly when most affected firms were victims rather than contributors to the Financial Crisis?