The collapse of PHL Variable Insurance Co. has exposed a gaping hole in the retirement plans of many Americans. With a $2.2 billion shortfall, 100,000 policyholders are now facing a grim reality. This story highlights the dangers of relying on life insurance companies for retirement income, especially when those companies are bought by aggressive private equity firms and asset managers. It also underscores the failure of state regulators to protect consumers, as they approved complex reinsurance deals that imperiled policyholders.
Annie Benjamin, a 3M executive with an autoimmune disease, invested $99,000 in an annuity, trusting the insurance company and its regulator to provide her with retirement income. But when PHL collapsed, her account was frozen, and she was left with no way to know if her money was at risk. This is a stark reminder that the staid, steady life insurance industry of the past is no more. Today's insurers are taking on more risks, often offloading policyholder obligations to affiliated companies in secrecy, leaving policyholders in the dark about the financial health of their insurers.
The PHL case is a perfect example of what happens when an insurance company hides a black hole on its balance sheet. The company conducted complex reinsurance deals with affiliates, and an asset backing a 2019 reinsurance transaction was later found to be worthless. This highlights the risks associated with excess-of-loss agreements, which are not approved by the National Association of Insurance Commissioners due to their inability to be sold quickly to pay claims. State regulators, however, can authorize departures from these principles, as they did in the PHL case.
The failure of PHL illustrates the failure of state regulators to protect consumers. Larry Rybka, a registered investment adviser, calls this a catastrophic failure. Mary Quinn, a spokeswoman for the Connecticut Insurance Department, declined to comment on the PHL deals, citing potential legal action. This lack of transparency and accountability is a major concern for policyholders.
The story also highlights the risks associated with reinsurance deals. When promises haven't been truly transferred to other companies, the IOUs can boomerang to the original insurers, which may not have the cushion to cover them. This is a major issue for American Equity Investment Life Insurance Co., which has three reinsurance transactions that depart from National Association of Insurance Commissioners guidelines. These deals involve roughly $6 billion in obligations owed to policyholders, and the assets backing those financial obligations do not meet the required standards.
The involvement of private equity firms and asset managers in the insurance industry is a growing trend. These aggressive companies are snapping up insurers and engaging in complex deals that can imperil policyholders. This raises a deeper question about the regulation of the insurance industry and the protection of consumer interests. It's time for a closer look at the practices of these firms and the role of state regulators in ensuring the financial health of insurance companies.
