New York gets tough on insurers

Eric Dinallo, superintendent of the New York State Insurance
Department (NYSID) is taking no chances that insurers under his
jurisdiction will spring any more unpleasant surprises.

In the first part of a two-part strategy to ensure stability,
the NYSID has announced that it will undertake on-site reviews
lasting between one to two days of insurers’ financial stress
testing and scenario analyses processes.

In preparation for this, insurers have been instructed review
the processes they have in place with particular reference to
recent market turmoil.

Providing a guideline, the NYSID said scenarios may include:
interest rate shocks, equity market shocks, yield curve shifts,
changes in credit quality and liquidity, rating agency downgrades,
collateral calls and large-scale catastrophes.

As a second leg of its review, the NYSID has launched a special
liquidity enquiry specifically targeting life insurers and life
reinsurers. The enquiry is closely aligned with the department’s
stress-testing probe and includes a wide array of questions
including:

• Does your company have a formal written liquidity plan? If
yes, provide an overview, particularly as it relates to coping with
stress conditions. If not, explain why a written liquidity plan is
not necessary and describe your company’s liquidity policy,
particularly as it relates to coping with stress conditions;

• Describe how your company would respond to an immediate and
material cash demand, such as could be triggered by a rating agency
downgrade;

• Describe means of raising cash other than disinvestment such
as lines of credit and issuing commercial paper and restrictions,
limiting the company’s ability to utilise these means; and

• State the reasons why available lines of credit are expected
to be reliable, for example, by describing the terms and conditions
under which they may be cancelled by the lender.

The deadline for submission of liquidity enquiry returns which
must be completed by an insurer’s highest ranking financial officer
is 10 December 2008. At its discretion, the NYSID may or may not
make the returns public.