Collateral needs on the rise for life insurance companies

There have been a number of regulatory changes to the entire insurance industry in the last few years, as the government has moved to put tighter controls into place. That trend continued in June, as life insurers were required to carry far more collateral and liquidity.

Moody's Investors Service recently stated that the nation's top life insurance companies will be required to have anywhere between $10 billion and $30 billion in additional collateral and liquidity within the next few years, according to a report from Life Health Pro. This requirement comes as a result of new rules related to derivatives. Under Title VII of the Dodd-Frank Act, which went into effect on June 10, life insurers using derivatives to hedge risk are now required to trade and clear trades of their interest rate swaps on registered exchanges, and carry larger, higher-quality collateral.

Interest rate swaps last year alone totaled $957 billion, about 60 percent of total derivative exposure for the top 20 life insurers in the nation, the report said. Consequently, the new rule's mandated an increase of 1 to 3 percent, which would total between $10 billion and $30 billion in additional collateral, once outstanding derivatives expire, the report said. If anything, though, those estimates may be somewhat conservative, boosting the issues these insurers might face going forward.

Further, though, agencies may continue to grow regulatory efforts on life insurers in general, particularly for those dealing in derivatives outside the U.S., the report said. International regulators may likewise raise minimum standards for certain types of derivatives within the next several years.

Already, a few of the major life insurers in the U.S. say they have addressed these concerns and increased their collateral in general, with one saying it has grandfathered in all its derivative positions as of the end of last month, the report said. This is largely seen as a positive for these companies, and shows that it may be within the abilities of all industry participants to make such moves in the future as a means of shoring up their standings.

Insurance companies that take the time to get out in front of all proposed regulatory changes may have an easier transition into the new environments than those that are less proactive, as taking an additional few months may make a significant difference in terms of preparation and the options that are available.