Comment Text:
Hello
I forgot to send in this email from the National Association of Insurance Commissioners.
Sorry,
Steve
From: Sagat, Mark [mailto:[email protected]]
Sent: Thursday, October 28, 2010 4:03 PM
To: Kane, Stephen A
Cc: Daigler, Matthew; Sells, Todd; Toy, Ed
Subject: RE: Michael Kreps' Clarification
Hi Steve,
Thanks for your email. I have now had the opportunity to consult with our experts on this issue, Todd and Ed, whom you have spoken with previously and are cced on this email. As a preliminary matter, as your email suggests, we assume you are referring to the stable value contracts that are "wraps," but if not, let us know. Also, it is not clear to us that regulating these products through the types of regulations that Title VII of Dodd-Frank would require such as margining, collateral requirements, clearing, etc., makes sense given that the states already regulate insurer sale of such products and impose stringent regulatory requirements including the imposition of capital charges for these products as well as reserving requirements. We would be happy to provide information on how states regulate such products should you find it useful.
As for your specific question, though, intuitively, the concern that the insurers raise seems to make some sense. If the CFTC/SEC imposed margining and collateral requirements on these products, then that will increase the costs for stable value contracts and impact the desirability of those stable value funds compared to other fixed income investments like bond funds, etc. in retirement plans. The extent of that impact is unclear since that would depend on the specific collateral requirements but, intuitively,there would be some impact.
With that being said, we understand your need and desire to prove or disprove the insurers' assertions empirically. We would think you would need pricing data and the "guarantee rates" offered by various companies to even begin such an analysis. Unfortunately, the NAIC doesn't capture this type of granular data in our financial statements so you would have to contact insurers directly. We also have concerns that collecting any type of data from insurers or creating models to measure "impact" of additional margining, collateral, and/or capital requirements on the cost of the wraps would require significant conjecture on the part of the companies.
As for your question regarding the impact of increased cost stable value contracts on the funds themselves such as tighter underwriting or increased management fees, we really can't comment as the stable value funds are not products that we collect data for at any level or regulate. The providers of such stable value funds or the 401(k) managers might have a better sense on those impacts.
If it is helpful, we are happy to find a time to talk through our understanding of the issue and where the potential problems/pitfalls may lie in an empirical analysis. Please don't hesitate to contact us if you have any other questions.
Kind Regards,
Mark
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From: Kane, Stephen A [mailto:[email protected]]
Sent: Monday, October 25, 2010 9:23 AM
To: Sagat, Mark
Cc: Daigler, Matthew
Subject: Michael Kreps' Clarification
Hello Mark,
We had a telephone conference with Michael Kreps of Senator Harkin’s staff about our stable value contract study on Wednesday, October 21. The underlying swap under the broad definition of a swap in the Dodd-Frank Act seems to be the wrapping stable value funds with a stable value contract (the wrap). Michael Kreps has asked us to investigate the claim of insurers that regulating stable value contracts as swaps by requiring collateral and margining will significantly and negatively impact the stable value product with respect to other fixed income investments in pension plans.
Stable value contracts seem to use guarantees that are only minimal in order to satisfy “benefit responsiveness”. If guarantees were to be made stronger through margining and capital requirements, then the stronger guarantees might manifest themselves as a combination of: (1) increased management fees that are induced by passing through larger guarantee fees from stable value fund wrappers; or (2) tighter underwriting of the stable value funds itself. In either case, the return of the stable value fund would be lower. In the first case, it is by absorbing a higher upfront management fees, and in the second case, it is through less risky investments in the fund that would have lower returns.
I’m seeking your advice on how to investigate this issue empirically.
Do you have any suggestions or resources that the NAIC might provide to aid in our study?
Thank you,
Steve
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