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Consumer groups are opposing the insurance industry’s effort to lower reserve requirements. The Consumer Federation of America and the Center for Economic Justice are up in arms – they believe that doing so would increase the risk that an insurer would not be able to pay its annuities and life insurance claims as they come due.

Insurance companies are required to set aside portions of the premiums that they charge in reserve against future liabilities. They are allowed to invest those reserves until the liability (claim or annuity payment) arises. This proposal would admittedly lower the reserve level, industry wide, by $25,000,000,000 (yes, that’s billions), or 7% of total reserves. The insurance industry believes that this proposal is justified by the present economic climate.

But J. Robert Hunter, director of insurance for the Consumer Federation of America, feels that lowering reserves would allow companies in trouble to appear financially healthy:

"What I am afraid of," he said, "is that there are a handful of companies that would be insolvent without these changes, and policyholders won’t know."

Joseph Belth, professor emeritus of insurance at Indiana University and editor of the Insurance Forum, a trade publication, agrees:

"In the midst of the current financial crisis, it is unseemly even to discuss the idea of weakening the conservative statutory accounting rules that have long been in place for insurance companies," Belth wrote in a letter protesting the change. He said regulators should first assess whether the proposal "is in the long-term best interest of the insurance-buying public."

I live in South Alabama. This region was hit hard by hurricanes in 2004, 2005, 2007 and 2008. In the years following those disasters, each involving billions of dollars of claims, the insurance industry reported increasingly larger profits after each disaster. It is no coincidence that premiums for all types of insurance increased after each of those years. Watching the insurance industry spin machine at work is a lot like watching Lucy Van Pelt manipulate her brother. Sometimes she may have a point, but Linus wisely has his hand on his wallet, nonetheless. The Big Dogs in the industry have already been bailed out once, even after years of record profits. What’s the hurry? No one is rushing to bail out our clients.

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