WASHINGTON -- New Jersey's Department of Insurance was cast as both villain and wise man among fools Wednesday as a Senate panel investigated the failure of state insurance regulators to warn of the Executive Life Insurance Co. collapse earlier this year.
In testimony before the Senate Judiciary Committee's antitrust subcommittee, members of a panel of state insurance regulators suggested New Jersey's actions to protect its consumers from a possible Executive failure may have actually helped precipitate the insurance firm's collapse.
But New Jersey Deputy Insurance Commissioner Jay Anghoff and senators on the subcommittee instead portrayed the state as a beacon of reason, the lone state regulatory body that had the wisdom to take protective measures against Executive Life's imminent demise.
Subcommittee Chairman Howard Metzenbaum called the hearing to determine why a National Association of Insurance Commissioners 'working group,' set up to analyze the financial stability of Executive Life, issued a memo declaring the firm 'in no imminent financial danger' just four months before California regulators had to take it over.
'The working group continually ignored the warning signs that Executive Life was in serious financial difficulty and was heading for insolvency,' Metzenbaum said. '... They knew the truth. They should have pronounced Executive Life dead on arrival, but instead issued a clean bill of health.'
With a panel of witnesses made up of members of the working group, the hearing quickly evolved into finger pointing between New Jersey's Angoff and NAIC officers.
'In the case of Executive Life, I do think the state regulators erred on the side of unduly reassuring people,' said Angoff, who represented New Jersey on the NAIC working group.
Concerned about reports that Executive Life's heavy investments in junk bonds had left it vulnerable, Angoff said New Jersey authorities asked the firm in early 1990 to detail the market value of its assets. When the company failed to supply the data, New Jersey made its own anaylsis and concluded Executive Life, based in California, and Executive Life of New York were both 'insolvent,' he said.
As a result, in November 1990 New Jersey asked the firms to post deposits totaling $500 million 'to protect New Jersey policy holders' in the event Executive Life became unable to meet its obligations, Angoff said.
Angoff said the NAIC, meanwhile, downplayed New Jersey's request for an independent study on the value of Executive Life's assets and instead relied on financial reports from a firm connected to Executive.
But NAIC officers argued a value assessment of Executive Life's assets had little meaning and charged New Jersey's demand for cash from the firm may have hastened its downfall.
'In the expert opinion of all the regulators who had been tracking the company,' said NAIC Vice President William McCartney, Nebraska's director of inusrance, '... sudden and large outflows of cash would threaten the ability of the company to meet its obligations to policy holders and creditors.'
'We were afraid that that would start a run on the company,' said Terrence Lennon, an official of the New York Insurance Department and a member of the NAIC working group. ' ... We frankly don't to this day understand why New Jersey took that action.'
In the same December 1990 resolution pronouncing 'no imminent danger' to Executive Life, NAIC also criticized New Jersey's action as 'irresponsible and contrary to the best interest of New Jersey policyholders.'
Sen. Arlen Specter, R-Pa., questioned the New Jersey criticism as 'a very strong statement to make about a state regulatory body. ... It has a fairly intimidating ring to it.'
'I'm a little at a loss as to why you would criticize New Jersey,' Specter said. '... Are you calling them stupid?.'
As Lennon and Illinois insurance chief James Schacht, the working group's chairman, defended the criticism of New Jersey, Metzenbaum threw up his hands.
'This hearing is not being conducted as a debate or as a battle of fisticuffs between New Jersey and other states,' Metzenabum said.
The senator said despite other hearings on the subject he remained confounded that the NAIC would give Executive Life a clean bill of financial health months before its takeover by state regulators.
'I just don't understand how you could know what you knew ... and give that kind of statement,' Metzenabum said.
McCartney replied that the 'no imminent danger' resolution 'was never intended for the insurance consuming public,' but only for state regulators.
Under a strict financial definition of 'imminent danger,' McCartney said, Executive Life today is 'still not in imminent danger.'
