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Reserving emerges as key fed-state issue

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The director of the Federal Insurance Office (FIO) said today that some of the findings that the FIO has about potential abuses in use of captives by the life insurance industry might find its way into the report on recommendations for modernizing and improving insurance regulation the agency will release by July.

Michael McRaith’s comments imply that the captives issue is potentially emerging as another source of conflict between federal and state insurance regulators.

He made the comment in disclosing that the FIO is examining the national implications of the use or possible abuse by life insurers of captives and special purpose vehicles.

McRaith said he was not interested in duplicating the efforts of the states, but needs the U.S. Treasury Department to be “fully informed” about what is going on with this type of risk transfer.

Washington, D.C., Insurance (and Banking and Securities) Commissioner William White, who is very experienced in captives and the various kinds of risk transfers that can be done, and multiple scenarios for their use, and who oversees as a regulator a thriving captives industry in D.C., will head the task force.

Tom Finnell, who heads FIO’s regulatory policy development, is very interested in the issue and will work on it at the FIO end, McRaith said.

Some members of FACI had wanted the investigation of the use of captives for offloading excess reserves to artificially bolster risk-based capital ratios to be the sole province of the NAIC.

An NAIC subgroup headed by Rhode Island Insurance and Banking Superintendent Joe Torti III is spearheading the issue at the NAIC and developing its own white paper, which has been circulated in draft form so far under the Captive and SPV Use Subgroup.

New York’s Department of Financial Services (DFS) is also investigating the use of captives to soak up excess reserves.

Robert Easton, insurance regulatory deputy superintendent of the DFS, who often sits in for FACI member, DFS superintendent Ben Lawsky, is dealing with the issue for the DFS.

He has voiced concerns that some insurers have not said that the practice would cease even under the more malleable principles-based reserving regime, when it is implemented in future years.

Easton has called the risk transfer process by life insurers opaque, involving largely untrackable risk transfers that occur out of state and could impact the domestic industry in New York.

“Many life insurers use captives because they enable effective risk management and capital efficiency,” an ACLI spokesman said. “Appropriately regulated captives are a positive component of a diverse and innovative insurance market that can help life insurers provide consumers with affordable insurance products,” the spokesman added.


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