In a white paper draft exposed today, the NAIC Captive & SPV (special purpose vehicle) Use Subgroup called for enhancement of the current regulatory process so that regulators can actually see the captive transactions of commercial insurers, and changes to rein in, or at least better view, the practice by some insurers to offload perceived excess reserves to free up capital. It also suggested beefing up the state accreditation requirements to include a key model law, the Special Purpose Reinsurance Vehicles (SPRVs) model act.
Some industry regulators and participants called the dealings of commercial insurers stowing excess reserves in captives and SPVs opaque, for one, and possibly damaging to the solvency of the company and creating a race to the bottom, as one mutual life insurance executive described it.
To that end, the NAIC subgroup recommended enhanced disclosure in ceding company statements on the impact of these transactions to the financial position of the insurers so regulators can peer into what is actually being ceded. Insurance companies worry that this would also allow competitors to peer in to their finances and strategies.
New York regulators say the transactions are so spotty that they do not know what is going on — there is no consistency in disclosure and they cannot keep a handle on what their own domestics, which number almost 80, are up to in other states.
The subgroup said that commercial insurer-owned captives and SPVs should not be used to avoid statutory accounting, as has been suspected by some state regulators.
The subgroup offered several other recommendations to the parent committee, the NAIC Financial Condition Committee, today.
The Captives Subgroup recommended examining the use of conditional letters of credit (LOC) or parental guarantees, and whether they even meet the requirements of real credit for reinsurance under NAIC model laws or even state solvency requirements.
One recommendation is the formation of a separate subgroup to develop possible solutions for addressing any remaining Triple X (XXX) and A-Triple X (AXXX) reserve redundancies.
Triple X regulations are NAIC-generated regulations that determine how many reserves life insurance companies must keep for benefits. Some say the high reserve requirements slow down the company by stockpiling too much money that could be used as capital to deploy for growth opportunities. This is especially felt by stock life insurers who must show quarterly earnings statements and report to shareholders.
Because of the resolution of Actuarial Guideline 38 (AG 38), there should be no more creation of new captives and SPVs, the subgroup said. If there are, the NAIC could, in specific circumstances, consider changes to statutory accounting to eliminate the need for these separate transactions, the subgroup said. However, Robert Easton, the top insurance deputy from the New York Department of Financial Services (DFS) yesterday noted to a federal advisory panel at the Federal Insurance Office that his domestics have intimated they would not stop using captives, even with the advent of PBR. He is worried that the transactions are being framed as reinsurance transactions when they are not.
The subgroup determined that the vast majority use of captives and SPVs by commercial insurers was related to the financing of XXX and AXXX reserve redundancies.