Houston–The NAIC released the the principle-based reserving implementation plan for for comment for 30 days with features such as a a new NAIC working group that would help support individual states in running PBR, recommendations for changes to annual forms, a training agenda and an evaluation of risk-based capital (RBC) requirements.
A sizable PBR implementation knot to untangle involve the RBC requirements and the impact on capital of PBR. New modeling uncertainties–errors, basically–could be introduced int calculations, possibly increasing reserve volatility and the overall desired level of solvency measurement, regulators noted in the implementation plan.
The NAIC also tied the PBR implementation boat to the solvency implications of life insurer-owned captive insurers and special purpose -vehicles (SPVs) and said it would likely create a working group to concentrate on this issue and propose a way forward.
“The solution for captives and SPVs within the context of PBR will be largely based on the Captives and SPV Subgroup’s report as adopted,” stated the draft document.
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The March draft of 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.
Gathered at the NAIC National Spring meeting here, the PBR Implementation (EX) Task Force wrestled with the captives issue, with Joe Torti III of Rhode island, both head of the Subgroup and chair of the Implementation Task Force, noting that once PBR is fully implemented, the use of SPVs will be hopefully very limited.
A fellow state regulator on the Task Force warned that there are still redundant reserves and he would still see the industry take advantage of captives and SPVs.
Torti responded that, well, yes, the industry feels PBR still has a level of conservatism in it, and hopes that PBR will come to a point in development where industry and regulators agree on what the reserves should be so there will be no need for the life insurers to fiance their reserves.
The group also tussled with the role that the Federal Advisory Committee on insurance (FACI) serving Treasury’s Federal Insurance Office (FIO) would have, with some regulators saying the questions should be filtered through the NAIC. State regulatory concern was whipped up by word that FIO’s director wants his advisors to also study the issue and report back to Treasury.
FACI member and Washington D.C. Commissioner William White, who heads the new FACI captives task force, posed questions the nascent group he is heading on captives at FACI might be exploring acknowledged a broader concern about captives centering around solvency, he believed, at the FIO level.
Torti said he thinks any questions pondered by the federal government need to be addressed at the NAIC first and foremost.
“If problems brought up at FACI that are not being brought up at the NAIC, that is a problem,” Torti said.
White said that would not happened and that he will also function as a conduit for the discussion between FACI and the NAIC. State regulators don’t want FIO “to reinvent the wheel,” they said afterward in comments to press.