The insurance industry and others are proposing fixes to the NAIC Captives and Special Purpose Vehicles White Paper Discussion Draft to keep in use what is “deeply embedded” in the business model for life insurers, and offer more to appease regulatory concern.
Also, industry interests say that even the AG38 changes and implementation of Principles-Based Reserving (PBR) may not necessarily eliminate the need for captive/SPV use by commercial insurers.
Captive reinsurance arrangements “will likely be useful into the future since they support a pledge of assets to a particular block of business,” the life insurance industry has said.
Parties commented on the latest captives white paper discussion draft of March 14 in advance of a conference call with the NAIC captives and SPV use subgroup Wednesday morning. A subgroup of state regulators at the NAIC, led by Rhode Island’s lead insurance regulator Joe Torti III, is examining the use of captives by life insurers, with comments due on a draft white paper at the end of April. Insurers have said they support the use of captives, regardless of whether the more liberal and specially tailored reserving methods allowed under PBR. The industry has succeeded in getting the taint of captives being a shadow industry scrubbed from the white paper.
“Curtailing the use of captives in advance of changes that might occur at the ceding company level (e.g., the accounting changes to allow certain transactions at the ceding company level) could be problematic for companies that have ceded to captives/SPVs and should be discouraged,” said the Vermont Captive Insurance Association, one of the oldest captive insurance industry groups around.
The Vermont group is also concerned that the NAIC might consider making the Special Purpose Reinsurance Vehicle Model Act (#789) an accreditation standard, but is not opposed to updating it. The Vermont letter was signed by Richard Smith, its president.
The American Council of Life Insurers (ACLI) has proposed enhanced transparency and risk analysis of life insurers’ captive transactions that it says would expand regulators’ knowledge about life insurers’ use of captives.
The ACLI is also proposing a uniform analytical framework to use in servicing captive reinsurance transactions. The state regulators would use these as part of their handbook, the ACLI suggested.
The North American CRO Council (Chief Risk Officers group) also supports uniform supervisory guidelines that would apply to all regulators in order to assuage the concerns of regulators, it said in a letter.
The CRO group also said it supports disclosure and transparency in transactions, which some state regulators had found lacking, and supports the ACLI position on this. Namely, that proposal includes mandating NAIC tracking codes for life insurer-affiliated captives and adding new disclosures to the life insurer annual statement.
In addition, the CRO group said all material risk could be considered during a group’s own assessment of its capital adequacy under the NAIC’s group insurer self-assessment tool — the ORSA guidance manual.