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Captive paper comments aim for fixes

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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.

The CRO Council letter was signed by chair Sean Ringsted and Joe Celentano, the group’s secretary.

Even with AG 38 (AXXX) reserve issues now managed, where captives have been used for XXX and AXXX reserve financing, captives are still needed because they are also used for managing product risk in macroeconomic scenarios, insurers say.

“In certain instances permitted practices or accounting on a basis more similar to GAAP has been agreed upon with captive regulators to provide a better accounting match between the product liabilities and the assets supporting those liabilities. These assets mitigate the risk of those market sensitivities, and also lead to a more meaningful presentation of the results of this risk management strategy,” stated the ACLI in the letter signed by Bruce Ferguson.

The ACLI supports the NAIC in exploring modifications to the current statutory accounting framework to allow “tier two type assets,” such as letters of credit (LOC), in certain situations. 

Although the LOCs have come under scrutiny from some regulators, in particular those in New York’s Department of Financial Services, the ACLI assured that issuers of letters of credit generally require “ring- fencing” of the business risks into separate legal entities. 

However, New York Life urged the NAIC to make sure that statutory reserving requirements are set at “appropriately conservative levels.”

New York Life is concerned with other insurers offloading redundant reserves instead of accounting for them on the books then and there, creating solvency issues later on. 

As stated in the white paper, “captives and SPVs should not be used by commercial insurers to avoid statutory accounting prescribed by the states.” Instead, any perceived reserve redundancies should be addressed directly and uniformly through the underlying valuation requirements,” stated the New York Life letter, signed by George Nichols III, the company’s senior vice president, Office of Government Affairs.

More concerns and proposed changes, along with regulator input, are sure to be added to the discussion during the conference call tomorrow. 

The Federal Insurance Office (FIO) is also taking note of the captives issue and solvency concerns and has tasked its advisory group investigate the regulatory landscape and industry’s common practices. Progress on this is expected to be reported upon at the Federal Advisory Committee on Insurance (FACI) open meeting on June 12 at the U.S. Treasury building. 


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