The National Association of Insurance Commissioners (NAIC) is going further to address solvency concerns regarding the use of captives by life insurers.
The regulatory group is contemplating a system where regulators review certain captive transactions, collect data and express any concerns or recommendations to the state regulatory and a key reserving NAIC task force.
The goal, the state regulators say, is to preserve the effectiveness and uniformity of the solvency oversight system.
On a conference call July 17 to discuss the new charges, one regulator went so far as to say that if the NAIC didn’t take up the charge, the federal government would come in and do it for the states while another regulator was concerned about creating a bureaucracy outside the bounds of state regulation.
“This is a fairly minimalist approach. We are all aware our brother in New York has called for a moratorium. California has declined to join in that call but we agree we have a big problem here,” California Insurance Commissioner Dave Jones said, referring to New York Superintendent of Banking and Insurance Ben Lawsky, who has cracked down on life insurers in his state accessing the captives industry to offload reserves. (Lawsky’s comprehensive report on what he terms “shadow insurance.”)
“As I read this charge, it is not subjecting every transaction to this review. This is a far cry from a moratorium on this action. I think we are at a very pivotal moment — if we do not at least do this, we run the risk of the Feds getting involved…this is keeping our house in order,” Jones said.
“If we don’t,” Jones warned, “the Feds will jump in and take it away from us. I view it as the minimum we can do.”
Specifically, the Financial Condition (E) Committee of the NAIC supported a proposal by its financial policy group to perform analytical reviews of transactions by big U.S. life insurers to reinsure Triple X and/or AXXX reserves ceding to affiliated captives, special purpose vehicles (SPVs) or other entities with different solvency requirements than the ceding insurers.
For transactions done prior to a certain date and still in place, the group would collect specified data in order to provide information into the prevalence and significance of these transactions throughout the industry. The Financial Analysis Working Group (FAWG) group would also inform the domiciliary state regulatory and the Principles-Based Reserving (PBR) Task Force of any issues and concerns that arise from its review.
“XXX” is based on the name commonly used to refer to the NAIC Model Regulation, the standard that defines the reserve methodology for level premium term products. “AXXX” are statutory reserves underlying universal life with secondary guarantee products, where such reserves are calculated under NAIC’s Actuarial Guideline 38 (AG 38.) Tightening the screws on insurer use of AG 38 and on reserve securitizations has been a challenge for state regulators in recent years.
With regard to the new proposals, regulators worried about the storage of data, giving up authority and ceding authority to FAWG. Some hadn’t yet heard of the proposals.
Fellow regulators sought to assure their colleagues that they were not creating an unwanted mechanism.
“This came out of the commissioners retreat last week,” said long-time FAWG Chairman Steve Johnson, Pennsylvania deputy insurance commissioner, referring to the Executive Committee meeting held last week in South Dakota. The captives proposals came up at the Commissioners Roundtable session there.
“I can assure you we will do this professionally and timely. I just learned about this…We will do these reviews expeditiously, I will not be an impediment, we will not be a bureaucracy. I will commit to delivering that this is done professionally and timely,” Johnson said.