In a new report, Moody’s Investors Service says the use of captives is influencing in a negative way the view of capital adequacy of stock insurers.
“Use of captives can lead to complex corporate structures and reduced financial transparency, both credit negatives,” Moody’s says in the new report.
The report said that life reinsurers are the most prominent users of captives. The report also made clear that mutual life insurance companies, “immune from shareholder pressures to improve returns on capital, are noticeably absent from the list of insurers using captives.”
The Moody’s report said captives help life insurers manage the regulatory volatility of reserve and capital requirements associated with variable annuity guarantees. Although U.S. statutory reporting has more of a focus on balance sheets than income statements, there are also some statutory income benefits, according to Scott Robinson, a senior vice president at Moody’s and author of the report.
“These practices undermine the conservatism U.S. regulators have embedded in their reserving and capital regimes,” Robinson said in the report.