Moody’s: Captives can lead to credit negative

He said life insurers use captives because it enables them to operate in jurisdictions with weaker regulatory standards, both inside and outside the U.S. “This facilitates their ability to operate more freely, with less scrutiny over activities such as investment risk, Robinson said.

In seeking to explain the reason for rating agencies’ concern, Moody’s analysts calculate that use of captives in the aggregate equates to approximately 85 percent of industry capital and surplus.

“In aggregate, a greater reliance on captives by the industry creates overall negative credit pressure, and these practices undermine the conservatism U.S. regulators have embedded in their reserving and capital regimes,” Robinson said.

Robinson explained his concerns about the overall impact by saying that as of the end of 2012, the life industry reported approximately $169 billion of general account reserve credit for business ceded to unauthorized affiliates. Additionally, life insurers had entered into about $155 billion of modified coinsurance (modco) treaties on general account business with unauthorized affiliates, the report said.

While modco transactions do not provide reserve relief, they provide some capital benefits to the ceding company, Robinson said. Hence, in total, the industry received more than $324 billion, or approximately 12 percent of total reserves, of “relief” in aggregate, he said.

See also:

• Captive paper comments aim for fixes
• NY doubles down on captives, private equity firm scrutiny