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Life Health > Life Insurance

Captives looking for their place in the PBR sun

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Indianapolis — The summer meeting of the National Association of Insurance Commissioners (NAIC) became a proving ground for captive reinsurance and other reserving concerns, with insurance company lawyers coming in to present their cases with state commissioners, even as New York continued to call for a national moratorium on captive insurance transactions used to “artificially lower reserve and collateral requirements.”

One insurer noted that the NAIC membership is not as divided over the issue as one might think — that most regulators want measured use of captives for redundant reserves as overall reserving methods for the life insurance industry are modernized. NAIC conferences provide an opportunity for an easier exchange of views in hotel hallways and rooms. The industry generally supports greater disclosure on captives but wants freedom to do the transactions it sees fit — and there are many of these. 

Although the New York Department of Financial Services (DFS) will not approve such transactions, other states are still trying to figure out to what extent they will curtail what some see as abuses or loopholes to offload excess reserves and free up capital. 

The lobbying efforts by major insurers at the summer national meeting come at a time when the NAIC Principle-Based Reserving (PBR) Task Force will be accepting recommendations from the Financial Analysis Working Group (FAWG) as it completes a survey and analysis of existing and pending captive reinsurance transactions.

Some within the insurance sector want, as a minimum, the transactions to be approved only if they meet the threshold of “real,” as opposed to “artificial,” and are looking at the possibility of captive standards as an accreditation standard. 

This would be a long way out, but co-chair of the PBR Implementation Task Force and Rhode Island Insurance Commissioner Joe Torti III said today in a brief remark that it was “possible” there could be some future captive-related accreditation standard.  

PBR is supposed to address the practice of reinsuring Triple X and/or A-XXX’s (Actuarial Guideline 38) hefty reserves for universal life products with secondary guarantees to affiliated captives or special purpose vehicles (SPVs).

The first charge for the Captive Working Group is to address any remaining Triple X or AG 38 problems without encouraging the formation of significant legal structures using captives to cede business. 

At the PBR meeting Aug. 24, Steve Kinion, director of the Bureau of Captive and Financial Insurance Products for the Delaware Insurance Department, submitted a comment that the charge directly conflicts with the Delaware insurance code, which states that the growth of the captive insurance industry is in Delaware’s best interest, and when the legislature redrafted the law in 2007, it did so in order to attract captive insurers that reinsure Triple X or AG 38 reserves.

The NAIC is likely adopting items from the PBR Implementation Task Force, including a plan to modify the regulatory system in order to implement PBR in three or more years. This implementation is contingent upon the operating manual, or the “Valuation Manual,” becoming operative six to 18 months after 42 states with at least 75 percent of subject premium have adopted the revised law.  

The NAIC’s White Paper on Captives and Special Purpose Vehicles calls for more transparency in transactions. Torti said that members of FAWG should be ready to sit down with him and his co-chair, Tennessee Commissioner of Commerce and Insurance Julie Mix McPeak, and have recommendations to the task force at the cause of action meetings after the end of September. McPeak has been very supportive of the captive industry and mentions it on her department’s website video as a path to growth and jobs for Tennessee. 

While PBR implementation is still being calibrated, the PBR task force has proposed two major components to support the implementation of a NAIC-staffed actuarial review board, and a new working group to work on valuation analysis. NAIC leadership said they are fully staffed and have the actuarial resources needed but have budgeted for outside consultants if necessary.

These added NAIC resources and reviews, and the uniform approach to the PBR, will likely give PBR the support of the Federal Insurance Office (FIO) in its pending modernization report, which will review U.S. insurance practices and provide recommendations. California regulators had been worried about resources and staffing, as well, but the PBR implementation plan calls for a bevy of new actuarial hires to serve all or any states. California and New York, together with Texas, have enough insurance premium clout to block PBR, irrespective of any FIO endorsement. 

A PBR approach would replace reliance on static formulas with modern statistical forecasting methods and reliance on actuarial judgment.

Raising the FIO’s role, Connecticut Insurance Department  Commissioner Tom Leonardi again spoke out at a Saturday’s NAIC meeting on financial stability against the FIO’s intrusion, as he saw it, into the captives issue when Director Michael McRaith earlier this year called for his reluctant advisory committee  to examine the issue. Leonardi called the effort duplicative and a waste of time since most people on the Federal Advisory Committee on Insurance (FACI) were insurance commissioners who had worked on not one, but two drafts of an insurance white paper. 

In terms of captive premiums in 2012, according to NAIC data, Vermont led, with its 500 domestic captives and $25.14 billion in total premium. Missouri was a far second, with nearly $6.6 billion in total premiums, followed by active and maturing captive jurisdictions New Jersey, Arizona, Hawaii and Delaware. 

Next year will be a critical year for passage by the states of the PBR initiative, NAIC President and Louisiana Insurance Commissioner Jim Donelon said at a press conference Aug. 25

Donelon also said that New York Banking and Insurance Superintendent Ben Lawsky was “correct” in elevating the captives issue to the level that he did with his call for the moratorium, and now Moody’s has done “its own expose,” and the NAIC is fast-tracking the issue, and getting so that there are definitive answers by the end of the year. The NAIC is contracting with Rector & Associates Inc. and Donelon says they are ahead of schedule. The NAIC is not supporting the moratorium, however.


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