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FIO zeros in on captives

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Indianapolis — One of the gaps in state insurance regulation is in the area of insurers’ use of captives, Federal Insurance Office (FIO) Director Michael McRaith said today in a closed meeting with state insurance regulators, staff and leadership of the National Association of Insurance Commissioners (NAIC) here at the NAIC summer meeting.

McRaith also reportedly told the assembly of regulators at the NAIC Commissioners Roundtable that the overdue FIO modernization report could be out in as little as two weeks to perhaps a longer horizon of a month or more, and that although he’s an optimist, he has been wrong before, according to attendees.

The long-anticipated report was officially due in January 2012, so the timetable could shift still. It must yet be scored by the Office of Management and Budget, although certainly earlier drafts have been sent up before. Treasury needs to give final approval to the FIO’s reports. 

At the meeting, former NAIC CEO Sen. Ben Nelson, D-Neb., asked McRaith five prepared questions on major issues, although Nelson would not disclose the questions and attendees said that McRaith did not answer questions directly, deferring to Treasury and the Administration at times.

Conversation also touched on the Financial Stability Board (FSB) now “coming out of the shadows” and issuing directives to the international insurance supervisors, Nelson noted. Nelson said McRaith reminded regulators that FSB does not have statutory authority.

The National Flood Insurance Program (NFIP) was also mentioned by the NAIC. While McRaith didn’t answer the question directly, he did suggest that there may be a delay when it comes to Federal Emergency Management Agency (FEMA) implementing a provision of the 2012 law reauthorizing the NFIP provision that mandates phased-in rate increases for grandfathered properties, according to NAIC President and Louisiana Commissioner Jim Donelon, who participated in meetings today by conference call. 

Nelson also said that although the use of captives for reinsurance issue may be seen as a gap in state regulation by FIO, it is a gap “we are closing.” He noted that the NAIC has been diligently working on the issue for some time.

FIO appears to have a laser focus on the captives issue, and indications that it had stepped back from the issue now appear misguided.

Nelson described the meeting as congenial and said the NAIC leadership meets with the FIO director regularly and will have another meeting the week after next. 

Nelson said at a press conference Sunday that the relationship between FIO and the NAIC had improved over the past two months. 

The captives issue is of concern to many state regulators, who have worked on drafts of white papers and conducted research on captive reinsurance transactions and special purpose vehicles over the past two years. New York has gone so far as to call for a moratorium and the NAIC, although not accepting a moratorium, has acknowledged that the use of captives is indeed a practice that needs oversight through various arms of the NAIC.

Many regulators want more transparency with these transactions so they can follow the money. They also want the risk that is insured to be “real,” and not a ploy to offload redundant reserves or shift risk into a less stable vehicle. The use of captives on lender-placed insurance is also an issue. 

McRaith took a pointed interest in captives and said it is something that FIO should monitor this past March, calling for a task force on the subject during a meeting of the Federal Advisory Committee on Insurance. There was immediate friction between the FIO and Connecticut Insurance Commissioner Tom Leonardi on FIO’s actions on the captives issue, with Leonardi reiterating that he does not think FIO should be weighing in or intruding on work that the NAIC is already undertaking effectively.