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Fitch warns of 'mission creep' on traditional captives

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Federal-regulatory concerns about life-reinsurance captives could give rise to “mission creep” that would sweep up traditional single-parent and group captives in any actions taken, warns Fitch Ratings.

“While federal interest currently centers on life reinsurance captives — i.e., captives sponsored by life insurers — and not traditional single-parent or group captives formed by industrial corporates, Fitch believes that traditional captive insurance could be swept up in the vortex if some regulators and others do not appreciate the difference between the two types of entities,” the ratings agency says.

Fitch notes that the SEC has asked at least five publicly traded life insurers for information on their use of captive reinsurance, used to finance conservative statutory reserve requirements for some products sold by life insurers. “This heightened federal interest may stem from a New York State Department of Financial Services report in June that criticized life insurers’ use of captive reinsurance,” says Fitch.

The National Association of Insurance Commissioners, says Fitch also is looking into life insurers’ use of captive reinsurers.

Fitch expressed concern that somewhere along the line, “captive reinsurers” could become “captive insurers,” leading to complications for traditional captives.

“In the extreme,” says Fitch, “subjecting traditional captive insurers to new reporting requirements or other new regulation would add cost and complexity to the captive-insurance process and may ultimately result in non-insurance sponsors deciding not to form new captive insurers, and possibly even to wind up existing captive insurers.”

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