California insurance regulators have continued the fight over accounting treatment for life insurers’ reinsurance subsidiaries in its response to a life insurer’s policy administration problems.
The California Department of Insurance talks about life captive reinsurer accounting treatment in an order it issued concerning how Accordia Life and Annuity Company, a unit of Global Atlantic Financial Group Ltd., has administered a block of life insurance policies it took over from a unit of Athene Holding Ltd.
Accordia Life has its official state of domicile in Iowa. That company has three subsidiaries, or “captives,” of its own based in Iowa, along with three subsidiaries based in other states.
California department officials have issued an order seeking permission from California Insurance Commissioner Dave Jones to suspend Accordia Life’s ability to operate in California for a year, because of concerns about how the company has handled billing for life insurance policyholders affected by problems with efforts to move a large block of policies to a new administration system.
California department officials say in the policy administration order that they believe that Iowa regulators have let Accordia Life use a “permitted practice” or exception from the usual statutory accounting rules for insurance companies, to make its finances look better than its finances would have looked without that exception.
“Under this exception, Accordia was allowed to have its six subsidiaries, which had been formed in or about August 2013, reinsure about $3 billion worth of the $10 billion in assumed obligations, by allowing the subsidiaries to pass contingent notes back and forth amongst each other, rather than actual assets,” according to the California department’s order. “The annual statements of the three Iowa-based subsidiaries reflect that, but for the permitted-practice exception, they would be insolvent.”
The passage in the order reflects a controversy that erupted in April 2015. The New York Times ran an article that month about concerns about life insurance company accounting. A reporter for the paper cited the Accordia Life deal as an example of how Iowa reinsurance captive rules work, and how Iowa’s disclosure rules help outsiders get details about any reinsurance captive transactions taking place there.
The reporter quoted Benjamin Lawsky, who was then New York state’s financial services superintendent, as calling reinsurance captive arrangements “financial alchemy.” Nick Gerhart, the former Iowa insurance commissioner, defended use of a flexible, “principles-based reserving” approach to letting insurers optimize reserving levels.