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California Regulators Continue Life Reinsurance Captive Fight

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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.

(Related: California Regulators Blast Accordia and Athene Over Policy Administration)

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.

(Related: NY Rejects Principles-Based Reserving for Life Insurers)

Global Atlantic said in a statement Tuesday that it’s still reviewing California’s new policy administration order and will respond in due course.

Iowa Regulator Responds

Doug Ommen, the current Iowa insurance commissioner, said Wednesday, in a statement, that Iowa would also like to see the Accordia Life policy administration problems resolved more quickly.

Ommen also commented on California officials’ assertions about Iowa regulation of Accordia Life’s reinsurance captives.

“The order incorrectly alleges risk at subsidiaries of Accordia implying a lack of financial strength,” Ommen said in the statement. “The truth of the matter is that these subsidiaries do not cause any undue risk to the solvency of Accordia.”

Both the Iowa Insurance Division and the California Department of Insurance were were members of the Principles-Based Reserving Implementation Task Force and the Financial Analysis Working Group at the National Association of Insurance Commissions (NAIC) when the NAIC was looking at the reserving rules for captive reinsurers in great detail, Ommen said.

“The Iowa Insurance Division and the California Insurance Department also helped to develop the new national reinsurance framework for term and universal life contracts with secondary guarantees,” Ommen said. “Both California and Iowa have enacted laws implementing this new national framework.”

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