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NAIC wants captive transactions review board

The operations would be handled by the Financial Analysis Working Group

California Insurance Commissioner Dave Jones (AP Photo/Rich Pedroncelli)
California Insurance Commissioner Dave Jones (AP Photo/Rich Pedroncelli)

The National Association of Insurance Commissioners (NAIC) is going further to address solvency concerns regarding the use of captives by life insurers.

The regulatory group is contemplating a system where regulators review certain captive transactions, collect data and express any concerns or recommendations to the state regulatory and a key reserving NAIC task force.

The goal, the state regulators say, is to preserve the effectiveness and uniformity of the solvency oversight system. 

On a conference call July 17 to discuss the new charges, one regulator went so far as to say that if the NAIC didn’t take up the charge, the federal government would come in and do it for the states while another regulator was concerned about creating a bureaucracy outside the bounds of state regulation.

“This is a fairly minimalist approach. We are all aware our brother in New York has called for a moratorium. California has declined to join in that call but we agree we have a big problem here,” California Insurance Commissioner Dave Jones said, referring to New York Superintendent of Banking and Insurance Ben Lawsky, who has cracked down on life insurers in his state accessing the captives industry to offload reserves. (Lawsky's comprehensive report on what he terms "shadow insurance.")

“As I read this charge, it is not subjecting every transaction to this review. This is a far cry from a moratorium on this action. I think we are at a very pivotal moment -- if we do not at least do this, we run the risk of the Feds getting involved...this is keeping our house in order,” Jones said. 

“If we don’t,” Jones warned, “the Feds will jump in and take it away from us. I view it as the minimum we can do.”

Specifically, the Financial Condition (E) Committee of the NAIC supported a proposal by its financial policy group to perform analytical reviews of transactions by big U.S. life insurers to reinsure Triple X and/or AXXX reserves ceding to affiliated captives, special purpose vehicles (SPVs) or other entities with different solvency requirements than the ceding insurers.

For transactions done prior to a certain date and still in place, the group would collect specified data in order to provide information into the prevalence and significance of these transactions throughout the industry. The Financial Analysis Working Group (FAWG) group would also inform the domiciliary state regulatory and the Principles-Based Reserving (PBR) Task Force of any issues and concerns that arise from its review.

“XXX" is based on the name commonly used to refer to the NAIC Model Regulation, the standard that defines the reserve methodology for level premium term products. "AXXX" are statutory reserves underlying universal life with secondary guarantee products, where such reserves are calculated under NAIC’s Actuarial Guideline 38 (AG 38.) Tightening the screws on insurer use of AG 38 and on reserve securitizations has been a challenge for state regulators in recent years. 

With regard to the new proposals, regulators worried about the storage of data, giving up authority and ceding authority to FAWG. Some hadn’t yet heard of the proposals.

Fellow regulators sought to assure their colleagues that they were not creating an unwanted mechanism.

“This came out of the commissioners retreat last week,” said long-time FAWG Chairman Steve Johnson, Pennsylvania deputy insurance commissioner, referring to the Executive Committee meeting held last week in South Dakota. The captives proposals came up at the Commissioners Roundtable session there.

 “I can assure you we will do this professionally and timely. I just learned about this...We will do these reviews expeditiously, I will not be an impediment, we will not be a bureaucracy. I will commit to delivering that this is done professionally and timely,” Johnson said.

Likewise, Rhode Island Banking and Insurance Superintendent Joe Torti III, who chairs the Captives and SPV Subgroup, and ushered through passage of the Captive and Special Purpose Vehicle White Paper on the use and regulation of captives last month said he also just learned of these charges. 

William P. White, the District of Columbia’s insurance, banking and securities commissioner, who serves on the Federal Advisory Committee on Insurance (FACI) at the Treasury’s Federal Insurance Office (FIO), and chairs a working group there on captives, said he was not able to attend the South Dakota roundtable meeting.

"I do understand this will add to the information we will have on these transactions. What do we do with it after it gets put together?” White asked. 

Torti said there was not a plan to build a database.

“It might be a good idea to specify a range of these type of transactions, and narrow it a bit to the kinds of things we really want to look at,” White said. 

“It is going to be a learning experience for all of us if we move forward with these charges...It is intended to be an interim step in the process (to PBR implementation,) but that will take a little time, and we already have that mechanism of FAWG,” Torti told Indiana Commissioner of Insurance Stephen W. Robertson. 

The Indiana commissioner had expressed reservations about FAWG becoming a captives bureaucracy, but wants to participate in the process.

FAWG is charged with supporting, encouraging, promoting and coordinating multi-state efforts in addressing potential solvency problems, including identifying industry trends. Securitizations and reinsurance ceding of perceived redundant reserves has spurred regulatory investigations, white papers, federal scrutiny and proposed NAIC disclosure and transparency enhancements.

The new Principles-Based Reserving methodology, which the NAIC hopes many states adopt, is seen by some as curative for overuse of captives by life insurers, although some insurers have told regulators they will continue to use captives for Triple X and AXXX redundant reserves even if PBR is fully implemented.

Doug Stolte, chief solvency regulator for the Virginia Bureau of Insurance, noted that his state has approved a number of these captive funding deals and the department would welcome the additional peer review. 

Missouri Insurance Department Director John Huff, who sits on the federal Financial Stability Oversight Council (FSOC) as a nonvoting member (he noted his dissent on Prudential Insurance’s systemically important financial institution designation) told the E Committee that he was supportive of addressing “this particular issue at this particular time,” in this way. 

“We all acknowledge the need for more transparency and uniformity,” Huff said.

Missouri, which just announced today Maria Sheffield as its new Captive Program Manager, has new legislation going into effect Aug. 28, allowing the formation of sponsored captive insurance companies in Missouri which may establish and maintain one or more incorporated protected cells. The bill also lowers the minimum of capital and surplus requirements for an association captive insurance company from $750,000 to $500,000.

Likewise, many states, including New Jersey and Connecticut have recently opened the doors to captives as a burgeoning industry, with governors and associations issuing press releases welcoming the new business. The District of Columbia with White and his staff is seasoned as acaptives domiciliary, but it is Vermont that wears the long-standing captives crown.

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