Captive reinsurance arrangements do not take place “in the shadows”, according to a new report.
Professor Scott Harrington’s The Use of Captive Reinsurance in Life Insurance, which was funded by the American Council of Life Insurers, has contradicted a previous study by researchers Ralph Koijen and Motohrio Yogo.
"Captive reinsurance arrangements have not taken place in the shadows," said Harrington of the University of Pennsylvania.
"The use of captive reinsurance arrangements has received significant scrutiny by regulators and rating agencies.”
“The arrangements require regulatory approval, generally by two different regulators and often accompanied by independent actuarial analysis. Rating agencies have been considering the arrangements' potential effects on ceding insurers' financial strength for at least a decade.”
According to Harrington, captive reinsurance arrangements are an “important tool” to help life insurers fulfill their financial obligations.
The study follows high-profile debate over the use of life captives and principles-based reserving for certain life insurance products.
In March, New York Department of Financial Services superintendent Benjamin Lawsky wrote to the National Association of Insurance Commissioners (NAIC) criticising its plan to increase oversight of captive insurers.
New York claimed in 2013 that life insurers based in its state hid at least $48 billion in ‘shadow insurance’ transactions, through captive and reinsurance entities, from regulators.
Fitch Ratings revealed that the debate is causing regulatory uncertainty, saying: “New York seems to embrace the conservatism of current formulaic approach to setting reserves, and believes the safety margins in statutory accounting, even if non-economic, are a key strength.”
“The NAIC and certain other states are empathetic to arguments stating that by being non-economic, statutory accounting can introduce inefficiencies into the insurance system, which can hurt the ability of insurers to provide insurance at a reasonable cost to the consumer.”
