Fitch Ratings believes new requirements proposed by the National Association of Insurance Commissioners (NAIC) to subject corporate captive insurers to full accreditation standards could materially increase costs for these captives, according to a new report.
Fitch also claims that the proposals could lead to disclosure of information that the captive's parent views as competitively sensitive.
This could lead such captive arrangements to be moved offshore, which could have the unintended consequence of weakening, rather than strengthening, captive regulation and disclosure.
Fitch believes that the recent proposal stems from an ongoing controversy over the use of captive life reinsurers for life insurance reserve financing.
The NAIC recently proposed new accreditation standards, which would require certain captives to comply with the accounting and disclosure rules for traditional insurance companies. This addresses a core concern voiced by critics, which is lack of transparency and consistency in the regulation of captives.
However, read literally, the NAIC proposal would apply not only to captive life reinsurers, but also potentially to other captives including traditional corporate-sponsored captives.
The report states: “Fitch has found it difficult to ascertain if the regulatory intent is truly to include traditional corporate-sponsored captives, or if the current wording in the regulation simply needs to be tightened up. Therefore, Fitch would urge the NAIC to clarify its position.”
It is likely the proposed standards were primarily intended to cover life captives used for reserve financing, since the proposal focuses on captives acting as multistate reinsurers and excludes captives owned by non-insurance entities for the management of their own risk.
The report continues: “Life captives are typically reinsurers, are owned by an insurance company, and are often domiciled in a different state than the parent insurer. Thus, Fitch believes they are to be subject to the proposed regulation.”
The full report from Fitch can be found here.
