Life insurance organisations using captive reinsurers have been given a vote of confidence by rating agency A.M. Best.
In a statement, the company said that “[A.M. Best] believes these transactions are reasonable mechanisms for companies to proactively address conservative statutory reserve requirements and achieve some capital and tax efficiency.”
A.M. Best receives proprietary, detailed financial information on key reinsurance transactions undertaken by its rated companies.
Captive reinsurance transactions are similar to commercial reinsurance transactions in that they must meet the same regulatory requirements for the ceding company to receive credit for reinsurance.
Two regulators must review transactions, one from the company’s state of domicile and the other from the captive’s domiciliary state.
The statement from A.M. Best follows an investigation into ‘shadow insurance’ by the New York State Department of Financial Services.
Life insurers' use of captives has come under scrutiny from a number of regulators that are concerned that companies may be disguising their financial health by moving business to offshore entities, which are not subject to the same strict funding requirements as the insurance companies.
In its report, the department described shadow insurance as “financial alchemy”, coming to the conclusion that the practice does not adequately transfer risk between entities.
