The Federal Insurance Office (FIO) has criticised state insurance regulators for not doing enough to address ongoing concerns about captive reinsurance.
The FIO’s third annual report on the insurance industry, released at the end of September, criticised the XXX/AXXX Reinsurance Framework, which is being spearheaded by the National Association of Insurance Commissioners (NAIC) until principle-based reserving (PBR) requirements become fully effective, for not addressing all transactions between life insurers and reinsurance captives.
The framework only covers transactions involving cessions of reserves for term life and universal life with secondary guarantees, which, according to the FIO, misses a significant chunk of deals between life insurers and reinsurance captives.
The FIO explained: “Due to its limited scope and its exclusive focus on ceding insurers, the … framework does not fully address concerns about the non-uniform prudential regulation of reinsurance captives. Therefore, reinsurance captives would continue to be subject to a wide variety of less stringent requirements across the states with regard to minimum capital, risk-based capital, allowable assets, and accounting practices.”
State insurance regulators have also failed to require reinsurance captives to publically disclose their financial statements, and are proceeding to implement the framework with no clear timeframe in place.
“The framework is expected to be implemented in phases, including the development of a new reinsurance standard pertaining to term life and universal life with secondary guarantee products—thereby requiring state-by-state adoption over the course of an uncertain number of years.”
“The NAIC expects that the incentives to create reinsurance captive transactions will ‘be almost, if not fully, eliminated’ once PBR becomes effective, although insurers have not conceded that expectation. A.M. Best has noted that ‘given the uncertain timeframe for adoption of PBR’, the ‘stopgap’ measures established in the … framework may become the new regulatory reality and, thereby, not eliminate the use of reinsurance captives.”
