States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives, said a report by Nelson Levine de Luca & Hamilton.
The law firm was commenting on the Federal Insurance Office’s (FIO) long-awaited report, ‘How to Modernize and Improve the System of Insurance Regulation in the United States’. In its report, the FIO acknowledges the work of state regulators, both historically and on current regulatory reform efforts, but repeatedly notes the lack of uniformity and perceived limitations inherent in a state based system.
The report makes 18 short-term recommendations for actions by the states to modernise and improve the US system of insurance regulation. These recommendations fall into three categories: capital adequacy and safety/soundness; reform of insurer resolution practices; and marketplace regulation.
For the first category, capital adequacy and safety/soundness, the FIO had recommendations pertaining to captives. For marital solvency oversight decisions of a discretionary nature, states should develop and implement a process that obligates the appropriate state regulator to first obtain the consent of regulators from other states in which the subject insurer operates. The report states this would reduce the variations that result from discretionary regulatory practices and decisions.
To improve consistency of solvency oversight, states should establish an independent, third-party review mechanism for the NAIC Financial Regulation Standards Accreditation Programme. The report notes that state regulators often consult with the NAIC's legal staff about adoption of model laws, the same staff that determines whether states have complied with requirements to adopt model laws.
To improve the reliability and bolster the credibility of the accreditation programme, the report suggests an independent review and audit that would provide a perspective on whether there is uniform adoption and implementation of capital rules and other accreditation standards.
According to the report, this should include transparency of the liabilities transferred to reinsurance captives and the nature of the assets that support a reinsurance captive's financial status. Subject to limitations on the disclosure of legitimately proprietary information, these transactions should be disclosed in the financial statements of the ceding insurer.
