The federal government is becoming increasingly interested in the captive insurance market niche, an area currently regulated at the state level with little federal involvement, according to an article from Fitch Ratings.
The agency said that a form of captive insurance used to finance conservative statutory reserve requirements for some products sold by life insurers has piqued the interest of two agencies of the Federal government—and that most insurance has historically been regulated by states.
A Federal Insurance Office (FIO) report on 12 December 2013 included recommendations on captive reinsurers. On 29 December, it was reported the SEC had asked at least five publicly traded life insurers for information on their use of captive reinsurance.
This heightened Federal interest may stem from a New York State Department of Financial Services report in June that criticised life insurers' use of captive reinsurance, said Fitch.
“The FIO's recommendation, as per their report, appears to encompass all captive reinsurers. Although it was reported that the SEC requested information only from a group of public life insurers and the FIO's discussion centered on life insurers' use of captives, the FIO's intent remains unclear as the wording chosen for that section of their report may have been simply general in nature.”
While federal interest currently centers on life reinsurance captives (ie, captives sponsored by life insurers) and not traditional single parent or group captives formed by industrial corporates, Fitch believes that traditional captive insurance could be swept up in the vortex if some regulators and others do not appreciate the difference between the two types of entities.
This could create the possibility that "captive reinsurers" will become simply "captive insurers," giving rise to mission creep as the regulatory process evolves.
The National Association of Insurance Commissioners (a group of state regulators) has several current initiatives related to life insurers' use of captive reinsurers. An NAIC working group is addressing the subject and has already published a white paper.
“Some of these initiatives have been quite controversial and several state regulators have expressed distinctly different opinions regarding the best direction of the NAIC's efforts and the appropriateness of using captives to reinsure life insurance,” added Fitch.
“In the extreme, subjecting traditional captive insurers to new reporting requirements or other new regulation would add cost and complexity to the captive insurance process and may ultimately result in non-insurance sponsors deciding not to form new captive insurers and possibly even to wind up existing captive insurers.”
