The quarrel between the NAIC and New York insurance regulators as to how captives should be best overseen is creating an uncertain regulatory environment, said Fitch Ratings.
In a release from the firm, it said that ongoing debate on captives and principle-based reserving are key contributors to an uncertain regulatory environment, which it viewed as a “credit negative” for US life insurers.
Fitch described a letter sent last week by New York Department of Financial Services Superintendent Benjamin Lawsky, that was critical of a plan proposed by the National Association of Insurance Commissioners (NAIC) to increase oversight of captive insurers.
“While there appears to be consensus around the need for improved regulatory oversight and transparency in the industry's use of captives, the New York insurance regulators are raising concern that the NAIC's plan incorporates the use of principles-based reserving,” said the ratings firm.
“The ongoing tension between New York State and the NAIC, along with some other states, on use of life captives and principles-based reserving for certain life insurance products has been far from secret,” continued the ratings firm, which also noted that this tug of war appeared rooted in a philosophical difference between a strict application of statutory accounting concepts, versus a proposed shift to a more principles-based or economic approach.
“New York seems to embrace the conservatism of current formulaic approach to setting reserves, and believes the safety margins in statutory accounting, even if non-economic, are a key strength.”
“The NAIC and certain other states are empathetic to arguments stating that by being non-economic, statutory accounting can introduce inefficiencies into the insurance system, which can hurt the ability of insurers to provide insurance at a reasonable cost to the consumer.”
Fitch added that it would view positively steps taken to enhance the regulatory oversight of captives, including the adoption of more uniform captive regulation at the state level.
It also called for greater public disclosures on captive arrangements and reserve financings in general, and believes that disclosure is the best way for the state regulators to avoid allegations of a shadow insurance system.
