On a call held this morning, the Captives and Special Purpose Vehicle Use (E) Subgroup of the Financial Condition (E) Committee of the National Association of Insurance Commissioners (“NAIC”) adopted a draft of the Captives and Special Purposes Vehicles White Paper. The White Paper is now being referred to the Financial Condition (E) Committee for review and further consideration.
During the call, the Subgroup members and interested parties discussed written comments provided by the American Council of Life Insurers, New York Life, the North American CRO Council, and the Vermont Captive Insurance Association.
Life insurers have utilized captive reinsurance subsidiaries and insurance securitizations to address “reserve redundancies” associated with requirements under Regulation XXX and AXXX. Such captives are now commonly referred to as special purpose financial captives (or “SPFCs”). The use of these SPFCs by commercial life insurers has attracted attention in both industry and mainstream press. In response to certain concerns raised regarding the evolution of a so-called “shadow insurance industry,” the NAIC charged the Committee to study insurers’ use of captives and special purpose vehicles (“SPVs”) and establish appropriate regulatory requirements. This Committee appointed the Subgroup to fulfill such charge.
For more on the emergence of these types of captive reinsurance transactions, click here for an article authored by three Edwards Wildman lawyers and published in Best’s Review (March, 2013). Notwithstanding the recent negative press, there is a clear trend by the states toward permitting the use of SPFCs.
To see a copy of the draft in substantially similar form to what was adopted by the Subgroup, click here.
In the White Paper, the Subgroup identifies a number of regulatory concerns associated with the broadened use of captive reinsurance transactions by life insurers. One of the concerns expressed is that these transactions may be used to address reserve redundancies resulting from the application of statutory accounting requirements under Regulation XXX and AXXX. Another concern expressed is with respect to a lack of disclosure and transparency. The Subgroup recommends enhanced disclosure in the ceding company statements regarding the impact of the captive transactions on their financial position.