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    FIO Showing Increased Willingness to Intervene on Use of Captives to Finance Perceived Excess Reserves

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    In recent years, the use of captives to help life insurers finance perceived excess XXX and AXXX reserves has accelerated.  The NAIC continues to monitor the emerging practice and has drawn considerable attention to the matter through its solicitation of opinions by various players in the industry as well as through the publication of white paper on the matter and actions by the Principle-Based Reserving Implementation (EX) Task Force at the NAIC’s Summer National Meeting.  The Federal Insurance Office (“FIO”) has indicated it too is reviewing the use of captives by insurers.

    In March, FIO director Michael McRaith called for a creation of a task force operating under the Federal Advisory Committee on Insurance to analyze potential issues revolving around the use of captives to finance reserves.  On August 26th, during a closed meeting with state regulators, McRaith reiterated the FIO’s concern regarding the use of captives by insurers, characterizing the practice as “one of the gaps in state insurance regulation.”  The FIO’s increasing interest in the matter has come as a surprise, as many believed that the FIO had retreated from the issue and had left the NAIC and the states to adequately address the practices through a combination of regulation and principle-based reserving.

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