Reinsurance Focus

On June 11, 2013 the New York Department of Financial Services released a report titled Shining A Light On Shadow Insurance: A Little-Known Loophole That Puts Insurance Policyholders And Taxpayers At Greater Risk (“the NY Report”). The NY Report describes an investigation that the New York Department initiated in July 2012 into the practice of reinsuring term and universal life insurance policies with non-New York domiciled captive insurers which are subject to “looser reserve and regulatory requirements.” Receiving publicity in a New York Times article, the NY Report pledges to continue the investigation, urges the NAIC to develop enhanced disclosure requirements for “shadow insurance,” urges the Federal Insurance Office (“FIO”) and the NAIC to conduct a “similar investigation,” and suggests “an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete ….”

As reported previously in Reinsurance Focus, the NAIC formed a special working group of the Financial Condition (E) Committee in November 2011, which has been investigating the use of captives, including the possible use of captives to evade regulatory accounting rules concerning reserves. The working group, of which New York has been an active member, approved a white paper containing its recommendations on June 6, 2013, shortly before the release of the NY Report, which inexplicably failed even to mention the existence of the NAIC’s on-going inquiry. The approved NAIC white paper recommends a number of changes to accounting and other rules. In order to promote uniformity of practice, the NAIC working group has recommended that some of the proposed changes be included in the NAIC’s accreditation requirements rather than in merely optional guidelines which may or may not be adopted by individual states. In another instance of curious timing, the NY Report recommended that the FIO establish a task force to look into issues relating to captives, while it is public knowledge that the FIO already had established such a task force.

The insurance commissioners of Delaware, Louisiana (the current NAIC President) and Tennessee have, according to news reports, rejected the call in the NY Report for a moratorium, stating that: (1) many transactions engaged in by captives are appropriate and lawful, not involving the “shadow insurance” allegations contained in the NY Report; (2) captives can be regulated properly, if necessary with additional resources applied by the state insurance departments; and (3) the current NAIC captives initiative will continue and proceed to a proper conclusion.

This post written by Rollie Goss.

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