FIO Eyeing Captive Life Reinsurers

By Cyril Tuohy

InsuranceNewsNet

The U.S. Treasury’s Federal Insurance Office has a message for the National Association of Insurance Commissioners on the issue of captive life reinsurance: We’re keeping an eye on you.

“FIO will continue to monitor and report on regulatory treatment of this issue,” it said in its second-annual wide-ranging report on the state of the insurance industry.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, FIO must report annually to the president and Congress on the state of the insurance industry.

Howard Mills, director and chief advisor to the Insurance Industry Group with Deloitte, told InsuranceNewsNet that the mention of captive reinsurance transactions is something “you could take as an indicator that the FIO is looking at this.”

Regulation of captive life reinsurers has undergone a tumultuous nine months since the FIO issued its separate Modernization Report last December, suggesting the industry implement reforms to life insurer-owned captives.

In February, consultants hired by NAIC put forth interim steps to reign in life reinsurance transactions, only to water down their very recommendations four months later in the face of industry lobbying.

In the ensuing months last spring, the NAIC sought input from state regulators about life reinsurance transactions. Some regulators pressed for accelerated implementation of the recommendations by the consultant, Rector & Associates, while other regulators advocated an immediate moratorium on reinsurance captive transactions until adoption of more reforms.

New York Department of Financial Services Superintendent Benjamin M. Lawsky reacted to the June announcement by skewering the NAIC and its consultants, saying regulation of life insurance captives had taken a step backward.

If adopted, the June recommendations would leave unresolved “a gaping regulatory problem that is … central to the protection of policyholders,” the NYDFS said.

In its December Modernization Report, the FIO recommends “uniform and transparent” oversight for “the transfer of risk to reinsurance captives.”

Captive life reinsurance transactions allow U.S. life insurers to transfer the risk to a reinsurance company the life insurer already owns, but which is located in another state. A New York-based life insurer, for example, could transfer life insurance liabilities to its reinsurer located in South Carolina or Utah.

Transferring the risk allows large commercial life insurance companies to meet reserve requirements for life insurance and annuities.

Since states follow different rules, capital and transparency standards governing captive reinsurance transactions differ from state to state, and regulators have raised questions about uniformity and adequate policyholder protection.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].