Fitch: Regulatory Uncertainty Rises On Captive Insurance Debate

NEW YORK--()--The ongoing debate on captives and principle-based reserving are key contributors to an uncertain regulatory environment, which Fitch views as a credit negative for US life insurers.

According to a report in Tuesday's Wall Street Journal, a letter sent last week by New York Department of Financial Services Superintendent Benjamin M. Lawsky 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.

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. This "tug of war" appears rooted in a philosophical difference between a strict application of statutory accounting concepts versus proposed movements 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 would view positively steps taken to enhance the regulatory oversight of captives, including the adoption of more uniform captive regulation at the state level.

Fitch also calls 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.

Please see our report titled, "New York Insurance Regulatory Criticisms: Captives and AXXX Reserves Called into Question," available on our website www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

New York Insurance Regulatory Criticisms (Captives and AXXX Reserves Called into Question)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720239

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Contacts

Fitch Ratings
Keith M. Buckley, CFA, +1 312-368-3211
Managing Director
Global Insurance
or
Doug Meyer, +1 312-368-2061
Managing Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
FitchWire
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Keith M. Buckley, CFA, +1 312-368-3211
Managing Director
Global Insurance
or
Doug Meyer, +1 312-368-2061
Managing Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
FitchWire
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com