Commissioners Mixed on NAIC Panel Draft Accreditation Plan to Treat Captives as Multistate Insurers
March 31, 2014 by Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com
ORLANDO, Fla. – A draft proposal offered by the National Association of Insurance Commissioners that would treat captive insurance in the same manner as a multistate insurer has been greeted with mixed feelings by some commissioners, some of whom said it would send captives offshore.
The NAIC’s financial regulation standards and accreditation committee moved to consider the draft proposal for 45 days. The issue emerged last fall when the committee discussed whether the definition of “multistate insurer” in preambles to parts A and B of NAIC’s accreditation standards is unclear on whether reinsurers organized under captive law and reinsurance business written in other states should be considered multistate insurers subject to NAIC accreditation standards (Best’s News Service, Dec. 19, 2013).
Dan Schelp, managing counsel of the NAIC’s legal division, presented the draft to the panel during the committee’s March 29 meeting at the NAIC’s Spring National Meeting in Orlando. He said the proposed revisions were meant to be broader than to address only XXX and AXXX reserves that are ceded to life captives and are the target of NAIC efforts to require life insurers to use principles-based reserving.
The revisions, Schelp said, would recognize that multistate reinsurers that assume business in any state other than its state of domicile would be a multistate business subject to accreditation standards. He said the Dodd-Frank Wall Street Reform Act pre-empts the extraterritorial application of state credit for reinsurance laws, which means non-domiciliary regulators of a ceding company must rely on the state of domicile of the ceding insurer but only if that state has accreditation. “Dodd-Frank created a potential accreditation issue with respect to multistate reinsurers that should be fixed,” he said.
Also, the authors tried not to write language that would interfere with the functioning of traditional captive insurance companies. To that end, Schelp said the authors proposed to exempt from accreditation standards those captive insurers owned by non-insurance entities for management of their own risk, but would apply to reinsurance transactions. Schelp said the issue of whether this would exempt group captives such as associations and sponsored/cell captives that facilitate coverage for the risk of their members or participants nationwide through unaffiliated fronting. Exemptions might also include agency captives in certain instances where they assume risk from their book of business written from an unaffiliated licensed fronting company.
To avoid taking away a state’s accreditation based on business that was currently in-force, the authors decided to limit impact on multistate reinsurers to not include an insurer solely assuming business pursuant to agreements entered into prior to July 1, 2014 on direct business written before Jan. 1, 2015. There was also a recognition that existing reinsurance agreements should be able to remain in force until the end of 2014.
“It was not our intent to try to force these transactions offshore or place a moratorium on such transactions,” Schelp said. The main goal was to allow for appropriate disclosure of prescribed or permitted accounting practices when multistate reinsurers are subject to solvency requirements that differ from those that apply under accreditation standards.
But Ray Martinez, senior deputy commissioner in the North Carolina Department of Insurance, thought otherwise. “The only impact would be to drive transactions offshore,” he said, and called for another approach. “If there’s a problem with these transactions, let’s educate the public … I really don’t see what the problem is. We seem to be creating a problem that does not exist and is based on a false perception of what’s going on here.” North Carolina is one of the newest captive domiciles.
Utah Commissioner Todd Kiser said he is unsure how the draft might impact self-insured captive companies. He said discussions with the industry in his state showed that 70% of those doing business as captives in his state were prepared to abandon Utah for sites offshore.
Rhode Island Insurance Superintendent Joe Torti initially brought the issue to the panel’s attention. He said the issue has “exposed a hole in the fabric of regulation that needs to be plugged” and urged quick action. New York Department of Financial Services Superintendent Benjamin Lawsky agreed. “The stakes in this are as high as they get, not only for the industry, but for NAIC,” he said.
The NAIC captive proposal likely would cause insurers to raise premiums, discontinue certain lines of life insurance coverage or both, said Steve Kinion, director of captive insurance for the Delaware Insurance Department. “The end result will very likely be higher prices and less choices for consumers,” Kinion said in an email. “Unfortunately, no NAIC committee, working group, or task force has researched what would happen if these standards apply.” He said Delaware Insurance Commissioner Karen Weldin Stewart demands analysis to make informed decisions and Kinion suggested the NAIC do likewise in this case.
The American Council of Life Insurers was worried the draft might result in the committee doing an end-run of the regular accreditation review process. The change in definition of a multistate insurer should have resulted in discussions and changes to as many as 19 different standards that currently do not apply to the captive insurance industry, said Paul Graham, senior vice president, insurance regulation and chief actuary at the ACLI. However, he said the process outlined in the draft document would have the entire set of changes taking effect on Jan. 1, 2015.
