State regulatory discussion of captives and special purpose vehicles (SPVs) may be heading toward a focus on life insurance solvency and a referendum on long-held statutory accounting practices (SAP), according to a panel today on an NAIC subgroup white paper.
The discussion also revealed divisions between the captive–friendly regulators and those that think their heavy use reveals an underlying solvency problem—when the group met at the NAIC National Meeting in National Harbor, Md., November 29.
However, the subgroup will soften its portrayal of captives in the next draft of its white paper, according to the subgroup's chair, Doug Slape of Texas.
Some state regulators are concerned about the way captives are being used to avoid the burden of reserve redundancies and free up much-needed capital while some are concerned about how captives are being portrayed.
"This has become a commentary on captives rather than a problem we are trying to address," Rhode Island Insurance and Banking Superintendent Joe Torti III said.
Despite pushback from fellow regulators on the portrayal of captives, which Torti bristled at, he remained firm that he would continue to study the underlying issue.
"I am not going away. This is a solvency issue," said Torti, who chairs the NAIC's Financial Condition Committee, under which the subgroup operates, but is a nonvoting member of the subgroup.
The Captive and SPV Use Subgroup has decided to remove the "shadow industry" allusion from the draft white paper, but Torti says the growing use of captives to reinsure or securitize excess reserves makes solvency monitoring more difficult.
Companies are using these to avoid certain statutory accounting tenents…thinking of creative solutions on how to work their way around problems, Torti said.
"You might as well not have statutory accounting if you can do whatever you want to," Torti said. Ceding billions of dollars in reserves, as is being done, is not a permitted practice of statutory accounting, according to Torti.
Torti goaded the representative from the captive-rich state of Delaware, Steve Kinion, who serves as director of the Bureau of Captive and Financial Insurance Products for the Delaware Insurance Department, by asking if was a member of the NAIC.
"We are the NAIC—there is concern that the NAIC is going to do something to the captive industry. I have been here 27 years but I don't think we have done anything foolish to intentionally harm the captive industry. Delaware is part of this NAIC and I just resent the fact that somehow we are going to do something harmful to the captive industry when 40 states have a captive industry—including Rhode Island. There is no history of the NAIC or any state doing anything harmful to the captives," Torti argued.
Delware's Kinion had come before the subgroup worried about the affect on some businesses the NAIC subgroup might be having with companies worried about a perceived threat from the NAIC, if competitors could use their captive standing against them, it could become a monetary issue for them if certain insurers are demonized.
Kinion replied that Delaware is indeed a member of the NAIC, but as a member of the NAIC, "it is important to give different view points."
"I do not see this as an attack on captives. It is not. I have been involved in captives longer than anyone in this room," noted Washington Insurance, Securities and Banking Commissioner William P. White, who held Kinion's job in Delaware previously and has a thriving captive industry under his regulation in Washington.
Torti asked how does one work in a uniform solvency system under these rules and acknowledged there was a problem with a formulaic approach creating an excess of reserves.
