The NAIC last week adopted a new set of guidelines aimed at giving regulators more comfort in approving captive financing deals for life insurance products.The insurance company practice of reinsuring liabilities through their own captive companies has come under withering fire by some regulators, particularly New York Financial Superintendent Benjamin M. Lawsky. In a Nov. 21 letter to the U.S. Treasury, Lawsky said the use of captives is "in many ways similar to the exploitation of differing global tax rules across various countries through corporate tax inversions. ... the scheme involves the gaming of varying insurance laws and regulations right here in our own nation across different states."
The NAIC's Executive Committee adopted Actuarial Guideline 48 (AG 48) to apply only to a specific set (XXX/AXXX) of captives used by the life insurance industry. These are level premium term life insurance policies and reserves required for universal life insurance policies with sold secondary guarantees.
The new rules are effective Jan. 1, 2015.
Insurance carriers have found captives useful as a capital management tool as captives have allowed insurers to meet higher regulatory reserve requirements while also allowing underwriters to competitively price life insurance policies. As a result, the use of captives has grown over the past 15 years.
The American Council of Life Insurers reinsurance transactions with affiliated subsidiaries "are an important component of risk management."
Adam Hamm, North Dakota commissioner and NAIC president, said AG 48 "furthers our objectives of transparency and uniformity related to the regulation of life insurer-owned captives."
According to lawyers at Mayer Brown, the regulation affects what financing would be allowed for the primary security, or the collateral that shores up the deal, also called the "economic reserve layer" of the portfolio policies. The Mayer Brown lawyers said that financing will now be restricted to cash and SVO- listed securities, but excluding, excluding any synthetic letter of credit, contingent note, credit-linked note or other similar security that operates in a manner similar to a letter of credit.
Another key, according to Mayer Brown, is that it is not retroactive. Mayer Brown lawyers said the fear of retroactivity had limited these type of financing deals from being completed because interested parties were fearful of retroactivity since the issue of captives became intense in 2011.