OFR deems captive reinsurance ‘risky’

The US Treasury’s Office of Financial Research (OFR) has branded captive reinsurance a “risk to financial stability”.

The OFR has stated that regulators and market participants need better information about captive reinsurance in order to evaluate the financial solvency of captive reinsurers themselves, and become aware of the potential risks to holding companies.

In its 2014 annual report, the OFR commented: “It remains difficult not only for policyholders and investors, but also in some cases for state regulators, to determine the capital adequacy and financial strength of captive reinsurers.”

The report cited recent cases such as the National Association of Insurance Commissioners attempting to broaden its definition of a multistate insurer, which would subject captive reinsurers to the same oversight and transparency requirements as other insurance companies.

This definition would sweep in numerous alternative risk structures that have little or nothing to do with life reinsurance, including some captives that operate on a direct basis, which has drawn industry opposition.

The Captive Insurance Companies Association (CICA), most notably, claimed that the adoption of the proposed accreditation standards would cause severe damage to the captive insurance industry and also that “no bases have been put forward as to why the proposal should apply to the entire captive industry”.

The OFR has also stated that it will continue to explore what it refers to as “data gaps” in areas such as captive reinsurance.