18 October 2013Analysis

Fitch: transparency and regulatory cooperation are essential

In a new report Fitch Ratings calls for greater public disclosure on captive arrangements and reserve financings in general, asserting that squabbles between regulators could damage the credit quality of US life insurance industry and insurer ratings.

The report, titled “New York Insurance Regulatory Criticisms”, reads: “Fitch believes for state regulation to be truly effective, there should be no firewalls and the various states should be willing and able to share information they have on insurers and captives in their domicile with any other state that has a legitimate interest. To not support the sharing of information among state regulators begs criticism and essentially shines a flashing light on the current weaknesses of state regulation.”

It continues: “Fitch believes the best way for the state regulatory system to avoid allegations of a shadow insurance system [like those levelled by officials in New York earlier this year] are simple—state regulators should require public disclosures of key information in a systematic and consistent basis, and the industry should move forward at an accelerated pace on such efforts that are already underway.”

Dennis Harwick, president of the Captive Insurance Companies Association (CICA), told Captive International: “Mr. Lawsky of the New York Department of Financial Services has a history of making overly broad undocumented statements about the captive industry and his statement that there is a "race to the bottom" is another example of his inflammatory rhetoric.”

“While the Fitch article makes a valid point about whether there are enough captives for a new domicile to attract a sufficient number of captives to support a dedicated captive regulator -- which is an important consideration -- most captives in the traditional captive market place are managed by experienced captive managers who understand the importance of having knowledgeable captive regulators and thus steer their clients to domiciles with experienced captive regulators.”

He continued: “There are significant differences between the traditional captive industry consisting of those organisations and groups that utilise captives as part of their risk management strategy and the reinsurance transactions utilised by some banks and life insurance companies.  The President of the NAIC has confirmed that the NAIC has a fast-track review of the regulatory framework regarding these reinsurance transactions by banks and life insurance companies, which are New York's primary concern.”