US regulatory changes expected to shrink use of captives and benefit insurers

US regulatory efforts to revise the statutory framework for variable annuities (VAs) to reduce non-economic volatility, shrink and/or eliminate the use of captives, promote sound risk management, and improve disclosure would be a positive development, according to a new report from Fitch Ratings.

"Both insurers and investors should benefit from these proposed changes to VAs," said Douglas Meyer, managing director, Fitch Ratings.

The National Association of Insurance Commissioners has made specific recommendations for revisions in reserve, capital, and disclosure requirements following a quantitative impact study.

The recommendations could become effective as early as January 1, 2018, and are expected to be applied to both existing and new business.

The proposed changes in statutory reserve and capital requirements for VAs are intended to mitigate non-economic volatility and shrink or eliminate the incentive to use captive reinsurance. Given the complexity and lack of transparency of existing captive reinsurance arrangements, Fitch would view the proposed changes as a credit positive.

"The current statutory framework has contributed to the inherent volatility and pro-cyclical nature of the VA business due to the unstable interplay between statutory reserve and capital requirements, and has been a primary driver of the industry's use of captive reinsurance. The regulators have made good progress on this important initiative," added Meyer.