21 May 2014Bermuda analysis

CICA explains its rejection of NAIC's multi-state reinsurer definition

CICA has reiterated its disapproval of the NAIC’s proposed definition of 'multi-state reinsurer', stating that it would impose an unreasonable and unneeded regulatory burden on the captive industry.

The proposal has been described as ‘overly broad’, and the ‘imprecise’ language of the proposed definition has been criticised for sweeping in numerous alternative risk structures that have nothing to do with life reinsurance, including some captives that re/insure some form of property or casualty risk. Yet, no supporting information has been provided by any NAIC representative as to why the property/casualty industry should be included in the proposal:

“A multi-state reinsurer is an insurer assuming business that is directly written in more than one state and/or in any state other than its state of domicile. This includes but is not limited to captive insurers, special purpose vehicles and other entities assuming business”.

CICA believes the imprecision of the language may stem from the fact that the problem to be remedied has not been established, and disputes that the exceptions to the proposal are too narrow and ineffectual.

CICA also believes that the effect of the proposal would be to impose NAIC accreditation standards on most captive reinsurers, encumbering them with additional regulatory burden. It is argued that captives should not have to sustain the additional expense of the new standards imposed upon them, when they have been providing risk transfer to businesses “all over the world in a cost efficient manner for decades.”

CICA recognizes that life and annuity reinsurance provided by the captive subsidiaries of some of the largest commercial insurers in the world may need special attention because some of these entities are, in fact, large enough to present “systemic risk” to the global financial system. However, it sees that this does not warrant the application of the same rules or scrutiny to the thousands of captives that are not in this category.

It is also believed that the proposal poses legal problems, and would potentially violate the McCarran-Ferguson Act and the Due Process Clause of the US Constitution. A captive insurer is licensed in its state of domicile and only “transacts insurance business” within that state, yet the proposal seems to assume that captives conduct business in non-domiciliary states, arguably attempting to empower such states in order to regulate captives.

Furthermore, CICA states that the proposal appears to violate the NAIC’s own rules regarding the adoption of amendments to the accreditation standards, and “does not consider the existing regulatory structure which is designed to ensure financial soundness.”

All in all, CICA believes that the adoption of the proposal would cause severe damage to the captive insurance industry, as no bases have been put forward as to why it should apply to the entire captive industry.

“Clearly, the proposal is an attempt to address some regulatory concerns regarding the use of captives in the context of large commercial life and annuity insurers.”