Attachment Seven. Proposed Definition of Multi-State Reinsurer

Transcription

1 Attachment Seven Proposed Definition of Multi-State Reinsurer

2 To: Director John M. Huff (MO) Chair, Financial Regulation Standards and Accreditation (F) Committee From: Daniel Schelp, Managing Counsel Re: Multi-State Reinsurers Date: March 24, 2014 During the Fall 2013 National Meeting, the Financial Regulation Standards and Accreditation (F) Committee discussed whether the definition of multi-state insurer included in the preambles to Part A and Part B is unclear as to whether reinsurers organized under captive laws and reinsuring business written in other states are considered multi-state under the accreditation program and, therefore, subject to the Part A: Laws and Regulations and Part B: Regulatory Practices and Procedures accreditation standards. The Committee directed NAIC staff to draft proposed revisions that will clarify the definition of multi-state insurer for review at the 2014 Spring National Meeting. The Committee further provided that any action taken should include ample time for impacted jurisdictions to comply. Attached please find proposed revisions to the Part A and Part B preambles that would add a definition of Multi-State Reinsurer and clarify the circumstances under which such a reinsurer would be subject to the accreditation standards National Association of Insurance Commissioners 1

3 DRAFT: NAIC POLICY STATEMENT ON FINANCIAL REGULATION STANDARDS PART A: LAWS AND REGULATIONS TRADITIONAL INSURERS Preamble for Part A The purpose of the Part A: Laws and Regulations standards are to assure that an accredited state has sufficient authority to regulate the solvency of its multi-state domestic insurance industry in an effective manner. The Part A standards are the product of laws and regulations that are believed to be basic building blocks for sound insurance regulation. A state may demonstrate compliance with a Part A standard through a law, a regulation, an established practice, which implements the general authority granted to the state or any combination of laws, regulations or practices, which achieves the objective of the standard. The following Part A standards apply to traditional forms of multi-state domestic insurers. This scope includes life/health and property/casualty/liability insurers and reinsurers that are domiciled in the accredited state and licensed, accredited or operating in at least one other state, including multi-state reinsurers as described below. This scope also includes insurers that are domiciled in the accredited state and operating or accepting business on an exported basis in at least one other state as excess and surplus lines insurers or as risk retention groups (RRGs); except that the term does not include risk retention groups incorporated as captive insurers. Part A standards for RRGs are included in the following section. It also does not include those insurers that are licensed, accredited or operating in only their state of domicile but assuming business from insurers writing that business that is directly written in a different state. The terms insurer and insurers used in the Part A standards fall within the definition of multi-state domestic insurers. For the purpose of this definition, the term state is intended to include any NAIC member jurisdiction, including U.S. territories. Multi-State Reinsurers 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. For the purposes of compliance with Part A standards, multi-state reinsurer does not include an insurer solely assuming business pursuant to agreements entered into prior to July 1, 2014 on direct business written prior to January 1, Captive insurers owned by non-insurance entities for the management of their own risk will continue to be exempted from both the Part A and Part B accreditation requirements. For example, multi-state reinsurers include, but are not limited to, captive insurers, special purpose vehicles and other entities assuming business in accordance with the Valuation of Life Insurance Policies Model Regulation (#830) (commonly referred to as Regulation XXX) and Actuarial Guideline XXXVIII The Application of the Valuation of Life Insurance Policies Model Regulation (AG 38) (commonly referred to as AXXX). [Drafting Note: The purpose of this paragraph is to recognize that reinsurance transactions may have multi-state nature for the purposes of both the Part A and Part B accreditation standards. The federal Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) provides that if the 2

4 DRAFT: ceding insurer s state of domicile is an NAIC-accredited state, or has financial solvency requirements substantially similar thereto, and the state of domicile recognizes credit for reinsurance, then no other state may deny such credit for reinsurance. The NRRA preempts the extraterritorial application of state credit for reinsurance laws, so that non-domiciliary regulators of a ceding company selling insurance policies in their state must rely on the state of domicile of the ceding insurer, but only if it is accredited. In order to ensure that non-domiciliary states may rely on the uniform application of state credit for reinsurance laws, it is necessary to recognize that an insurer licensed in only one state but assuming business written in other states meets the definition of multi-state insurer, and must be subject to the accreditation standards. However, captive insurers owned by non-insurance entities for the management of their own risk will continue to be exempted from these requirements. All other captive insurers, special purpose vehicles and other entities assuming business in states other than their state of domicile will be subject to the accreditation standards. This paragraph is intended to have prospective effect-only, so that insurance entities reinsuring multi-state business will only be subject to the accreditation standards if they enter into reinsurance transactions on such multi-state business on or after July 1, 2014, or with respect to reinsurance agreements entered into prior to this date on direct business written on or after January 1, In addition, it is understood that the NAIC is currently considering other financial solvency mechanisms with respect to reinsurance assumed for XXX and AXXX reserves, and that it may be necessary to further revise these accreditation standards to recognize the adoption of these mechanisms by the NAIC at some future date. ] Preamble for Part B PART B: REGULATORY PRACTICES AND PROCEDURES The purpose of Part B is to identify base-line regulatory practices and procedures required to supplement and support enforcement of the states financial solvency laws in order for the states to attain substantial compliance with the core standards established in Part A. Part B identifies standards that are to be applied in the regulation of all forms of multi-state insurers. Part B sets out standards required to ensure adequate solvency regulation of multi-state insurers. Each state must make an appropriate allocation of its available resources to effectively address its regulatory priorities. In addition to a domestic state s examination and analysis activities, other checks and balances exist in the regulatory environment. These include other states regulation of licensed foreign companies, the appropriate application of FAST and IRIS ratios, the analyses by NAIC s staff, the NAIC Financial Analysis Working Group, the NAIC Analyst Team Project, and to some extent the evaluation by private rating agencies. The scope of Part B is broader than the scope of Part A. Multi-state insurer as used in Part B encompasses all forms of insurers domiciled or chartered in the accredited state and licensed, registered, accredited or operating in at least one other state, including multi-state reinsurers. This scope also includes insurers that are domiciled in the accredited state and operating or accepting business on an exported basis in at least one other state as excess and surplus lines insurers. It does not include those insurers that are licensed, accredited or operating in only their 3

5 DRAFT: state of domicile but are assuming business from insurers writing that business that is directly written in a different state. The term insurer in Part B includes traditional insurance companies as well as, for instance, health maintenance organizations and health service plans, captive risk retention groups, and other entities organized under other statutory schemes. Although this scope includes risk retention groups organized as a captive insurer, it does not include any other type of captive insurer (except for captive insurers, special purpose vehicles and other entities described under Multi-State Reinsurers). While the unique organizational characteristics of some of these entities may require specialized laws, their multi-state activity demands solvency oversight that employs the base-line regulatory practices and procedures identified in Part B. For purposes of this definition, the term state is intended to include any NAIC member jurisdiction, including U.S. territories. The accreditation program recognizes that complete standardization of practices and procedures across all states may not be practical or desirable because of the unique situations each state faces. States differ with respect to staff and technology resources that are available as well as the characteristics of the domestic industry regulated. For example, states may choose to emphasize automated analysis over manual or vice versa. Reliable results may be obtained using alternative, yet effective, financial solvency oversight methodologies. The accreditation program should not emphasize form over substance in its evaluation of the states solvency regulation. 4

6 April 10, 2014 Via and US Postal Service The Honorable John M. Huff Director, Missouri Department of Insurance, Financial Institutions & Professional Registration Chair, Financial Regulation Standards and Accreditation (F) Committee c/o Ms. Julie Garber, CPA, FLMI, ARe Senior Accreditation Manager National Association of Insurance Commissioners Re: Opposition to Revisions to Part A and Part B Preambles Impacting Captive Insurers Dear Director Huff: On April 2, 2014, the Financial Regulation Standards and Accreditation (F) Committee ( F Committee ) exposed for comment its proposed revisions to the Part A: Laws and Regulations Traditional Insurers and Part B: Regulatory Practices and Procedures preambles of the accreditation standards. The proposed revisions add a definition of multi-state reinsurer and purportedly clarify the circumstances under which a multi-state reinsurer would be subject to accreditation standards. The North Carolina Department of Insurance ( NCDOI ) views the proposed revisions as unnecessary and requests that the F Committee reconsider this proposal for the following reasons: 1. Accreditation standards do not apply to non risk retention group captives. According to the memorandum regarding multi-state reinsurers from Daniel Schelp to Director John M. Huff dated March 24, 2014, during the Fall 2013 National Meeting, the F Committee discussed whether the definition of multi-state insurer is unclear as to whether reinsurers organized under captive laws and reinsuring business written in other states are considered multi-state under the accreditation program, and therefore, subject to the Part A: Laws and Regulations and Part B: Regulatory Practices and Procedures accreditation standards. According to the title for the Part A accreditation standards, Part A: Laws and Regulations Traditional Insurers, it is quite clear that the standards only apply to traditional insurers and not captives, except for RRGs incorporated as captives, which are addressed in a separate Part A specifically for RRGs. Additionally, the first sentence of the second paragraph of the Preamble for Part A states, The following Part A standards apply to traditional forms of multi-state domestic insurers. Because traditional insurers are insurers that sell to the general public, they operate within an extensive insurance regulatory system for the protection of consumers. However, captives and special purpose 5

7 entities are alternative risk financing mechanisms utilized by sophisticated buyers and sellers of insurance. They are not traditional insurers; they are not regulated as traditional insurers; and as such, they must not be subject to the accreditation standards that were designed for traditional insurers. 2. The NAIC, through these proposed changes, is reacting to a concern about an issue that does not exist. Certain regulatory bodies, such as the Federal Insurance Office, have expressed concern that captive reinsurers, especially those captives providing reinsurance on life products, are not regulated as closely as traditional insurers and reinsurers. Additionally, these bodies are concerned there is a lack of transparency for captive oversight under the state regulatory system. These concerns are primarily related to captive reinsurers of life insurance products. Superintendent Torti, in his December 2, 2013, memorandum to Director John Huff stated that his concern is specifically with XXX and AXXX captives and special purpose entities. However, the proposed revisions will impact not only captives reinsuring life business, but captives reinsuring other lines of business as well. Before enacting additional regulatory requirements that will significantly impact captive reinsurers, state regulators must consider the standards, regulations and statutes that are already in place. Doing so will alleviate the concerns about the regulation of captive reinsurance transactions. The NCDOI believes there are already sufficient standards and regulations governing the oversight by state regulators of traditional insurance companies and their transactions with captive reinsurers. As state regulators, instead of reacting to the criticism of others by creating another layer of bureaucracy, we must educate others and perhaps remind ourselves about the measures that are already in place to address these concerns. We must not create additional regulatory bureaucracy for our insurers and state regulators, whose resources are already limited. We must not react by taking unnecessary action just to appease others that are not fully educated about the state regulatory process. The NCDOI is in agreement with the recommendation contained in the Report of Rector & Associates, Inc. to the Principle-Based Reserving Implementation (EX) Task Force dated February 17, 2014, to focus almost exclusively on regulation of the direct/ceding insurer and on trying to ensure that high quality assets in an appropriate amount will be available to the direct/ceding insurer to allow it to pay policyholder claims as they come due. It is the belief of the NCDOI that transactions by traditional insurers with captives and special purposed entities are already subject to the standards of accreditation through the various NAIC model laws adopted by the states for accreditation. Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) All accredited states have enacted laws and regulations that are substantially the same as the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786). Model #785 provides the basis for which credit for reinsurance is allowed a domestic ceding insurer. Section 3 of that model law provides the requirements for a ceding 6

8 insurer to take credit for business ceded to an unauthorized reinsurer. Following is the language of Section 3 of Model #785: Section 3. Asset or Reduction from Liability for Reinsurance Ceded by a Domestic Insurer to an Assuming Insurer not Meeting the Requirements of Section 2 An asset or a reduction from liability for the reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of Section 2 shall be allowed in an amount not exceeding the liabilities carried by the ceding insurer. The reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the ceding insurer, under a reinsurance contract with the assuming insurer as security for the payment of obligations thereunder, if the security is held in the United States subject to withdrawal solely by, and under the exclusive control of, the ceding insurer; or, in the case of a trust, held in a qualified U.S. financial institution, as defined in Section 4B. This security may be in the form of: A. Cash; B. Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office, and qualifying as admitted assets; C. (1) Clean, irrevocable, unconditional letters of credit, issued or confirmed by a qualified U.S. financial institution, as defined in Section 4A, effective no later than December 31 of the year for which the filing is being made, and in the possession of, or in trust for, the ceding insurer on or before the filing date of its annual statement; (2) Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance (or confirmation) shall, notwithstanding the issuing (or confirming) institution s subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs; or D. Any other form of security acceptable to the commissioner. In addition to the above, Model 786 provides additional guidance regarding reinsurance transactions with unauthorized reinsurers, including specific guidance about the requirements for trust accounts and letters of credit. Through these laws and regulations, which specify the type of collateral that must be provided for all reinsurance transactions, regulators have the tools necessary to ensure that traditional insurers ceding to captive reinsurers obtain the required type and amount of collateral to support the obligations ceded. 7

9 If there is concern that Section 3.D. of the model allows for too much subjectivity by the domestic regulator, then regulators may consider modification to that provision to clarify the proper types of collateral that must be held to support business ceded to all reinsurers by traditional insurers. We also agree with the Captive and Special Purpose Vehicle (SPV) Use (E) Subgroup s recommendation in the June 6, 2013, White Paper that consideration be given to study further the effects of, and potential limits on, the variability in qualified LOCs or any other security that might not provide the intended protections provided within Model #785 and Model #786. Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450) All accredited states have enacted laws and regulations that are substantially the same as the Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450) for regulation of transactions within an insurance holding company system. Section 5.A.2. of Model #440 requires an insurer to provide prior notification to the Commissioner of certain affiliated transactions including certain reinsurance transactions. Section 5.A.2.(c) states the insurer must provide prior notification to the Commissioner for the following affiliated reinsurance arrangements: Reinsurance agreements or modifications thereto, including: (i) All reinsurance pooling agreements; (ii) Agreements in which the reinsurance premium or a change in the insurer s liabilities, or the projected reinsurance premium or a change in the insurer s liabilities in any of the next three years, equals or exceeds five percent (5%) of the insurer s surplus as regards policyholders, as of the 31st day of December next preceding, including those agreements which may require as consideration the transfer of assets from an insurer to a non-affiliate, if an agreement or understanding exists between the insurer and non-affiliate that any portion of the assets will be transferred to one or more affiliates of the insurer; Through these laws governing affiliated reinsurance transactions, state regulators have the opportunity to review and disapprove any material transactions that do not meet the appropriate standards, including standards regarding the collateral supporting the business ceded to a captive. If the transactions are not material, then the level of concern is low anyway. If state regulators feel an additional level of transparency is necessary to fully understand the reinsurance transactions, then the NCDOI would not object to additional disclosure requirements in the financial statements of the ceding insurers that would provide additional clarity and transparency. As already required, any permitted practices granted by regulators for these transactions must be disclosed, including the impact on surplus, in the insurers financial statements. 8

10 3. The application of the accreditation standards to United States domiciled captives results in a different set of standards from those applied to off-shore captives. If the proposed revisions to multi-state insurer definition are accepted, instead of bringing uniformity to the regulation of these captive reinsurance transactions, the end result will be the unfair application of standards to United States domiciled captives that are not imposed on off-shore captives. The United States domiciled captives will be economically penalized, driving captive insurers from United States domiciles to offshore domiciles. Offshore domiciled captive insurers will be able to continue to provide these reinsurance transactions without being subjected to additional regulatory standards. We disagree with the F Committee member that stated the offshore captive insurers are regulated the same as traditional companies, and even if that is true, as a state regulator, the NCDOI prefers for its traditional domestic insurers to transact reinsurance business with captives that are regulated in the United States. Conclusion In summary, the NCDOI does not support the F Committee s proposed revisions to the definition of multi-state insurer that is included in the accreditation standards. Instead, the NCDOI believes we, as state regulators, must educate others about the tools we already possess to address the concerns raised about captive reinsurance transactions. Through the regulation of traditional insurers, which are subject to the laws required by accreditation such as those addressing credit for reinsurance and holding company transactions, it is unnecessary to apply accreditation standards to captive insurance companies. Application of such standards will result in the movement of the captive industry from United States domiciles to offshore domiciles, which will have a detrimental economic impact on the United States. If there remains a concern about the types of collateral that may be used to support business ceded by the traditional insurers, then it is recommended that we develop an amendment to Section 3.D. of the Credit for Reinsurance Model Law (#785) that clarifies the types of collateral that is deemed acceptable. If it is determined that additional transparency is necessary for regulators and others to fully understand these reinsurance transactions, then the NCDOI would not object to additional disclosure requirements in the ceding insurers Notes to Financial Statements that would provide additional clarity and transparency. As already required, any permitted practices granted by regulators for these transactions must be disclosed, including the impact on surplus, in the insurers Notes to Financial Statements. 9

11 The NCDOI looks forward to participating in further dialogue on this issue and bringing this to a full resolution without imposing accreditation standards on captive insurers. Sincerely, Wayne Goodwin North Carolina Commissioner of Insurance cc: F Committee Members Laura N. Cali, Commissioner, Oregon Sharon P. Clark, Commissioner, Kentucky Susan L. Donegan, Commissioner, Vermont John D. Doak, Commissioner, Oklahoma Gordon I. Ito, Commissioner, Hawaii Scott J. Kipper, Commissioner, Nevada Kenneth E. Kobylowski, Commissioner, New Jersey Monica J. Lindeen, Commissioner, Montana Germaine L. Marks, Director, Arizona Chester A. McPherson, Interim Commissioner, District of Columbia Merie D. Scheiber, Director, South Dakota Karen Weldon Stewart, Commissioner, Delaware Stephen Johnson, Deputy Insurance Commissioner, Pennsylvania 10

12 I have recently become aware of the movement to impose a new definition of multi-state insurers that will result in additional requirements on many types of captives. I am unaware of impetus for such changes but I cannot imagine that you have found problems that justify this proposal. Consequently, please record me personally and R&Q Captive Management Services as being opposed and fully in accord with Director Kinion s positions. Thank you. Rod Morris, Chief Executive Officer R&Q Quest USA Captive Management N. 40th St. Ste 109 Phoenix, AZ rod.morris@rqih.com

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16 JANICE K. BREWER Governor Department of Insurance State of Arizona Office of the Director Telephone: (602) Facsimile: (602) North 44th Street, Suite 21 0 Phoenix, Arizona GERMAINE L. MARKS Director of Insurance May 7, 2014 The Honorable John M. Huff Director, Missouri Department of Insurance Chair, Financial Regulations Standards and Accreditation Committee PO Box 690, Jefferson City, MO Re: Financial Regulations Standards and Accreditation Committee's Definition of "Multi-State Insurers" Dear Director Huff: I write to voice my objection to the clarified definition of "multi-state insurer" circulated for review at the NAIC's 2014 Spring National Meeting by the Financial Regulations Standards and Accreditation Committee. As part of the revisions, the Preamble for Part A includes striking the line: "... insurers that are licensed, accredited or operating in only their state of domicile but assuming business from insurers writing that business that is directly written in a different state." Deleting this language and incorporating the proposed Multi-State Reinsurer language would create an additional population of insurers subject to accreditation in Arizona. Approximately 75 Arizona Life and Disability Reinsurers and Unaffiliated Credit Life and Disability Reinsurers and a significant number of Arizona's approximately 90 captives would be subject to accreditation standards under the proposed changes. In order for Arizona to comply with the proposal, the Arizona Legislature would need to amend numerous statutes, which is neither a quick nor easy process, nor a process that guarantees the desired result. The imposition of accreditation standards upon these additional insurers would require an increase in analytical and examination resources that would be difficult for the Department to obtain. Subjecting these insurers to Part A and B accreditation standards could potentially drive many of these insurers offshore. Two of many possible consequences of such a move would be the state of domicile's inability to directly regulate these insurers and the loss of the benefit from the associated revenue. These consequences are a serious concern for Arizona and likely several other states, as well Before pursuing these changes, the F Committee should be able to assure regulators and the industry that applying accreditation standards to insurers that are currently exempt is justified. Additionally, the F Committee should be able to articulate the benefits of applying the standards to these insurers. In most cases, the insurers that would be subject to review are already limited in their ability to assume reinsurance, either pursuant to statute or pursuant to their business plan. In addition to obtaining and maintaining the minimum standards that are required prior to receiving a Certificate of Authority, all of these insurers must comply with the provisions of the Model Reinsurance Law, as adopted by this and all other states and required by their ceding 17

17 The Honorable John M. Huff Page2 May 7, 2014 insurers. The reinsurance statutes and related regulations provide a solid foundation on which these insurers operate and the guidance with which ceding insurers must comply in order to take reinsurance credit. The burden lies upon the ceding insurer. Although several accreditation Part A and 8 standards apply directly or indirectly to these insurers, the principal areas of concern relate to statutory reserve security, transparency and capital adequacy. These insurers currently provide the Department with reports on an at least annual basis, and are subject to other checks such as examination, minimum capital requirements, hazardous financial conditions, actuarial reporting, Director approval of business plan changes, dividend approvals, and desk audits. These insurers are not subject to guaranty fund coverage. Thus, there is no apparent benefit to subjecting these insurers to these additional requirements and therefore, the proposed accreditation standards do not appear justified. Though it has been implied that the primary focus of this proposed change is to only subject insurer owned XXX and AXXX captives to accreditation standards, the result would be a significant burden upon regulators and the industry without a corresponding benefit. Transactions with these captives are subject to the Model Reinsurance and Holding Company Laws. These laws are sufficient and provide authority to impose regulatory standards upon affiliated assuming insurers, for whatever line of business. The ceding insurer and affiliated captives are also subject to holding company analysis, enterprise risk management, their own risk and solvency assessment, and, in most cases, supervisory colleges. There exists more than adequate oversight of these affiliated transactions. Although XXX and AXXX reserving standards relate to an issue that is under review by the Principle Based Reserve Task Force, I feel strongly that they are related and can be addressed simultaneously. If the PBR TF adopts adequate standards, then the need to define XXX and AXXX captives as multi-state reinsurers is neither necessary nor useful. I support the utilization of the Model Reinsurance Law for guidance; however, without considering the use of regulator discretion to allow for alternative forms of reserve security. The Rector Report suggested the use of a PBR that is covered by primary assets, and the difference up to statutory reserves to be covered by other assets. PBR has not been adopted to date and may not ultimately be adopted. Current statutory reserves should remain the current reserve standard and should be secured as required by the provisions of the Model Reinsurance Law, again without regulator discretion as to security. In addition to the utilization of the Model Reinsurance Law, provisions should be established to require full disclosure of the XXX and AXXX reinsurance relationship within the notes of the ceding insurer's financial statements. As an additional capital adequacy measure, the domestic regulators should direct the ceding insurers to provide a consolidated RBC that would include the recapture of the XXX and/or AXXX reinsurance agreement(s). As with any reinsurance relationship, the burden should be imposed upon the ceding insurer, not the assuming insurer. Regulators can implement these guidelines immediately, with specific guidance on RBC consolidation and disclosure requirements furnished in the near future. 18

18 The Honorable John M. Huff Page 3 May 7, 2014 In conclusion, the Arizona Department of Insurance does not support the F Committee's proposal to redefine the definition of "multi-state insurer." Laws already exist that diminish the risk that these reinsurers and other captives may impose upon a ceding insurer, including oversight by regulators. I appreciate you taking the time to review my concerns, and I am available at your convenience if I have raised any points that you would like to discuss. Sincerely, ;2-,4.~ Kurt A. Regner cc: Financial Regulations Standards and Accreditation Committee 19

19 May 8, 2014 Via Federal Express Mr. Adam Hamm President National Association of Insurance Commissioners c/o North Dakota Department of Insurance 600 E. Boulevard Ave. Bismark, ND RE: NAIC Proposal to Change Definition of a Multi-State Reinsurer Dear Mr. Hamm: I am writing to make you aware of SIIA's strong opposition to a proposal by Superintendent Joseph Torti that would include "multi-state reinsurers" within NAIC accreditation standards. This proposal is currently pending in the Financial Regulation Standards and Accreditation (F) Committee. SIIA is a national trade association that represents the business interests of companies involved in the self-insurance marketplace. Its membership includes captive managers and other service providers who collectively support hundreds of captive insurance companies throughout the country. As you know, the current NAIC policy statement on multi-state domestic insurers specifically excludes captive insurance companies. While Superintendent Torti has stated his proposal would only affect XXX life insurance reinsurance captives, poor drafting and the lack of clarifying public comments lead us to conclude that there will be a broader application if it is not rejected in its entirety or amended to address specific industry concerns. We believe this proposal incorrectly assumes that a reinsurance captive is doing business in another state because the reinsurance it provides to another carriers covering risks in another state. Notwithstanding this fundamental misunderstanding of the insurance marketplace, our view is that the proposal is simply not necessary as the existing regulatory structure already ensures that captive reinsurance arrangements are closely monitored with regard to financial solvency considerations. For example, the regulator of the ceding insurer has to approve the credit for reinsurance provided by the captive reinsurer, which would generally include collateral in the form of a trust, letter of credit, or funds withheld from the reinsurer. Moreover, the regulator of the 21

20 captive has to approve the captive reinsurer's business plan and financial filings showing this and other transactions. Finally, SIIA questions whether the NAIC is following its own procedures with regard to changes to existing accreditation standards. For these reasons, we respectfully request that the NAIC leadership take appropriate action to ensure that the referenced proposal is not adopted in its current form. Please let me know if you have any questions or would like to discuss this matter in more detail. Sincerely, Michael W. Ferguson President & CEO cc: Mr. Les Boughner, SIIA Chairman of the Board Ms. Monica Lindeen, NAIC President-Elect 22

21 May 12, 2014 Director John M. Huff, Chair Financial Regulation Standards and Accreditation (F) Committee National Association of Insurer Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO Dear Director Huff: Re: Proposed Definition of Multi-State Reinsurers The Vermont Captive Insurance Association ( VCIA ) appreciates the opportunity to comment on the Financial Regulation Standards and Accreditation (F) Committee s ( Committee ) proposed revisions to the definition of multi-state reinsurer in the Part A and Part B preambles of the standards for state accreditation. Specifically, the Committee is proposing to define a multi-state reinsurer as an insurer assuming business that is directly written in more than one state and/or in any state other than its state of domicile. The VCIA is composed of nearly 500 member companies and is the largest captive insurance trade association in the world. The VCIA recognizes the intention behind the efforts of the Committee members and National Association of Insurance Commissioners ( NAIC ) staff to study and clarify the definition of multi-state reinsurer. In general, the VCIA supports efforts to eliminate inconsistencies and provide guidance regarding the use of captives and special purpose vehicles (SPVs). However, the VCIA respectfully urges the Committee to reconsider the proposed, overly inclusive definition of multi-state reinsurer for several reasons. First, the suggested definition is overly broad and would encompass a number of alternative arrangements not currently covered or envisioned in the accreditation standards process, thereby unnecessarily imposing NAIC accreditation standards on almost all captive reinsurance transactions. For example, the proposed definition would encompass fronting or pooling arrangements and many captive reinsurers other than SPVs created by life insurance industry participants. As a result, the Committee s proposal would impact not only life reinsurance captives, but other captive insurers that currently operate under a robust system of state supervision and regulation. 23

22 VCIA letter to Director Huff May 9, 2014 Financial Regulation Standards and Accreditation (F) Committee Page 2 of 3 Second, the Committee s proposed language is vague and unclear. The Committee uses the phrases assuming business and directly written without clarifying whether this includes risks underwritten in a non-domiciliary state or whether the insurer must physically be writing business in that state. A captive insurer generally writes business in its state of domicile, which is traditionally how most captive insurers conduct business. Third, the proposed accelerated effective date for including captive reinsurers under the multi-state reinsurance accreditation requirements (July 1, 2014 but January 1, 2015 for reinsurance agreements entered into before July 1, 2014) is too short to allow states time to fully prepare for these significant changes, if they are ultimately adopted. Fourth, imposing NAIC accreditation standards on most captive reinsurers by including them in the definition of multi-state reinsurer not only would have a chilling effect on the formation of domestic captives, but also would drive existing captive reinsurers offshore and out of reach of U.S. regulators. Fifth, a captive insurer traditionally only does business in the state of domicile which has regulatory jurisdiction over the captive. Generally, states may regulate an insurer that is transacting business within the state. Transacting business is defined by law in many states as (1) solicitation, (2) negotiation, (3) execution of a contract, or (4) transactions in the state subsequent to execution of a contract arising out of that contract. By these criteria, captive insurers do business only in the domiciliary state and are not subject to the regulatory jurisdiction of other states, although a policy issued by the captive insurer may cover risks in other states. The attempt to subject captive insurers to the regulatory jurisdiction of non-domiciliary states would run afoul of limitations established by the McCarran-Ferguson Act as well as the Due Process Clause of the U.S. Constitution. VCIA believes the change in the definition of multi-state insurer is not necessary to address perceived concerns about the use of SPVs by life insurers. Under the law of every state, the regulator of the ceding insurer has the authority to approve a reinsurance transaction and the domestic regulator of the captive insurer also has authority over the transaction. The issue appears to be how to provide more transparency of captive reinsurers whose activities may have an effect on the general public, as opposed to a defined group. VCIA would support greater transparency in these arrangements. The Committee should delay taking any action on the proposed multi-state definition of captive reinsurers until more thought and consideration have been given to other options to address the need for improved transparency. The Committee could address the transparency issue of life insurer-owned SPVs by referring directly to such arrangements and thereby avoid the unintended consequences that will surely result from the proposed definition of multi-state reinsurer. 24

23 VCIA letter to Director Huff May 9, 2014 Financial Regulation Standards and Accreditation (F) Committee Page 3 of 3 VCIA appreciates the opportunity to provide these comments on behalf of its members. Respectfully submitted, Richard Smith President cc: Daniel Schelp, Managing Counsel Julie Garber 180 Battery Street Burlington, Vermont phone: fax: vcia@vcia.com 25

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25 KAREN WELDIN STEWART INSURANCE COMMISSIONER December 12, 2013 To: Director John Huff, Chair, Financial Regulation Standards and Accreditation (F) Committee From: Steve Kinion, Director, Bureau of Captive and Financial Insurance Products Re: Response to December 2, 2013 Memorandum from Superintendent Torti On behalf of Commissioner Stewart, I present this memorandum in response to the December 2 memorandum sent to the F Committee by Rhode Island Superintendent Joseph Torti. In his memorandum Superintendent Torti requests that the F Committee consider changing the definition of multi-state insurer for purposes of the NAIC s accreditation program so that it includes captive insurance companies. If this request becomes effective, then any captive insurer that reinsures risks located in a state other than the captive s domiciliary state would be subject to the accreditation standards. While the thrust of Superintendent Torti s request regards lifeinsurer owned captive insurers which reinsure XXX and AXXX excess reserves, the request would encompass practically all captives which act as reinsurers. Last August Superintendent Torti presented the same memorandum and at that time the Delaware Insurance Department replied that it opposed adopting the accreditation standards for life-insurer owned captive insurers. Delaware s position has not changed. Below are the enumerated reasons why Delaware s position has not changed. First, the application of the accreditation standards to these captives would directly conflict with not only Delaware law, but very likely the laws of the 30 plus states that are now captive insurance domiciles. Chapter 69 of the Delaware Insurance Code specifically exempts captive insurers from all other provisions of the insurance code unless otherwise stated. For purposes of Superintendent Torti s request this means captive insurers are exempt from Parts A through D of the accreditation standards. When states are required to adopt laws in order to satisfy accreditation requirements, it typically means adding new laws. In order to implement Superintendent Torti s request it would mean changing existing laws, which in states like Bureau of Captive and Financial Insurance Products 820 N. French Street, Room 325A Wilmington, Delaware Telephone Facsimile

26 Director John Huff December 12, 2013 Page 2 Delaware have been in place for many years. In Delaware s case it would mean asking the Delaware General Assembly to change a public policy it enacted years ago and for which no instate constituency desires a change. Seeking such change will be a formidable challenge, especially because the facts do not support doing so. Second, Superintendent Torti s request is premature. The NAIC is only beginning to gather data about life-insurer owned captive insurers that reinsure XXX and AXXX excess reserves. Consider the status quo: (1) only last August did the Financial Analysis Working Group begin to collect information for its survey regarding these types of captives and the FAWG s work continues; (2) the final report prepared by Rector & Associates for these life insurer-owned captives is not complete and less than three months ago the Principle-Based Reserving Implementation Task Force received Rector & Associates initial report; (3) the initial report did not offer any final recommendations, but instead posed questions for the PBR Task Force s consideration; (4) the initial report does not recommend making the regulation of these captives an accreditation standard it merely mentions doing so; and, (5) the initial report is clear that if the NAIC intends to develop uniform regulatory standards for life-insurer owned captives, then a monumental amount of work remains to be done. Third, the monumental amount of work regarding how to regulate life insurer-owned captives is only beginning. There is much work to complete in order to develop guidance for the states in regard to regulating life-insurer owned captives. If the NAIC is to follow its own recommendations, it must first develop guidance, and then consider any accreditation standards. The NAIC s Captive & Special Purpose Vehicle White Paper on page 32 is clear when it states that additional guidance must be developed by the NAIC before considering any accreditation questions, To the extent affiliated captives and SPVs may be created in the future for purposes unseen today, additional guidance should be developed by the NAIC to assist the states in a uniform review of transactions, including recommendations for minimum analysis to be performed, as well as ongoing monitoring of the ceding insurer, the captive and the holding company. The guidance should be developed for perspectives of the ceding state, the captive state and the lead state. Once developed, the guidance should be considered to be added to the NAIC Financial Regulation Standards and Accreditation Program standards to ensure consistency and uniformity among the states. The status quo is that life insurer-owned captives and SPVs are being created and will continue to be created. The NAIC has not yet taken some important steps to develop and complete guidance that assists states in reviewing these transactions. One untaken step is selecting the membership of the Captives (EX) Working Group. The Delaware Insurance Department believes it is a critical step to appoint the members of this working group. To support Delaware s position, it refers to the following passage on page 12 of the August 24, 2013 version of the Principles-Based Reserving Implementation Plan, 30

27 Director John Huff December 12, 2013 Page 3 The NAIC needs to further assess the solvency implications of life insurer-owned captive insurers and other alternative mechanisms in the context of PBR. The solution for captives and SPVs within the context of PBR will be largely based on Captives and Special Purpose Vehicle (SPV) Use (E) Subgroup s report as adopted by the Financial Condition (E) Committee and referred to the PBR Implementation (EX) Task Force. The Task Force will create a Working Group to concentrate on this issue and propose the way forward. Via the captive white paper and PBR Task Force, the NAIC has created a road map for addressing life insurer-owned captives. It is important to continue down the existing road map and not detour to pursue requests that are premature. Today, a monumental amount of work remains to be done in order to reach some type of resolution for life insurer-owned captives. Only after that work is completed will Superintendent Torti s request to impose accreditation standards on life insurer-owned captives become a topic that is ripe for discussion. Thank you for your consideration of this memorandum and if necessary, I look forward to any further dialogue on this topic. 31

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32 P.O. Box 2815 Honolulu, Hawaii May 15, 2014 John Huff Director, Missouri Insurance Department Chairman, F Committee National Association of Insurance Commissioners 1100 Walnut St., Suite 1500 Kansas City, MO Sent via to: NAIC Staff, Julie Garber, jgarber@naic.org Re: NAIC Staff Proposal to Change the Definition of a Multi-State Reinsurer On behalf of the Board of Directors and membership of the Hawaii Captive Insurance Council, we write to express our deep concern with the proposal introduced by Superintendent Torti (RI) that would include multi-state reinsurers within the Part A and B Accreditation Standards ( Proposal ). The Proposal would include captives reinsuring risks in any state other than its state of domicile within the definition of a multi-state reinsurer. Superintendent Torti has publicly stated as recently as the end of last month at a conference in New York City that the Proposal was intended only to address life insurer-owned reinsurance captives used for XXX and AXXX reinsurance transactions. About the Hawaii Captive Insurance Council: The HCIC is a non-profit industry association committed to promoting, developing, and maintaining a quality captive industry in the State of Hawaii. HCIC seeks to unify and support captive owners, regulators, legislators, and captive service providers on issues and initiatives to maintain Hawaii as a world-class captive domicile. Effect of the Proposal, if Adopted: The Proposal would require captive reinsurers to adhere to all NAIC Accreditation Standards, including laws and regulations relating to capital and surplus, market conduct, accounting and reporting, etc. In other words, a multi-state reinsurer would have to adhere to all the requirements of a traditional insurer. Compliance with the Proposal would add significant cost and regulatory burden for both captives and insurance departments across the nation. Hawaii has enjoyed a long history of prudent regulation of captives domiciled in the state, and is currently home to 188 captive insurers. NAIC staff have commented that the Proposal is not intended to place a moratorium on captive transactions, or to drive captive business off shore. However, this is exactly what will happen if the Proposal is adopted in its current form. We believe the Proposal will unnecessarily and detrimentally impact a far greater number of captive insurers and reinsurers than was intended. 37

33 Mr. John Huff May 15, 2014 Page 2 Specific Concerns with the Proposal: 1. The Proposal is ambiguous and overbroad. As noted above, notwithstanding the stated intent to apply only to captives owned by life insurers that are reinsuring XXX and AXXX transactions, the Proposal as drafted actually applies to a much broader spectrum of captives. Additionally, there are key terms used in the Proposal that are undefined which, if left undefined, could lead to improper and inconsistent interpretation, thus running counter to the stated desire of achieving regulatory uniformity. 2. The Proposal is based on the faulty legal premise that a reinsurance captive is doing business in another state just because the reinsurance it provides to another carrier covers risks in a non-domiciliary state. 3. The Proposal violates and contradicts the Nonadmitted Risk and Reinsurance Act (title v. of the Dodd Frank federal law). Under the NRRA, only the domiciliary regulators of ceding insurers are permitted to regulate reinsurance transactions with reinsurers domiciled in other states. The Proposal would open the door for non-domiciliary regulators to regulate those transactions in direct contravention of the NRRA, and would in fact destroy the uniformity of regulation of such transactions that the NRRA currently provides. 4. The Proposal is unnecessary because: a. The domiciliary regulator (in an NAIC accredited state) of a ceding insurer already must approve a ceding insurer s attempt to take credit for reinsurance ceded to a captive. b. If the captive reinsurer is an affiliate of the ceding insurer (i.e., within the same insurance holding company system as the ceding insurer), the captive reinsurance transaction must already be disclosed to and approved by the domiciliary regulator (in an NAIC accredited state) of the ceding company in both the ceding insurer s annual statement and in its insurance holding company filings, thus addressing concerns for appropriate disclosure and transparency of such transactions. 5. The Proposal contains an exemption for captive insurers owned by non-insurance entities and for the management of their own risk. First, the term own risk is a key term, but it is not defined. Second, it is far too limiting. Restricting the exemption to non-life captive insurers that reinsure their own risk would mean that group captives, 38

34 Mr. John Huff May 15, 2014 Page 3 risk pools, agency captives, branch captives, reciprocals and even pure captives with any third party risk would unnecessarily be treated like traditional insurers. 6. The Proposal has a grandfather provision, which is unreasonably short, only covering business written before July 1, It is not clear if the NAIC is following its own procedures for adopting or changing existing accreditation standards, which raises the question whether the NAIC is imposing a standard upon the several states without going through its own due process. 8. The Proposal arises out of the concern over the use by certain life insurers of captive reinsurers and special purpose vehicles to address XXX and AXXX reserves. The NAIC has already adopted a solution for the root underlying issue (XXX and AXXX reserves) in the form of Principles-Based Reserving, which is in the process of being adopted by the several states. 9. There is no evidence that any captives (life-insurer owned or otherwise) have created issues or problems that require the adoption of the Proposal. Conclusion: Captives have long served as alternative risk financing structures where insurance coverage is either unavailable or prohibitively expensive. Thus, captives fulfill a real and legitimate need for their insureds. Captives have provided important insurance solutions to countless U.S. businesses through prudent funding and management of risk in a controlled and regulated fashion. The Proposal will negate years of effort on the part of U.S. captive domiciles to create a welcoming yet well-regulated environment for captive insurance companies. Based on the foregoing, we request that the NAIC reject the Proposal. Thank you for your consideration. Sincerely, HCIC Board of Directors Cc: Hawaii Insurance Commissioner, Gordon Ito Hawaii Acting Captive Insurance Administrator, Sanford Saito Hawaii Director of Department of Commerce & Consumer Affairs, Keali`I Lopez 39

35 Date: May 15, 2014 To: John M. Huff; Director, Missouri Insurance Department Chair, Financial Regulation Standards and Accreditation (F) Committee From: Lockton Companies Risk Finance Group Mark E. Morris, CPA SVP; Lisa K. Wall, CPA, SVP; Diane Crowe, VP Re: NAIC Revisions to Multi-State Reinsurer Definition & Associated Accreditation Standards Imposed on Captive Insurance Companies The purpose of this communication is to comment on the NAIC proposed change in definition for Multi-State Reinsurers and the impact the accreditation standards would have on captive insurance companies. As you may be aware, Lockton has a robust captive practice with over 130 different single parent captive programs in 18 different domiciles (onshore and offshore) under our consultation. Domestically, we currently consult on captive programs domiciled in Vermont, Delaware, New York, South Carolina, Missouri, Texas, Oklahoma, Arkansas, Utah, Nevada, Arizona and Hawaii and these captives insure risk in all fifty states. We believe our extensive experience with our captive clients, the admitted insurance companies involved in their programs, and the various state captive regulators put us in a position to offer guidance on the proposed changes to the definition of Multi-State Reinsurers. As we followed the NAIC involvement as it respects captive insurance, we originally thought the intent was to regulate captive reinsurers of life insurance business. The proposed revisions to the definition of Multi-State Reinsurer go well beyond programs that write life insurance. Further, we do not believe they take into account all the potential ramifications of the changes. Our comments and/or concerns are identified below. Limited Comment Period The proposed changes to the definition of Multi-State Reinsurer seem to have fairly significant and far reaching consequences, especially for a comment period of only 45 days. The time frame seems entirely too short given the magnitude of the proposed changes. In the past, the NAIC has taken a more measured approach by allowing potentially affected classes adequate time to digest and understand the ramifications of the change. Reason for Change is Not Fully Explained We believe any proposed change in regulation should be in response to a clear problem. The change in definition of a Multi-state reinsurer could significantly increase costs of operation and add administrative burden in LOCKTON COMPANIES 444 W 47th Street, Suite 900 / Kansas City, MO / FAX:

36 Page 2 May 15, 2014 compliance. To date, aside from concerns on transparency brought forth by a few officials in limited states, we don't have any evidence of a problem that would require an overhaul of the current definition. Regulations are Ambiguous Further to our point above, there is not a clearly defined problem, nor have the changes been interpreted in a uniform manner by those that have already weighed in on this issue. Any change must be clearly defined to avoid ambiguous legislation that creates a burden for a class of captives that have not demonstrated any harm to the industry. Summary We believe the captive industry in the United States is thriving. In the recent past, many captives were formed offshore, but now there are great domestic captive domicile options. In the space of ten years, the captive landscape has shifted and now, most captives owned by US entities domicile onshore. We would not want to see regulatory changes move captives back to offshore domiciles. There are several states that have enacted sound captive regulations and built a solid team of captive regulators. The captive industry is performing well and we believe any laws regulating captives should be clearly defined with an articulated need for the change. Our opinion is that this proposed revision falls short on both accounts. Sincerely, Lockton Risk Finance Practice ` 42

37 Paul Graham Senior Vice President, Insurance Regulation & Chief Actuary (202) t (866) f paulgraham@acli.com May 16, 2014 The Honorable John Huff Director Missouri Department of Insurance Fin. Institutions & Prof. Registration (DIFP) P.0. Box 690 Jefferson City, Missouri RE: Exposure of Changes to Preamble to Part A and Part B Accreditation Standards to add a definition of Multi-state Reinsurer Dear Director Huff: The ACLI 1 appreciates the opportunity to provide our comments on the recent exposure draft of proposed changes to the Preambles of the Part A and Part B Accreditation Standards. Introduction ACLI continues to support life insurers use of captives and their appropriate regulation. ACLI is committed to ensuring that captives can meet their reinsurance obligations. We believe that well regulated captive transactions provide a useful financing mechanism that helps lower the cost of life insurance for consumers. It is important to keep this in mind as we endeavor to increase the regulatory oversight of these transactions. It is also important to keep in mind what problem regulators are trying to solve. We have heard numerous references by regulators to a regulatory gap that exists in regards to the supervision of captive reinsurers. It is difficult to determine exactly what that means. In fact, every state that licenses captive reinsurers has laws and regulations under which those captives are being regulated. It would not appear that there is a regulatory gap, but rather a lack of transparency and a need for much more uniformity in the regulation of captive transactions. To that end, ACLI has previously submitted to the PBR Implementation (EX) Task Force two proposals that directly address those regulatory concerns. ACLI recommends that the NAIC review those proposals as a means to fill in this perceived regulatory gap. Executive Summary ACLI opposes the proposed changes to the Preambles of Part A and Part B Accreditation Standards to include insurance-owned captive reinsurers. Regardless of how this proposal is characterized, it would 1 The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association with approximately 300 member companies operating in the United States and abroad. ACLI advocates in federal, state, and international forums for public policy that supports the industry marketplace and the 75 million American families that rely on life insurers products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, and reinsurance, representing more than 90 percent of industry assets and premiums. Learn more at American Council of Life Insurers 101 Constitution Avenue, NW, Washington, DC Page 1 43

38 Page 2 of 4 create material new accreditation standards with extremely significant ramifications. It would usurp the authority of state legislatures and place many states at immediate risk for loss of accreditation. For companies, the result would be tantamount to an immediate and permanent moratorium on all new on-shore captive reinsurers after July 1, Such a result would render meaningless the work of the PBR Implementation (EX) Task Force to address some of the recommendations expressed in Captives and Special Purpose Vehicles NAIC White Paper dated June 6, Authority Concerns A majority of state legislatures have given their insurance departments certain authorities relative to captive insurers and have adopted laws to govern those insurers. This proposal, without appropriate due process, would circumvent those authorities. Undoubtedly legislators, governors and others would feel entitled to be notified of, and have the opportunity to comment on proposals to expand accreditation requirements. It is for this very reason that the Financial Regulation Standards and Accreditation Program ( Accreditation Program ) requires that when changes to accreditation standards are being considered, notice and opportunity to comment must be provided to, among others, consumer groups, the National Conference of State Legislatures, the National Governors Association, and the National Conference of Insurance Legislators. If the changes to the accreditation standards are adopted as proposed, the accreditation status of every one of those states with captive reinsurance laws on their books would immediately be called into question if any provision of their captive laws and regulations differs from the accreditation standards. These states would not be afforded a period of time to bring their laws into harmony with the new standards as would be the case if the new accreditation standards were adopted pursuant to the Accreditation Program s specified governance procedures. Process Concerns The NAIC has an established process, adopted in 1998, for adding to or changing financial standards that are contained in the Part A accreditation requirements. The process includes extensive input from public officials, consumers, academics, regulators and industry representatives when changes in the Accreditation Program are considered. In addition, any suggested additions or changes to the accreditation standards are supposed to be accompanied by the following: 1. A statement and explanation of how the proposed addition or change is directly related to solvency surveillance and why the proposal should be included in the Standards. 2. A statement as to why ultimate adoption by every jurisdiction may be desirable. 3. A statement as to the number of jurisdictions that have adopted and implemented the proposal or a similar proposal and their experience to date. 4. A statement as to the provisions needed to meet the minimum requirements of the standard. That is, whether a state would be required to have substantially similar language or rather a regulatory framework. If it is proposed that substantially similar language is required, the referring committee, task force or working group shall recommend those items that should be considered significant elements. 5. An estimate of the cost for insurance companies to comply with the proposal and the impact on state insurance departments to enforce it, if reasonably quantifiable. Unfortunately, none of the elements of this process have been followed even though a change to the Preamble is a de facto change to nineteen Part A financial standards to include captives within those standards. We recommend that regulators review each of those nineteen financial standards to determine if they are appropriate to be applied to captives. 44

39 Page 3 of 4 The Accreditation Program is sometimes considered to be the crown jewel of today s state regulatory framework. The NAIC risks diminishing the credibility of that program by disregarding due process safeguards designed to assure that its standards are carefully and thoughtfully developed and implemented. Inconsistent with Goals of Accreditation Program According to the NAIC s Pamphlet on the Accreditation Program, the purpose of the Accreditation Standards is as follows: 1. It allows for inter-state cooperation and reduces regulatory redundancies; 2. If a company is domiciled in an accredited state, the other states in which that company is licensed and/or writes business may be assured that the domicilliary state insurance department is adequately monitoring the financial solvency of that company; and, 3. In lieu of performing its own examination, a state may accept the examination report prepared by an insurance department that was accredited at the time of examination. Under this description of purpose, it is difficult to consider captive reinsurers as having a multi-state presence. They are licensed to operate in, at most, two states, and, in some cases, only one (ceding company domicile and captive reinsurer domicile). States in which captives are not licensed to do business have no reason to examine the captive, and are not authorized to do so. Those states protect the consumer by regulating the ceding companies directly doing business in their states. And, the domiciles of the ceding company and captive reinsurer are already examining the captive transactions, both at the time of the transaction and on an ongoing basis. Therefore, there is no practical regulatory reason for captives to be subjected to accreditation requirements. As Rector & Associates pointed out in its February 17, 2014 report to the PBR Implementatin (EX) Task Force, Our recommmendations also are not an attempt to regulate captives. In our opinion, addressing the regulatory concerns regarding reserve financing transactions by focusing on the regulation of the assuming insurers will ultimately fail and will lead to finanancing transactions moving off-shore or otherwise out of the reach of U.S. regulators. Instead of focusing on regulation of the assuming insurer, our recommendations focus almost exclusively on regulation of the direct/ceding insurer... Thus, new enhanced requirements being developed by the PBR Implementation (EX) Task Force, which apply to the ceding company, should be considered for addition to existing accreditation standards, with the appropriate due process. Unintended Consequences Notwithstanding the comments made at the March NAIC meeting in Orlando of the Financial Regulation Standards and Accreditation (F) Committee, subjecting captive reinsurers to all of the Part A Accreditation Standards would effectively put a moratorium on virtually all onshore captives affilliated with insurers. This moratorium would include captives established for purposes other than the financing of Regulation XXX/AXXX reserves, which is well beyond the NAIC s stated scope of the captives project. This de facto moratorium is a result of the fact that, consistent with existing laws, most captive reinsurers have different capital and accounting requirements and are not subject to Actuarial Opinion and Memorandum Regulation (AOMR). Therefore, the proposed change would effectively require state legislatures to enact new laws before such states would agree to the formation of new captives. If a state were to choose not to conform its captive-related laws to the accreditation standards, another unintended consequence would occur. Because the state would lose it accredited status, its domestic insurers would be subject to multiple financial examinations, even though those insurers are, in fact, 45

40 Page 4 of 4 being subject to all the Part A standards and the regulator is following the Parts B and C standards. However, the captive reinsurers would be unaffected by loss of accreditation, since no other jurisdictions are relying upon the domestic regulator s financial examinations. This would seem to be a perverse outcome of a state s non-compliance with the new requirements. Also, the proposed change would have no effect on offshore captives. It would seem to be a step backwards to only allow captive reinsurers that are licensed outside of the U.S. to enter into captive transactions with U.S. insurers. Interaction with the Rector Report The proposed revisions call into question the NAIC s entire workplan for dealing with issues involving captives. At the March NAIC meeting in Orlando, Dan Schelp, on the NAIC legal staff, said the following: 1. While we did not limit the application of the revisions to XXX & AXXX reserves, there was a recognition that these revisions would potentially be impacted by the recommendations to the PBR Implementation Task Force contained in the Rector Report. ; 2. There was some initial concern as to whether the proposed revisions would be inconsistent with the approach recommended in the Rector Report, assuming the NAIC decides to go down that path. ; 3. However, upon close review, it appears that the Rector Report could be compatible with the proposed revisions, because it recommends that the framework would be codified through the adoption of a new XXX and AXXX Reinsurance Model Regulation, which provides for disclosure of these captive transactions and would be made part of the accreditation standards. ; 4. Captive reinsurance transactions that would comply with this new model regulation would be considered to be in compliance with the accreditation requirements. ; and, 5. As we state in the Drafting Note, it may be necessary to further revise the preamble upon adoption of the Rector Recommendations. If the NAIC staff who drafted the proposal are unclear how this proposal will interact wtih the work being undertaken by the PBR Implementation (EX) Task Force, we think it is reasonable to conclude that others, including regulators and insurance companies, will have as much or more uncertainty. Accordingly, we recommend that action on this proposal be deferred until such time as the PBR Implementation (EX) Task Force completes its work. Then, the NAIC can evaluate what changes, if any, need to be made to the accreditation standards to address captives. Conclusion In summary, we do not believe that the changes proposed are warranted or will enhance policyholder protection. In addition, this proposal appears to be a step backward in addressing the use and regulation of captives. Therefore, we urge you to withdraw the proposed changes to the Preambles of Part A and Part B Accreditation Standards. We thank you for your consideration of our views and look forward to working with you. If you have any questions or concerns, please feel free to call me at (202) Sincerely, Paul S. Graham, III, FSA, MAAA cc: Members, NAIC Financial Regulation Standards and Accreditation (F) Committee 46

41 KAREN WELDIN STEWART INSURANCE COMMISSIONER May 16, 2014 To: Director John Huff, Chair, NAIC F Committee From: Steve Kinion, Director, Bureau of Captive and Financial Insurance Products Re: Proposal to Redefine Multi-State Insurer On behalf of Commissioner Stewart, I am submitting this memorandum as a comment in strong opposition to the proposal to change the definition of multi-state insurer. Commissioner Stewart has a long record of consistently challenging unnecessary regulatory encroachment upon captive insurers. Because of her steadfast position, Delaware has become the leading voice within the NAIC as both the proponent and defender of the captive insurance industry. Commissioner Stewart also objects to the hurried process the F Committee is taking in regard to captive insurers. Normally an accreditation question is a deliberate process that allows one year for interested parties to comment and identify unintended consequences. Unfortunately, the F Committee in this case is unjustifiably removing 320 days of deliberation in spite of the fact that no systemic or specific financial risk has been identified involving captive insurers. Below are four reasons why Commissioner Stewart opposes this proposal. Commissioner Stewart also proposes a solution to replace the fragmented, schizophrenic, and undisciplined approach the NAIC is taking toward captive insurers. 1. The NAIC Should not Make Life Insurance More Costly and Less Affordable One of Commissioner Stewart s concerns with the overall debate within the NAIC regarding captive insurers is that despite the time and resources spent on investigating captives, very little effort has been made addressing the consequences for the consumer. The F Committee has made no effort to address two questions which are: (1) If the F Committee s proposal is adopted by the NAIC, what will be the cost for consumers? (2) Will the adopted proposal make life insurance more costly and less affordable? Bureau of Captive and Financial Insurance Products 820 N. French Street, Room 325A Wilmington, Delaware Telephone Facsimile Delaware is the 3 rd Largest U.S. and the World s 6 th Largest Captive Insurance Domicile

42 Director John Huff, Chair, F Committee May 16, 2014 Page 2 If the proposal to redefine multi-state insurer is adopted, it will make certain forms of life insurance more costly and less affordable. The expanded definition will result in insurers facing much greater significant capital demands. Insurers will be forced to raise premiums charged to consumers to meet market return on equity expectations and surplus requirements. For a short period of time, some insurers will absorb the extra cost of capital. However, the long-term consequences are that insurers will have to contribute more capital depending upon the insurer s determination of appropriate company action level capitalization ratios. If the NAIC adopts this proposal, premium rates will soon rise by an amount the regulatory community has yet to identify. Because the regulatory community does not know and understand the impact on consumers, the F Committee should decline to approve this proposal. 2. No Systemic Risk or a Particular Risk Related to Captive Insurers Exists To date, no one has identified an actual risk related to captives on either a systemic or specific basis. A systemic risk is an issue inherent in the concept of using captive reinsurers, while a specific basis is when a particular captive presents a risk of failure. An important policy question for the insurance commissioners who compose the F Committee is whether they are ready to cast a vote in favor of the proposal and the consequence of that vote being that certain life insurance products become more costly and less affordable for the citizens of their states in the absence of either a systemic or specific risk. 3. The Proposal Encompasses Many Forms of Captive Insurance Although the original intent of the effort to redefine multi-state insurer may have been directed at captive insurance companies owned by life insurance companies, the proposal includes many other forms of captive insurers. A key sentence within the proposal is, Captive insurers owned by non-insurance entities for the management of their own risk will continue to be exempted from both the Part A and Part B accreditation requirements. The own risk requirement means that a captive insurer may only write the own risk of its owner and not any other risk. The following types of captive insurers will be subject to the accreditation standards if this revised definition is adopted by the NAIC: association or group captives captive insurers writing controlled unaffiliated business sponsored cell captives with participants and participant contracts reciprocal captives agency captives captives insuring employee benefits a series of a limited liability company or statutory trust formed as a pooling arrangement for risk distribution purposes 48

43 Director John Huff, Chair, F Committee May 16, 2014 Page 3 any other form of captive insurance arrangement wherein the insured risk, whether on a direct or reinsured basis, is not 100 percent the own risk of the captive owner If the NAIC adopts this new definition for multi-state insurer, then the above listed captives will have to abide by the same laws applicable to either a commercial life or property & casualty insurer. This means that many businesses throughout the United States will lose the alternative risk transfer benefits offered by captive insurers resulting in higher operating costs. This proposal is an example of needless and costly overregulation at a time when our national economy is showing signs of recovery. 4. The Proposal will Create an Exodus to Offshore Domiciles If adopted, this proposal to redefine multi-state insurer will create an exodus of captive insurers from the states to offshore captive domiciles where the accreditation standards do not apply. Such a result will be economically harmful to states like Delaware which have invested time and resources to build successful captive programs. The harm this proposal will create is that it will deny the captive domicile states tax and fee revenue while shifting these same dollars to offshore domiciles. It will deny U.S. based banks captive insurance company deposits and fee income, while shifting these deposits and income to offshore banks. It will deny U.S. based service providers such as captive managers, accountants, and attorneys captive insurance company clients and fee income, while shifting these clients and income to service providers in offshore domiciles. The irony of this proposal is that at a time when the U.S. Government is encouraging the shift of monies from offshore locales back to the U.S. in order to stimulate economic growth, the F Committee s proposal does the opposite. - Commissioner Stewart s Three Step Solution - Transfer the Captive Insurance Discussion to the Captives (EX) Working Group Commissioner Stewart believes that the NAIC should cease its schizophrenic approach to addressing captives. Instead of one centralized working group to address captives, the NAIC is using three separate approaches. First, the Financial Analysis Working Group (FAWG) conducted a survey of life-insurer owned captive insurers. Second, this F Committee is considering whether life-insurer owned captive insurers should be subject to the accreditation standards. Third, the PBR Task Force is considering the Rector Report. Instead of continuing with this fragmented and schizophrenic approach, Commissioner Stewart believes in a one stop shop by having one working group address all captive issues. Such a working group has existed since last July. It is the Captives (EX) Working Group. Unfortunately, not a single state has been appointed to it. 49

44 Director John Huff, Chair, F Committee May 16, 2014 Page 4 Last summer the members of the NAIC voted to adopt the Principles-Based Reserving Implementation Plan. This plan created the Captives (EX) Working Group. Page 12 of the PBR Implementation Plan reads, The NAIC needs to further assess the solvency implications of life insurer-owned captive insurers and other alternative mechanisms in the context of PBR. The solution for captives and SPVs within the context of PBR will be largely based on Captives and Special Purpose Vehicle (SPV) Use (E) Subgroup s report as adopted by the Financial Condition (E) Committee and referred to the PBR Implementation (EX) Task Force. The Task Force will create a Working Group to concentrate on this issue and propose the way forward. Via the PBR Implementation Plan, the NAIC created a road map for addressing life insurerowned captives. Unfortunately, the NAIC is not following the map it created. Commissioner Stewart s solution merely gets the NAIC back on track in three simple steps. First, populate the Captives (EX) Working Group primarily with both regulators who regulate life reinsurance captive insurers and regulators who have domestic life companies that cede risk to these insurers. Second, transfer all captive insurance matters before the NAIC to this working group. Third, allow this working group to fulfill the charge given in the PBR Implementation Plan which is to concentrate on the captive insurance issue and propose a way forward. Commissioner Stewart is ready to have her staff devote the time and resources, including taking a leadership role as chair or vice chair, in order to make this working group a success. Thank you for considering this memorandum and I look forward to addressing the F Committee about this matter at the next meeting in Louisville. 50

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46 Sunday, May 18, 2014 I agree with the comments made by Delaware and the Captive Insurance Companies Association on the multi-state insurer proposal. Charles J. Lavelle Partner and Chair, Federal Tax Team Bingham Greenebaum Doll LLP 3500 National City Tower 101 S. Fifth Street, Suite 3500 Louisville, KY, Direct: Fax: clavelle@bgdlegal.com Follow us on Twitter Visit our Blog: 53

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58 2101 L Street NW Suite 400 Washington, DC Fax May 19, National Association of Insurance Commissioners NAIC Central Office 1100 Walnut Street, Suite 1500 Kansas City, MO Attn: Ms. Julie Garber Senior Accreditation Manager Via jgarber@naic.org Re: (F) Committee s Proposed Revisions to the Multi-State Reinsurer Definition The American Insurance Association (AIA) appreciates the opportunity to submit comments on the National Association of Insurance Commissioners (NAIC) request for comments on the (F) Committee s proposed revisions to the multi-state reinsurer definition. AIA represents approximately 300 major U.S. insurance companies that provide all lines of property-casualty insurance to consumers and businesses in the United States and around the world. AIA members write more than $117 billion annually in U.S. property-casualty premiums and approximately $225 billion annually in worldwide property-casualty premiums. This letter provides our comments on the proposed revisions to the Part A and Part B preambles that would add a definition of Multi-State Reinsurer and clarify the circumstances under which such a reinsurer would be subject to the accreditation standards. AIA has concerns with the lack of process surrounding a definitional change of this magnitude. The NAIC has an explicit process for adding to or changing accreditation standards as set forth in the Financial Regulation and Accreditation Program pamphlet. AIA urges the Committee to begin this process anew by following the formally adopted process for an accreditation standard change. In addition to the above concern about the lack of process, AIA believes that the proposed definition expands the scope well beyond the intended purpose: to capture entities assuming business in accordance with the Valuation of Life Insurance Policies Model Regulation (#830) (commonly referred to as Regulation XXX) and Actuarial Guideline XXXVIII The Application of the Valuation of Life Insurance Policies Model Regulation (AG 38) (commonly referred to as AXXX). We urge the Committee to re-visit this definition to ensure that it does not capture entities that it does not intend to capture. State regulators already employ many regulatory devices with regard to reinsurance from the perspective of the ceding insurer. By revising this definition to expand the scope of multi-state reinsurer, state regulators are unnecessarily increasing the regulatory burden for reinsurers without any added benefit. Furthermore, it may result in transactions moving off-shore away from the scrutiny of domestic regulators and create an immediate and permanent moratorium on all new on-shore captive reinsurers after July 1,

59 We urge the Committee to re-think these revisions and at least investigate further any unintended consequences, along with the need for such increased regulation. As always, please feel free to call on AIA with any questions and for further assistance. Sincerely, Adam E. Kerns Assistant General Counsel 68

60 From: Anonymous Sent: Monday, May 19, :24 AM To: Garber, Julie L. Subject: Revisions to Accreditation Standards The proposed changes should be made ASAP. While opponents to the changes are trying to link the changes to the Rector report, Rector only deals with XXX/AXXX. There are many large variable annuity captives (mainly in Arizona and Delaware). Why do these exist? To avoid RBC requirements for variable annuities. Either the Rector report needs to be expanded to include variable annuities or these accreditation standard changes should be made. There is now a lot of complacency on variable annuities risks due to the run up in stock markets. However a major correction could be coming soon and the industry could find itself short of capital due to the lax standards in the captives. There should be no grandfathering with respect to RBC requirements. 69

61 May 19, 2014 Mr. John Huff Director, Missouri Insurance Department Chairman, F Committee National Association of Insurance Commissioners 1100 Walnut St., Suite 1500 Kansas City, MO Re: Proposed NAIC Accreditation Requirements Imposed Upon Captive Insurers Dear Mr. Huff: I read with interest the draft of the subject proposed regulations relating to Captive Insurers and I am writing to you to voice my strong objection to these proposed regulations. Candidly, I was surprised that the NAIC is allowing only 45 days for comments on such an important matter. I am a CPA accustomed to the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS) utilizing a far longer review period for any proposed changes, let alone changes affecting such a broad range of people and organizations. The reasons why the proposed regulations put an unfair burden on captive insurers are as follows: 1) The proposed definition of Multi-State Reinsurers essentially applies the same standards of reporting and practice to smaller captive insurance entities as one would use for significantly larger commercial life or property & casualty insurers. This would subject captive insurance entities to unnecessary additional regulation and statutory reporting requirements, such as but not limited to the followings laws: Statutory accounting including risk-based capital Holding company act Limitation of risk so that a single risk may not exceed 10 percent of an insurer s capital and surplus Because certain captives will be multi-state insurers, they will have to submit financial statement filings to the NAIC Business Transacted with Producer Controlled Property/Casualty Insurer Act Managing General Agent s Model Act Reinsurance Intermediary Model Act. 2) Captive insurance companies are subject to significant IRS scrutiny interestingly, one of the primary reasons that small captives insure and manage risk other than their own is because the IRS requires the assumption of these additional risks to satisfy the requirements for recognition of a captive as a valid entity for income tax purposes. 71

62 3) Special purpose entities (an SPE ), of which a captive insurance company a type of, are regulated by the FASB which provides significant guidance under ARB 51, Consolidated Financial Statements, along with newer regulations such at FIN 46R and FAS 167. These regulations consider the relative risks and rewards of the various parties involved with the SPE, addressing the issue of who has the power (i.e., practical ability) to significantly impact the economic performance of an entity and to receive financial benefits and absorb losses from an entity s activities. Perhaps, the individual states themselves should be providing the NAIC with their own plans of how to address, manage and demonstrate the integrity of the interstate insurance system and the burden should not be placed on the captive insurer, who is already subject to multiple sets of rules and regulations. Thank you for considering my input into this process. Sincerely, John V. Maggi President Congress Asset Exchange-Congress Management Group 72

63 May 19, 2014 Director John M. Huff, Chair Financial Regulation Standards and Accreditation (F) Committee National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO Re: Proposed Definition of Multi-State Reinsurers Dear Director Huff, The Captive Insurance Companies Association ( CICA ) is writing this letter to provide comments on the Financial Regulation Standards and Accreditation (F) Committee s ( Committee ) proposed revisions to the definition of multi-state reinsurer in the Part A and Part B preambles of the standards for state accreditation. CICA is the leading domicile neutral trade association representing the global captive insurance industry. CICA represents hundreds of members, both onshore in North America and offshore in markets like Bermuda and Europe. CICA s members are individual captives, companies that own and utilize captives, and service providers to captives, such as actuaries, accountants, attorneys and insurance consultants. These members represent a wide range of industries and include both Fortune 100 companies and small, family-owned businesses. CICA understands the concerns expressed by Superintendent Torti regarding the utilization of special purpose vehicles ( SPVs ) and captives as reinsurance mechanisms by life and annuity insurers regarding the excess reserves required by Regulation XXX and AXXX. However, CICA respectfully submits that the proposed revisions to the definition of multi-state reinsurer (the Proposal ) should not be adopted because they would impose an unreasonable and unneeded regulatory burden on the captive industry. The Proposal is overly broad and the language is imprecise. The Preamble for Part A previously excluded insurers that are licensed, accredited or operating in only their state of domicile but assuming business from insurers writing that business that is directly written in a different state. The Proposal would eliminate this exclusion and create a new definition: Reply to: CICA Administrative Office CICA President 4248 Park Glen Road 1401 S. Ocean Blvd #1007 Minneapolis, MN Pompano Beach, FL Phone: (952) ; Fax: (952) Phone: (954) info@cicaworld.com dharwick@cicaworld.com v3 73

64 Director John M. Huff, Chair National Association of Insurer Commissioners May 16, 2014 Page 2 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. This broad definition would sweep in numerous alternative risk structures that have nothing to do with life reinsurance, including some captives that operate on a direct basis. The vast majority of captives insure or reinsure some form of property / casualty risk. No supporting information has been provided by Superintendent Torti, or any other NAIC representative, as to why the property /casualty industry should be included in the proposal. The proposed definition is vague and, in some instances, contradictory. For example, it references business that is directly written in the context of a reinsurance captive, which does not directly write, but rather reinsures. The imprecision of the language may stem from the fact that the problem to be remedied has not been established. The effect of the Proposal would be to impose NAIC accreditation standards on most captive reinsurers. Why should reinsurance captives, which reinsure the risk of the parent or affiliates of the captive, have to sustain the additional expense of adhering to all the Part A standards imposed on insurers and reinsurers providing insurance to the general public? For decades captives have been providing risk transfer to businesses all over the world in a cost efficient manner. Where is the evidence that captives need this additional regulatory burden? 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, this does not warrant the application of the same rules or scrutiny to the thousands of captives that are not in this category. The Proposal poses legal problems. A captive insurer is licensed in its state of domicile and only transacts insurance business within that state. The Proposal seems to assume that captives conduct insurance business in non-domiciliary states, which would include the solicitation of insurance and negotiations regarding the insurance contract in the non-domiciliary state. Because this is not the case, attempting to empower such non-domiciliary states to regulate the captive would potentially violate the McCarran Ferguson Act and the Due Process Clause of the U.S. Constitution. The exceptions to the Proposal are too narrow and ineffectual. First, the grandfather provision for existing captives would only allow a window of six months, which would be of v3 74

65 Director John M. Huff, Chair National Association of Insurer Commissioners May 16, 2014 Page 3 almost no assistance to an existing captive. Second, the exception for captive insurers owned by non-insurance entities for the management of their own risk, while well intentioned, is vague. Does a non-insurance entity mean a non-insurance company, i.e., any entity that is not a licensed insurer? Does owned mean controlled by? Does their own risk mean the risk of a controlling entity and its affiliates? Would it include an association or a pool? Clearly, more thought and precision needs to be brought to bear on this important portion of the Proposal. The Proposal appears to violate the NAIC s own rules regarding the adoption of amendments to the Accreditation Standards. The NAIC procedure for the adoption of Accreditation Standards requires that changes be adopted by the relevant committee and, after exposure, adopted by the NAIC Executive Committee and Plenary and then exposed again. Those procedural safeguards are being ignored by the Proposal. The Proposal appears not to consider the existing regulatory structure which is designed to ensure financial soundness. For example, the regulator of the ceding insurer has to approve the credit for reinsurance provided by the captive reinsurer. Moreover, the regulator of the captive has to approve the captive reinsurer s business plan and financial filings showing this and other transactions. In sum, the adoption of the Proposal would cause severe damage to the captive insurance industry, and no bases have been put forward as to why the Proposal 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. For the reasons set forth above, CICA respectfully requests that the Proposal not be adopted. Respectfully submitted, Dennis P. Harwick President Cc: Julie Garber (jgarber@naic.org) Daniel Schelp (dschelp@naic.org) Ryan Couch (rcouch@naic.org) RHM/bec v3 75

66 Sheila Small, CPCU, ARM President 30 Debbie Lane East Windsor, NJ Via and U.S. Mail May 19, 2014 Mr. John M. Huff, Chair Financial Regulation Standards and Accreditation (F) Committee National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO RE: NAIC Proposal to Change Definition of Multi-State Reinsurer Dear Director Huff: I am writing on behalf of the Captive Insurance Group of New Jersey ( CIGNJ ) to comment on the proposal pending before the Financial Regulation Standards and Accreditation (F) Committee to amend the definition of multi-state reinsurers." CIGNJ is a trade association that represents the interests of New Jersey-based captive insurance companies and service providers. For the reasons that follow, CIGNJ believes the proposal is unnecessary and should be tabled. We understand that the proposal to amend the definition results from the ongoing debate regarding regulation of life insurance reinsurance captives formed, in part, to address XXX and AXXX reserving requirements. We also understand that related issues associated with XXX and AXXX reserves are being addressed in the context of NAIC discussions on principal-based reserving ( PBR ). We further understand that, once consensus is achieved on PBR standards and such standards are implemented, many of the purported issues associated with XXX / AXXX reinsurance captives will be resolved. Accordingly, rather than alter the definition of multi-state reinsurers as a hasty reaction to the XXX / AXXX debate, and thereby invoke potentially unintended consequences for the industry, it would seem more prudent to allow the thoughtful and already well-developed PBR discussions to play out until such time that the NAIC acts. Allowing that process to run its course will provide time for various state regulators to work out their differences on these issues. Additionally, while we understand that some state regulators may oppose either the use of life insurance reinsurance captives and perhaps even the PBR recommendations thus far submitted via the Rector Reports, there has not been, to our knowledge, any demonstration of a pending default or other crisis requiring immediate action. In short, a process already is in place to address issues associated with XXX and AXXX reserve requirements and associated reinsurance captives, and we see no benefit to altering that course of action by imposing a new, sweeping definition of multi-state reinsurer and all that it implies. 77

67 If, however, the NAIC chooses to move forward with a new definition, the current draft should be rewritten to specifically and narrowly limit application to XXX and AXXX reinsurance captives. As currently drafted, the definition arguably would apply to all captives that in any way insure or reinsure risk outside the captive s domicile as well as captives that insure any third-party risks and would subject such captives to material changes and far-reaching regulation that history demonstrates as unnecessary. The captive insurance industry works. It is wellregulated and rarely has any captive insurance company ever failed to meet its obligations. Indeed, in this regard, the captive industry has a far more successful record than commercial insurers. As it stands, the proposed definition of multi-state reinsurer could cause a sea change in how captive insurance companies are perceived and regulated, affecting, potentially, capital and surplus requirements, accounting and reporting, market conduct, and much more. Such a change is simply not necessary and is not supported by historical performance or actual practice. For these reasons, we respectfully request that the NAIC table the proposed change or, at minimum, amend the definition such that it is strictly limited to its intended purpose. Sincerely, Sheila Small Sheila Small President 78

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78 May 19, 2014 The Honorable John M. Huff Director Missouri Department of Insurance, Financial Institutions & Professional Registration PO Box 690 Jefferson City, Missouri Re: Proposed Revisions to Accreditation Standards for Regulation of Reinsurers Organized under Captives Laws Dear Director Huff: The Northwestern Mutual Life Insurance Company appreciates this opportunity to comment on the proposal exposed by the NAIC's Financial Regulation Standards and Accreditation (F) Committee to bring the regulation of captive reinsurers within the NAIC's accreditation framework. The NAIC's pamphlet on the Financial Regulation Standards and Accreditation Program recalls that the program began in response to the failure of several large insurance companies in the 1980's. As noted in a May 1990 report of the United States General Accounting Office to Congress, those failures were linked to inadequate and non-uniform state regulation of reinsurance transactions. Despite this history, regulation of reinsurance provided by captives for policies sold to consumers currently falls outside of the accreditation program. We believe a captive used to reinsure policies sold to consumers should be subject to the same solvency regulations as commercial insurers and reinsurers. Any special standards for reinsurance captives should be developed by the NAIC, applied uniformly across the states, and require transparency and effective risk transfer. Accreditation is the state system's primary tool to achieve uniform solvency regulation and so should be put to its intended use here. Accordingly, we support the exposure's objective to subject regulation of captive reinsurers to accreditation and urge the NAIC to move expeditiously and consistent with good process. Please advise if you require any additional information or have any questions regarding these comments. Sincerely, Steven M. Radke Vice President Government Relations 91

79 New York Life 51 Madison Avenue New York, NY May, 19, 2014 The Honorable John Huff Director Department of Insurance Financial Institutions & Prof. Registration (DIFP) P.O. Box 690 Jefferson City, Missouri Re: NAIC Financial Regulation Standards and Accreditation (F) Committee Proposed Revisions to the Preamble to Part A and Part B to add a definition of Multi-State Reinsurer Director Huff: New York Life offers the following comments in response to the National Association of Insurance Commissioners (NAIC) Financial Regulation and Accreditation Standards (F) Committee s March 19, 2014, proposal to add a definition of Multi-State Reinsurer to the Preambles to Part A and Part B to the Accreditation Standards, and clarify the circumstances under which such a reinsurer would be subject to the NAIC s accreditation standards (the Accreditation Proposal). We view the Accreditation Proposal as a critical step toward ensuring the effective and uniform regulation of life insurer captive structures. The Proposal would strengthen and unify the states approach to the regulation of captives, address issues caused by the inconsistent regulation of captives from state to state, and further strengthen the state-based system of regulation. Most importantly, it would help eliminate the opportunities for regulatory arbitrage, and the resulting race to the bottom in the regulation of captives. Companies have taken advantage of the current lack of uniformity, effectively lowering solvency requirements to those of the regulator with the most laissez-faire standards. The Accreditation Proposal confronts the issue of regulatory arbitrage head on, and in doing so, enhances confidence in the state-based regulatory system that has served our industry and protected policyholders so well. The Accreditation Proposal makes clear what should be obvious: an insurer-owned captive assuming business written in more than one state is in fact a "Multi-State Reinsurer" since such a captive holds the same multi-state risk as the ceding insurer. Life insurers routinely sell policies in multiple states. If multi-state business is reinsured to a captive reinsurer, it does not magically become single state business by virtue of the captive reinsurance arrangement. The policies reinsured to the captive were still directly written in multiple states, so the captive, by definition, holds multi-state risk, just as the ceding life insurer. Because they hold multi-state risk, these captives should be subject to the same accounting, reporting and disclosure requirements as the ceding life insurer. We also believe that the Accreditation Proposal is a necessary complement to the framework proposed in the February 17, 2013, Final Report of Rector & Associates to the PBR Implementation (EX) Task Force (the Final Rector Report). Put simply, the recommendation in the Final Rector Report that life insurer captives must be addressed at the ceding company level to avoid simply pushing these structures offshore is not enough. The Accreditation Proposal is necessary to ensure the uniform regulation of U.S. life insurer captives, regardless of state of domicile, in a manner consistent with the 93

80 solvency regulatory framework applicable to an operating life insurer holding the same underlying policyholder risks. Together, the recommendations in the Final Rector Report and the Accreditation Proposal provide a comprehensive solution by addressing solvency issues at both the ceding company and captive in a way that discourages gamesmanship and improves solvency regulation. The safety and solvency of the U.S. life insurance industry is at stake and we are not alone in our concerns. The arbitrage that currently exists because of the varying regulatory standards applicable to life insurer captives has raised concerns among state regulators, as well as ratings agencies, and federal and international organizations. As a member of the Financial Services Oversight Council (FSOC), you are no doubt aware that just this month, FSOC expressed concerns in its annual report that the current regulation of life insurer captives raises the risk of regulatory arbitrage due to state-bystate differences in the oversight, accounting and capital requirements. FSOC also suggested that life insurers use of captives increases risk, since captives often hold riskier asset portfolios than would be permitted for a traditional life insurer and collateralize a portion of their reserves using letters of credit or direct guarantees from a parent holding company. The Accreditation Proposal addresses these concerns by applying the same uniform solvency requirements applicable generally to operating insurers to insurer-owned captives holding business written in more than one state. We thank you for the opportunity to comment on this important topic. Please do not hesitate to contact us if you have any questions regarding our comments or if there is additional information that might be useful. Sincerely, George Nichols, III SVP in Charge of the Office of Government Affairs Joel Steinberg SVP, Chief Risk Officer & Chief Actuary 94

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83 May 19, 2014 STEPHEN W. BROADIE VICE PRESIDENT, FINANCIAL POLICY John M. Huff Director Missouri Department of Insurance Financial Institutions and Professional Registration P.O. Box 690 Jefferson City, MO Dear Director Huff: The Property Casualty Insurers Association of America (PCI) appreciates the opportunity to submit comments to you and the NAIC s Financial Regulations Standards and Accreditation (F) Committee on the proposed revisions of the Part A and Part B preambles defining multi-state reinsurer. PCI represents over 1000 member property/casualty insurers which write over $195 billion in direct written premiums annually, almost 40% of the property/casualty premiums written in the United States. PCI objects to consideration of this significant substantive change in the NAIC s accreditation standards without following the normal process for adding to or changing standards contained in the Financial Regulation Standards and Accreditation Program pamphlet. This proposal appears to require all insurerowned captive reinsurers (including property/casualty reinsurers) to comply as of July 1 with the Part A solvency standards if they continue to enter into reinsurance transactions on multi-state business after that time. It could also jeopardize the accreditation of all states that have enacted legislation enabling insurerowned captive to write this business, without allowing those states the time they would have to adjust to new standards if they had been adopted according to the NAIC s regular process. The proposal is also overbroad. We are not aware of any concerns expressed about the use of insurer-owned captives by property/casualty insurers. If regulators believe there are problems, we would be happy to discuss them with the NAIC. In the meantime, we urge the Committee to follow the established NAIC procedure for considering revisions to its accreditation standards. If you have any questions concerning our comments, please contact me at your convenience. Sincerely, Stephen W. Broadie 97

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