Morris, Manning & Martin LLP
While CICA’s opposition to the NAIC’s proposed amendments is no secret, specific details have been in short supply. Skip Myers of Morris, Manning & Martin LLP gets to the heart of the matter
One of CICA’s main objections to the NAIC’s proposed amendments was the broad scope of the definition of a multi-sate insurer. In an ideal world, how would CICA clarify it?
In an ideal world, the National Association of Insurance Commissioners (NAIC) would take it back down to zero. It is just a bad idea. The proposed amendments are poorly drafted, misleading and not defined clearly enough. New York’s John Torti was on a panel talking about XXX captives at a recent conference, and I asked him. “Why don’t you just limit the amendments to life reinsurance, if that is what you’re interested in?” He said he just wanted to make sure that, in the property and casualty sector, captives would be included under the definition.
What I think he was referring to was third party risk. The NAIC drafted it broad enough to scoop up a lot of things with the expectation that there would be a lot of pushback, which there has been. In a perfect world nothing will happen and in a slightly less perfect world the terms would be defined in such a way that you could exclude all of the captives except the ones you were aiming for.
The ones they were aiming at were life reinsurance captives. They like the idea of regulating all reinsurance captives—that’s why they drafted it that way.
What do you believe the NAIC’s thought process was in regards to the amendments?
It is a long and drawn out process for a law to be changed, so the NAIC chose to amend the preamble to the handbook used to interpret the accreditation standards. Although not changing the law itself, it would still affect the standards. This reverses the interpretation of what a multi-state reinsurer is. In the existing preamble, it largely excludes captives and the new version would include them. It is a 180-degree turn.
It gets back to the issue of what actual authority the NAIC has. It does not have any regulatory authority but, by setting the standards that the states have to adopt, it has real power. There have been five or six states and a couple of associations that have put in letters of objection. The way the NAIC usually handles this is to have a hearing or a conference call and then it will ask the opposition for its view. Then only the regulators get to vote, without any representatives from the industry getting involved.
Could this be seen as a continuation of the NAIC’s suspicion of captives?
I think it is related to the general belief that captives are outside of the system, which they are to an extent. The regulators that are in charge of the NAIC and its staff do not like the idea that captives do not fall into all the regulatory provisions required of traditional insurance companies. They are just not comfortable that they cannot use all of their regulatory authority on these entities. That is their job, but they do not like the captives escape them. This is their opportunity to drag them all in.
They did try to carve out non-insurance entity owned captives. The problem is that the definition is so wobbly it is hard to see what they are getting at. They are trying for single-parent captives that reinsure their own risk, but many single-parent or group captives have risks in different states.
Is this last straw for the relationship between the NAIC and CICA?
This is not the first time these two groups have crossed swords—it is just the way the regulation in the US operates. There is a proposal to change the law and then the industry has to make its views known and persuade regulators to do things the right way. States are not bound by the NAIC models because they are just models. Their hammer is that they have the accreditation programme. If a state does not adopt something deemed to be part of the accreditation process then that state can be de-accredited and no-one wants that.
The issue here is whether this should be part of the accreditation standards and that is why it is so significant. If it was just a model law then the states could choose to ignore it, but they are trying to reverse the existing standards in one fell swoop, without due process. Due process would be to amend the law and in this case they are just amending the interpretation of the law. We have all got to live together but this is a major attempt to change the regulation of captives and could really hurt the industry and even drive a lot of captives offshore. We surveyed 230 people and around 25 percent of them said that they would go offshore if this is adopted and that is a very big deal. This could well affect the composition of the entire industry.
What are CICA’s plans while the NAIC processes these complaints?
The issue is who is talking to whom and how much pressure is being heaped on. The heaviest hitters in this debate are the life reinsurers that are owned by huge life and annuity companies. Commercial ventures such as MetLife have been deemed as systemically significant by the NAIC—they have a lot of clout and a lot of risk. The casualty industry is much more diverse and it does not have as big a voice as the other companies.
The fact that the life companies have been picked out as problematic makes them a big target. Life companies are big players and we are simply being dragged along in their wake.
CICA will continue to talk to regulators and others in the insurance community to build up the point of view that this is a provision that should not be passed, for all the reasons we have mentioned. There will be another NAIC meeting in August, so that is the next big thing.
