N.Y.’s Call for Moratorium on Life Insurance Captives Questioned by NAIC

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National Association of Insurance Commissioners President Jim Donelon questioned the need for a countrywide halt on approvals of captive insurance deals one day after New York’s regulator said the transactions hide risk.

“I don’t see an obvious need for such a moratorium,” Donelon said today on an NAIC conference call. “We are doing what we need to do in a thoughtful, deliberative way.”

MetLife Inc. and Prudential Financial Inc., the largest U.S. life insurers, are among companies that use subsidiaries known as captives to transfer risk and increase financial flexibility.

New York's top regulator Ben Lawsky (left) is calling for a national moratorium on approving additional captive insurance deals by life insurers. But Jim Donelon (right), the NAIC president and Louisiana's insurance commissioner, says he doesn't see a need for such a moratorium.

Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, said in a report yesterday that other states are allowing captives to use riskier collateral in a “regulatory race to the bottom.”

“The fact that certain insurers are inappropriately using shell games to hide risk and loosen reserve requirements is greatly troubling,” Lawsky said in the report. “Shadow insurance allows companies to divert reserves for other purposes besides paying policyholder claims.”

Donelon said NAIC members already have a group reviewing captives and that state regulators support improved transparency. The watchdogs are working to establish uniform rules for the risk-transfer deals, said Joseph Torti, the Rhode Island superintendent of insurance and banking.

“There have been some very diverse transactions out there and there are transactions that we would rather not see going forward,” Torti said on the call.

House Fire

Donelon said that the NAIC weighs standards rather than imposing regulations and that “one of those standards could be to implement what I consider a knee-jerk position of issuance of moratorium before the house is on fire.”

Lawsky already has the authority to address actions by New York-based insurers that could put policyholders at risk, Donelon said. He said he’d help Lawsky address any concerns he has regarding a lack of oversight by regulators in other states. Matt Anderson, a spokesman for New York’s Department of Financial Services, had no immediate comment.

“If they would give me a holler and tell me what regulator they think is not doing its job, I’d be happy to reach out to that regulator and express to them New York’s concerns,” Donelon said.

Editors: Dan Reichl, Steven Crabill