NAIC Investigates Captives Due To Newspaper Article

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NAIC Investigates Captives On A Whim?

The NAIC investigates captives due to a recent newspaper article.  I recently read an article on captives being investigated by the National Association of Insurance Commissioners (NAIC). The NA

IC is supposed to make recommendations or produce a new regulation model for captives. I think this is a grand waste of time. I have posted on captives previously here and here.

National Association of Insurance Commissioners Emblem Investigates Captives News Paper Article
(c) naic

The article seems to refer to captives as shadow companies. This flies in the face of various states that are ramping up their marketing efforts to be the domiciles for various captives. The list of states that can domicile captives are:

  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Delaware
  • DC
  • Florida
  • Georgia
  • Hawaii
  • Illinois
  • Kansas
  • Kentucky
  • Maine
  • Montana
  • Nevada
  • New York
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • West Virginia

The list points out that almost 50% of the US functioning as a possible domicile for onshore captives. The IRS has already ruled (see post)that captives do not violate the tax laws in any way. I have consulted with captives often over the last few years. If a majority of the states want to domicile captives, would one not assume the states have examined captives very thoroughly?

From the article – NAIC’s Executive Committee and plenary voted unanimously to adopt the new charge for the Financial Condition Committee. The committee will study insurers’ use of captives and special purpose vehicles to transfer third-party insurance risk in relation to existing state laws and regulations. If the study turns up any concerns, the committee will recommend possible modifications to existing NAIC model laws or the creation of a new model law.

Hand Presenting Investigates Captives Headline News Paper
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What I find astounding is that the New York Times would call captives shadow insurance. The NAIC is basically responding to the article. It is sensationalism at best. Most of the insurance industry has “shadow” elements. I think the NAIC’s time could be spent better elsewhere.

This author from CFO World forecasted that this would happen. This is the NY Times article on captives that started all the hubbub. I think this can be summed up with a comment from Vermont’s Captive overseer as quoted in the NY Times –

David F. Provost, the deputy commissioner of captive insurance in Vermont, said he believed confidential treatment was appropriate because these entities were, in essence, insurance companies with only one policyholder — their parent. He said Vermont’s large and experienced staff of regulators vetted all transactions carefully to make sure they were sound.

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One Response

  1. I strongly recommend you thoroughly investigate the actual mechanisms through which many of these SPFC deals are effected before you make sweeping statements in favor of them. If you agree that conditional Letters of Credit can be treated as actual assets to collateralize these deals you should study up on statutory accounting…namely SSAP No. 4.

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James Moore

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