RPT-Fitch: State regulatory debate creates uncertainty for U.S. life insurers

Wed Oct 16, 2013 9:30am EDT

Oct 16 (Reuters) - (The following statement was released by the rating agency)

A lack of consensus among state regulators on captive insurance companies and reserves is creating an uncertain environment for the U.S. life insurance industry, which could ultimately adversely affect insurer ratings, according to a new Fitch Ratings' report.

The New York State Department of Financial Services (NYSDFS) published very critical commentary alleging weakness in regulation exhibited by other states, and in the oversight provided by the National Association of Insurance Commissioners (NAIC). The department's focus was on captive arrangements described as 'shadow insurance', Actuarial Guideline 38 (AG38) and principles-based reserving (PBR).

The NYSDFS concludes that New York insurers have engaged in $48 billion of so-called shadow insurance transactions, and that the related reserve transfers 'artificially' inflate capital. In addition, the NYSDFS asserts that certain other states may be 'racing to the bottom' in governing such transactions, while concurrently making information on their captives unavailable to other state regulators, such as New York.

Other state regulators declined to implement a moratorium on captives, and some criticized NYSDFS's allegations, adding that New York breached certain regulatory protocols in making its statements. There has also been push back on the issue of PBR.

Fitch's report provides an analysis of the conflicting regulatory treatments of these issues. As a matter of transparency, Fitch believes that insurers should be required to publicly disclose key information in a systematic and consistent basis, and accelerate efforts already underway.

The full report 'New York Insurance Regulatory Criticisms' is available at 'www.fitchratings.com.'

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