The NAIC Captive and Special Purpose Vehicle Use Subgroup held a meeting on August 11, 2012 to discuss the Subgroup’s Captives and Special Purpose Vehicles draft White Paper. The Subgroup was formed earlier this year, the draft White Paper explains, to address the broadened use of captives and the potential concern that a “shadow insurance industry is emerging.” The draft White Paper addresses, in some detail, state authority over captives and SPVs, transparency and confidentiality requirements, the types of business and risks ceded to captives and SPVs, capitalization standards, accounting and reporting requirements, credit for reinsurance, and holding company analysis considerations.

A primary concern of the Subgroup is that some captives and SPVs may be being used as a means to avoid statutory accounting rules. The White Paper concludes that, in the transactions the Subgroup reviewed, regulators properly required that transactions made with captives to support economic reserves be backed with investment grade, liquid assets, such that the “net result” of the transactions be that “collectively the ceding insurer and captive have liquid assets supporting GAAP equivalent reserves.” The White Paper also makes recommendations regarding the accounting treatment for XXX and AXXX reserve redundancies, and encourages states with active captive and SPV markets to adopt the NAIC’s Special Purposes Reinsurance Vehicles Model Act, and further suggests that changes might be made to this model act to encourage states to adopt it. Minutes of the August 11 meeting and minutes of prior meetings of the subgroup held by conference call are available for review.