On June 11, 2013, the New York Times reported that New York Superintendent of Financial Services Benjamin Lawsky joined the debate on the increasingly-popular use of captives and Special Purpose Vehicles (“SPVs”) to reinsure “XXX and “AXXX” reserve redundancies. Mr. Lawsky believes that life insurers are engaging in “shadow insurance” by taking advantage of the laws in other jurisdictions to use what he calls “hollow assets” to support reserves that would traditionally not be approved in New York, such as parental guarantees and conditional letters of credit. Mr. Lawsky also notes that he believes such transactions are being carried out “outside the regulators’ view.” The same New York Times article reported that MetLife has issued a statement assuring the public that it has sufficient reserves to pay its policies, and Prudential has noted that its captives are capitalized to a level consistent with the ratings of its issuing insurance entities.
The topic of captive and SPV reinsurance within the life insurance industry has been hotly debated recently, with both public and private sector industry players expressing divergent views. The NAIC has issued a new white paper addressing the issue, which we have recently blogged about here. In addition, Edwards Wildman has written a thorough analysis of the issue in Best’s Review –including the origins of such practices and the future of XXX and AXXX reinsurance transactions – which may be found here.