On March 14, 2013, the NAIC’s Captive and Special Purpose Vehicle Use (E) Subgroup (the “Subgroup”) released a revised version of its White Paper with respect to Special Purposes Vehicles (“SPVs”) and Captives (the “New Draft”). The New Draft is now open for a public comment period until April 28, 2013.

The Subgroup’s original White Paper, published on November 29, 2012, focused on, among other things, the use by life insurers of captives and SPVs to reinsure “XXX and “AXXX” reserve redundancies. The White Paper noted concerns that captives and SPVs established by life insurers to reinsure “XXX and “AXXX” reserves hold non-admitted assets. The White Paper also suggested that the operations of captives and SPVs are not subject to the same regulatory scrutiny as are those of sponsoring insurers. We discussed the White Paper and commented on these concerns recently. (See here and here for information.)The New Draft differs from the original in several, important ways:

  1. References to a “shadow insurance industry” and comparisons to the regulatory failure that contributed to the recent financial crisis have largely been removed.
  2. The New Draft provides more background on the issue, notably by discussing the NAIC Special Purpose Reinsurance Vehicle Model Act.
  3. The scope of the New Draft has been refined to more specifically cover the NAIC’s view of the motivations for risk transfer to captives and SPVs.
  4. The New Draft explicitly concludes that a “higher level” of confidentiality should be afforded to captives since they do not issue policies to the public.
  5. The Subgroup concedes that enhanced regulatory requirements on U.S. captives may very well lead to increased utilization of offshore jurisdictions.

In all, the New Draft reflects continued skepticism of certain practices within the life insurance industry, but has toned down overt criticism of the life insurance industry’s usage of captive and SPVs. The New Draft shifts focus toward the need for further study as opposed to concluding that such practices are detrimental. Further, it suggests that the recent changes to the NAIC accounting procedures should render most concerns moot going forward as, ideally, XXX and AXXX reserve redundancies will be curtailed without the need for captive and/or SPV transactions.