ACLI Pushes Back Against Findings of FSOC Report
May 9, 2014 by Jeff Jeffrey
WASHINGTON – The American Council of Life Insurers is defending the life industry in the wake of a Financial Stability Oversight Council report that said captive reinsurance vehicles and nontraditional investment strategies could pose threats to insurers’ financial stability.
The FSOC’s May 7 report concluded the rising popularity of captive reinsurance entities could create risks for life insurers that escape the notice of the traditional state-led regulatory system for insurance (Best’s News Service, May 7, 2014).
The report said while captive reinsurance transactions must be approved by both the captive and primary insurers’ regulators, the opportunity for regulatory arbitrage arises because of state-by-state differences in oversight, accounting and capital requirements for the two types of entities. It noted many life insurers have been using captive reinsurers, in part, to avoid having to meet certain regulatory requirements. If captive reinsurers are not monitored properly, the report said they could exacerbate a troubled primary insurer’s financial problems.
But ACLI spokesman Whit Cornman said life insurers are financially strong, noting the industry currently accounts for more than $5 trillion in assets and pays out $1.5 billion daily.
He said captives play an important part of the industry’s risk management efforts.
“These reinsurance transactions are a legitimate, safe and carefully regulated means of fully satisfying reserve requirements,” Cornman said. “We are working with our regulators to assure that captive transactions are appropriately disclosed and handled uniformly from state to state.”
The FSOC report also raised concerns about life insurers’ investment strategies amid the ongoing low-interest environment.
The report said as interest rates have remained at historic lows, many life insurers have pursued investment strategies that pose greater risks than traditional investment-grade fixed-income investments.
The report said some insurers have increasingly turned to commercial mortgage loans, equity real estate and alternative assets such as private equity funds and hedge funds. All of those strategies are less liquid than traditional investments.
Cornman said life insurers’ investments are overseen by state regulators to ensure companies are able to meet their commitments to policyholders.
“They invest conservatively and represent the No. 1 purchaser of U.S. corporate bonds — the seed corn of business growth and job creation in America,” Cornman said.
(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)