MEMORANDUM

William P. White Page 1

TO: Michael McRaith, Director, Federal Insurance Office

Members of the Federal Advisory Committee on Insurance 

FROM: William P. White, Commissioner

District of Columbia Department of Insurance, Securities and Banking

SUBJECT: Update on the Activities of the NAIC Captives and Special Purpose Vehicles Subgroup

DATE: June 7, 2013

Introduction

The National Association of Insurance Commissioners’ Captives and Special Purpose Vehicle 

Subgroup of the Financial Condition (E) Committee prepared a draft white paper addressing the use of 

captives and similar alternative risk bearing entities by commercial life insurers in the United States. The 

white paper was exposed on March 15, 2013 and comments were due on April 29, 2013. On June 6, 

2013 the Subgroup adopted the white paper, and referred it to the E Committee for consideration. 

The Principle-Based Reserving Implementation (EX) Task Force, formerly known as the PrincipleBased Reserving Working Group, (http://naic.org/committees_ex_pbr_implementation_tf.htm) will 

consider the recommendations in the white paper in the context of the proposed PBR system, and make 

further recommendations, if any, to the Executive (EX) Committee. 

Issues Raised and Recommendations Proposed in the White Paper

The primary focus of the Subgroup was on U.S. commercial insurers’ use of affiliated captives or 

special purpose vehicles or SPVs. The Subgroup determined that the majority use of captives/SPVs by 

commercial insurers was related to the financing of XXX and AXXX reserve redundancies. The Subgroup 

offered the following recommendations to address the issues presented in the white paper.

1. Accounting Considerations

As stated above, captives/SPVs have been used to address the XXX and AXXX perceived reserve 

redundancies. The Subgroup held a consensus view that the Financial Condition (E) Committee should 

form a separate subgroup to develop possible solutions for addressing the remaining XXX and AXXX 

perceived redundancies. Possible solutions include changes similar to the AG 38 solution, or disclosed 

prescribed or permitted accounting practices. 

The NAIC should also consider modifications to the statutory accounting framework to 

recognize, in strictly limited situations, alternative assets, such as “tier 2” type assets” to support specific 

situations (e.g. less likely to develop liabilities) thereby eliminating the need for the separate transaction 

outside of the commercial insurer. The Subgroup held a consensus view that captives and special 

purpose vehicles should not be used by commercial insurers to avoid statutory accounting prescribed by 

states. 
MEMORANDUM

William P. White Page 2

2. Access to Alternative Markets

The Subgroup supports the use of solutions designed to shift risk to the capital markets or 

provide alternative forms of business financing. The NAIC’s Special Purpose Reinsurance Vehicle Model 

Act (#789) was developed to provide a uniform framework for the implementation of capital market 

securitizations of commercial insurers’ reserves. However, securitization solutions allowed for within the 

model are no longer being utilized as other solutions are preferred today. The NAIC should consider reevaluating the model and updating it as necessary to reflect alternative markets solutions acceptable to 

state regulators to ensure there is a uniform framework for the implementation of alternative market 

solutions. 

3. IAIS Standards

The Subgroup supports the IAIS Guidance Paper on the Regulation and Supervision of Captive 

Insurers which states in summary that insurer or reinsurer owned or common controlled Captives/SPVs, 

that are not otherwise self-insurance, should be subject to a similar regulatory framework as 

commercial insurers. The Subgroup believes that the use of captives should generally follow the 

international views contained within this guidance paper.

4. Credit for Reinsurance Model Enhancements/Added Reinsurance Disclosure/Transparency

Notwithstanding the Subgroup’s support for the IAIS Guidance Paper on the Regulation and

Supervision of Captive Insurers, the Subgroup recognizes that there will be situations where movement 

of the reinsured risk outside of the group may not be feasible, or practical. For such situations, the 

Subgroup recommends consideration should be given for ways to study the effects of and potential 

limits on the variability in qualified letters of credit or any other security that may not provide the 

intended protections provided within the NAIC Credit for Reinsurance Model Law.

5. Confidentiality

The Subgroup recommends that the Financial Condition (E) Committee study the issue of

confidentiality related to commercially owned Captives and SPVs more closely. Such study would pursue 

greater clarity regarding the specific reasons for and against the use of confidentiality for such entities. 

Principles Based Reserving (PBR)

The implementation of Principles Based Reserving (PBR) may ultimately reduce the desire of 

commercial insurers to create new captives and SPVs to address perceived reserve redundancies, but 

existing captives and SPVs are likely to remain in existence for several years or decades until the existing 

blocks of business are run-off. Moreover, it is likely that future changes in market conditions and 

macroeconomic events will create a need for insurers and reinsurers to use alternative risk financing 

entities and mechanisms to remain competitive through the efficient use of capital.

6. Disclosure and Transparency

The Subgroup recommends enhanced disclosure in ceding company statements regarding the 

impact of the transactions on the financial position of the ceding insurer. Increased disclosure includes 
MEMORANDUM

William P. White Page 3

possible changes to Schedule S and Schedule F as proposed by Vermont or as similarly proposed by the 

ACLI. In addition, enhancement of Note to Financial Statement 10M should be made to provide for 

disclosure of non-trade-secret captive information and disclosure of the overall utilization of captives. 

7. Financial Analysis Handbook Guidance

The Subgroup recommends the development of guidance in the Financial Analysis Handbook for 

states’ review and on-going analysis of transactions involving captives and SPVs, including specific 

considerations of such transactions when performing holding company analysis. The guidance should 

be developed for perspectives of the ceding state, the captive state and the lead state. This guidance is 

intended to increase the consistency in procedures between states involved with such transactions.