The Economics and Regulation of Captive Reinsurance in Life Insurance

Abstract

The use of captive reinsurance arrangements in life insurance has generated significant debate and led to recent adoption of new regulatory requirements by the National Association of Insurance Commissioners (NAIC). This paper provides an overview of the regulatory reserve requirements that spurred growth in captive reinsurance and how captive arrangements are used, including a summary of data on the use of captives made possible by new NAIC reporting requirements for captive reinsurance in 2013. It elaborates potential efficiencies and risks from the arrangements, and how insurers’ financial incentives, previous regulation, rating agency monitoring, and monitoring by non-insurance creditors mitigate those risks. A.M. Best ratings for life insurers with and without captive arrangements are summarized, documenting that most entities using captive reinsurance have relatively high ratings. The new NAIC regulatory framework for captive reinsurance arrangements and specific requirements for the amounts and types of assets permitted to back the arrangements are discussed.