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Captive reinsurance not 'shadow insurance': Bermuda panelists

Captive reinsurance not 'shadow insurance': Bermuda panelists

SOUTHAMPTON, Bermuda — Contrary to the New York Department of Financial Services' characterization of life insurers' captive reinsurance transactions as “shadow insurance,” a panel of life insurance securitization experts said the transactions are more stringently regulated than traditional reinsurance deals.

In a statement Wednesday, the New York agency discussed its yearlong review of the transactions. “Insurance companies use shadow insurance to shift blocks of insurance policy claims to special entities — often in states outside where the companies are based, or else offshore (e.g., the Cayman Islands) — in order to take advantage of looser reserve and regulatory requirements.”

But later Wednesday during a panel discussion on life securitization at the Bermuda Captive Conference, Keith Ryan, vice president and director of finance shared services at Radnor, Pa.-based Lincoln Financial Group, said, “Captive reinsurance transactions are more highly regulated than noncaptive transactions.”

“What's relevant about these is when these transactions go through, they require approval from the regulators of the ceding company and the regulators of the captives as well,” Mr. Ryan said.

Mr. Ryan said the transactions benefit consumers.

“We're able as a direct insurance company to lower their premiums because we can be more efficient with how we structure that policy,” he said. Meanwhile, for the ceding life insurance company, the transactions reduce the cost of capital, allowing the life insurer to meet reserve requirements that have been actuarially determined to be redundant with something other than the insurer's funds.


The transactions also benefit regulators, Mr. Ryan said, because they don't compromise the life insurer's solvency, and they benefit the financial counterparty on the transactions by providing a good return on investment.

“The benefit of the captive is very real,” said another panelist, Jeffrey R. Burt, executive vice president of financial solutions at Hannover Life Reassurance Co. of America in Orlando, Fla. “It allows for real benefits over traditional reinsurance, namely in terms of capital efficiency and tax efficiency.”

“Everybody wins” in the captive reinsurance transactions, said another panelist, Charles H. Scherer IV, senior vice president of insurance linked securities operations at Aon Insurance Managers (Bermuda) Ltd. in Pembroke, Bermuda. “It's not like you're just taking this money out and putting it in a back pocket.”

“There's no shadow underwriting at all,” said Mr. Burt, adding that concerns about transparency in the transactions raised by the New York agency have been addressed in recommendations the American Council of Life Insurers has presented to the National Association of Insurance Commissioners.

Robert Johnson, managing director of Aon Insurance Managers (Bermuda) Ltd., moderated the session.

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