INDIANAPOLIS — One of the gaps in state insurance regulation isin the area of insurers use of captives, Federal Insurance Office(FIO) Director Michael McRaith said today in a closed meeting withstate insurance regulators, staff and leadership of the NationalAssociation of Insurance Commissioners (NAIC) here at the NAICsummer meeting.

McRaith also reportedly told the assembly of regulators at theNAIC Commissioners Roundtable that the overdue FIO modernizationreport could be out in as little as two weeks to perhaps a longerhorizon of a month or more, and that although he s an optimist, hehas been wrong before, according to attendees.

The long-anticipated report was officially due in January 2012,and has long been seemingly imminent, so the timetable can shift,still. It must be scored by the Office of Management and Budget,still, although certainly earlier drafts have been sent up before.Treasury needs to give final approval to the FIO's reports.

At the meeting, former NAIC CEO Sen. Ben Nelson, D-Neb., askedMcRaith five prepared questions on major issues, although Nelsonwould not disclose the questions and attendees said that McRaithdid not answer questions directly, deferring to Treasury and theAdministration at times.

Conversation also touched on the Financial Stability Board (FSB)now “coming out of the shadows” and issuing directives to theinternational insurance supervisors, Nelson noted. Nelson saidMcRaith reminded regulators that FSB does not have statutoryauthority.

The National Flood Insurance Program (NFIP) was also mentionedby the NAIC. While McRaith didn't answer the question directly, hedid suggest that there may be a delay when it comes to FederalEmergency Management Agency (FEMA) implementing a provision of the2012 law reauthorizing the NFIP provision that mandates phased-inrate increases for grandfathered properties, according to NAICPresident and Louisiana Commissioner Jim Donelon, who participatedin meetings today by conference call.

Nelson also said that although the use of captives forreinsurance issue may be seen as a gap in state regulation by FIO,it is a gap “we are closing,“ Nelson told reporters, and noted thatthe NAIC has been diligently working on the issue for sometime.

However, FIO appears to have a laser focus on the captivesissue, and indications that it had stepped back from the issue nowappear misguided.

Nelson described the meeting as congenial and said the NAICleadership meets with the FIO director regularly and will haveanother meeting the week after next.

Nelson said at a press conference Sunday that the relationshipbetween FIO and the NAIC had improved over the past two months.

The captives issue is of concern to many state regulators, whohave worked on drafts of white papers and conducted research oncaptive reinsurance transactions and special purpose vehicles overthe past two years. New York has gone so far as to call for amoratorium and NAIC, although not accepting a moratorium, hasacknowledged that the use of captives is indeed a practice thatneeds oversight through various arms of the NAIC.

Many regulators want not only more transparency with thesetransactions so they can follow the money, but they want the riskthat is insured to be “real,” and not a ploy to offload redundantreserves or shift risk into a less stable vehicle. The use ofcaptives on lender-placed insurance is also an issue.

McRaith took a pointed interest in captives and said it issomething that FIO should monitor this past March, calling for atask force on the subject during a meeting of the Federal AdvisoryCommittee on Insurance. There was immediatefriction between the FIO and Connecticut InsuranceCommissioner Tom Leonardi on FIO's actions on the captives issue,with Leonardi reiterating that he does not think FIO should beweighing in or intruding on work that the NAIC is alreadyundertaking effectively.