Federal-regulatory concerns about life-reinsurance captivescould give rise to “mission creep” that would sweep up traditionalsingle-parent and group captives in any actions taken, warns FitchRatings.

“While federal interest currently centers on life reinsurancecaptives—i.e., captives sponsored by life insurers—and nottraditional single-parent or group captives formed by industrialcorporates, Fitch believes that traditional captive insurance couldbe swept up in the vortex if some regulators and others do notappreciate the difference between the two types of entities,” theratings agency says.

Fitch notes that the SEC has asked at least five publicly tradedlife insurers for information on their use of captive reinsurance,used to finance conservative statutory reserve requirements forsome products sold by life insurers. “This heightened federalinterest may stem from a New York State Department of FinancialServices report in June that criticized life insurers' use ofcaptive reinsurance,” says Fitch.

The National Association of Insurance Commissioners, says Fitchalso is looking into life insurers' use of captive reinsurers.

Fitch expressed concern that somewhere along the line, “captivereinsurers” could become “captive insurers,” leading tocomplications for traditional captives.

“In the extreme,” says Fitch, “subjecting traditional captiveinsurers to new reporting requirements or other new regulationwould add cost and complexity to the captive-insurance process andmay ultimately result in non-insurance sponsors deciding not toform new captive insurers, and possibly even to wind up existingcaptive insurers.”