A New York regulator is accusing major life insurers of tapping loopholes in individual states and countries to make themselves look bigger and richer, the New York Times’ Mary Williams Walsh reports.
Benjamin M. Lawsky, New York’s superintendent of financial services, said New York-based firms had inflated their balance sheets to the tune of $48 billion.
Here’s how the alleged scheme works, according to results of a study Lawsky commissioned:
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.
Reserves are funds that insurers set aside to pay policyholder claims.
In a typical shadow insurance transaction, an insurance company creates a “captive”
insurance subsidiary, which is essentially a shell company owned by the insurer’s parent. The
company then “reinsures” a block of existing policy claims through the shell company — and
diverts the reserves that it had previously set aside to pay policyholders to other purposes, since
the reserve and collateral requirements for the captive shell company are typically lower.
Sometimes the parent company even effectively pays a commission to itself from the shell
company when the transaction is complete.
The main goal of the scheme, Lawsky said, is to inflate the status of capital reserves, something he compared to what happened in 2008.
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