NY Says Captives Are Shadow Insurance
Captives for Workers Compensation and other types of Shadow Insurance have long drawn scrutiny – sometimes undeservedly. This week, the Superintendent of the New York State Department of Financial Services.said that captives were nothing more than shell games and all state insurance departments should stop allowing them.
The report called Shining A Light on Shadow Insurance, A Little-known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk” violates one of the rules of financial studies. The title should never speak for the results in the financial study. The numbers should speak for themselves and then a conclusion should be drawn from those numbers. (If you follow the link, please note that it is a PDF file. )
One of the first sentences in the study was “The use of shadow insurance emerged in great part due to a desire from insurers to do an end-run around higher reserve requirements that states established for certain term and universal life insurance policies.” Other comments included ” State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.”
Using the term Captive Insurance would have been much better than Shadow Insurance. Using such terms makes the study seem too one-sided. There may be a few legitimate concerns in the study. NY was the bunker for AIG’s failure. Geography can be a great influence.
The response from the insurance world was more surprising than the study itself. Many called the report sensationalism. The rating agency Moody’s totally disagreed with Captives being branded as shadow insurance. Most of these comments and articles concern life insurance captives. Captives for Workers Compensation coverage has been alive and well for years. The NAIC questioned the need for a moratorium nationwide on captives. Donelson, the head of the National Association of Insurance Commissioners (NAIC) said that the NAIC weighs standards rather than imposing regulations and that “one of those standards could be to implement what I consider a knee-jerk position of issuance of moratorium before the house is on fire.”
One of the common themes throughout the responses to the NY report was that onshore and even offshore captives are scrutinized by state regulators. All this hubbub did not mention Workers Comp. The study was life-insurance based. Captive insurance for Workers Comp will likely be the next captive subject ran up the proverbial flagpole. Many times I have often asked – “Did anyone consult with a (whatever line of insurance) expert or group of experts before we got to where we are today?” I usually receive blank stares or phone silence when I ask that question. There are thousands of insurance prognosticators on LinkedIn. What if the question on Captives had been posted there? All sides of the question would have likely been covered with differing opinions possibly.
Donelson of the NAIC put it best when he said that If they would give me a holler and tell me what regulator they think is not doing its job, I’d be happy to reach out to that regulator and express to them New York’s concerns.” There are many articles on captives in this blog written since 2007. Use the search box and type in captive.
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