NY agency faults 17 life insurers for shifting claim risks to affiliates with lower reserves

ALBANY, N.Y. – New York financial officials on Wednesday criticized 17 New York-based life insurers for shifting $48 billion of claim risks to affiliates elsewhere with lower reserve and collateral requirements.

The Department of Financial Services said so-called “shadow insurance” typically offloads potential claims to a subsidiary, freeing the parent company’s own reserves for other uses. However, the insurers would often remain responsible for paying claims if subsidiaries’ lesser reserves were used up, according to its report.

The department, which investigated practices of 80 New York-based insurers, declined to name the 17 companies but said it stopped approving similar new arrangements in October 2011. The report didn’t cite any examples where policyholder claims went unpaid.

“A key lesson of the financial crisis is that regulators have a responsibility to shine a light on questionable financial practices that shift risk out of sight and into the shadows,” Superintendent Benjamin Lawsky said in a prepared statement. “If we let our guard down and ignore this regulatory race to the bottom, taxpayers and insurance policyholders are the ones who could get left holding the bag.”

According to the department, the difference between these arrangements and regular reinsurance where insurers share claims risks with others are the lack of transparency with captive subsidiaries of entities either offshore or in other states, as well as generally weaker reserve and collateral requirements.

The report did not address property and casualty insurance companies.

The department began investigating the practices a year ago, requiring information from New York-based life insurers over which it has authority. Lawsky said it appeared to be a problem across the U.S., suggesting other state insurance regulators and federal officials likewise look into the transactions and take steps to protect consumers.

The Life Insurance Council of New York said the department will no doubt be part of the current national discussion with regulators and industry officials at the National Association of Insurance Commissioners, adding that insurers co-operated with the state probe.

“Captive reinsurance has been used by life insurers for many years to responsibly and appropriately manage risk,” the council said.

The New York Times, which first disclosed the report Wednesday, reported that the big users of the approach appeared to be publicly traded companies that have to meet targets for earnings and returns. MetLife told the newspaper that it holds more than enough reserves to pay policy claims and that it uses reinsurance subsidiaries to address “overly conservative reserve requirements” for some types of insurance.