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New York investigating insurance company captives


New York’s top financial-industry regulator is investigating whether life insurers are potentially masking their financial health through dealings with related companies, according to people familiar with the probe, The Wall Street Journal reported. 

The state’s Department of Financial Services in mid-July sent letters to about 80 life insurers, including large companies such as MetLife Inc., seeking details about their financial arrangements with affiliated entities known as captive insurance companies, the people said.

Many of these entities are incorporated offshore or in other states and were set up specifically to take on responsibility for certain types of policyholder claims from their parent companies.

New York regulators, led by Benjamin Lawsky, superintendent of the New York State Department of Financial Services, are looking for potential risks in these “reinsurance” transactions, the people said.

New York’s probe is part of a broader state effort to resist any potential watering down of insurance industry solvency standards.

In this instance, the New York regulators are concerned that some insurers may be shifting significant liabilities off their balance sheets onto these entities, which have more lax funding requirements than New York-regulated companies.

The scenario is a repeat of the 2008-09 financial crisis, in which a severe worsening of the economy would leave the insurers short of the money they need to make good on claims.

Many insurers contend the current formula-based reserve requirements result in claims reserves that are far bigger than necessary. Many state regulators allow insurers to establish captives or other entities into which they transfer some of their liabilities.

In Iowa, insurers setting up captives are required to hire an independent actuary to review their modeling of reserves, and the state hires its own actuary, to protect policyholders, senior insurance regulator Jim Armstrong told The Wall Street Journal.

“The last thing” the state wants “is a troubled company in Iowa,” Armstrong said.

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