Insurance Regulation

At least a few people in the Dallas – Fort Worth area and surrounding counties such as Parker County, Palo Pinto County, Johnson County, and others in Texas know that the insurance industry in the State of Texas is regulated by the Texas Department of Insurance.
Each state in the United States is able to enact its own rules and regulations for insurance companies. The New York Times published an article on May 8, 2011, that discusses how some states regulate insurance in such a way as to encourage insurance companies to come to their state to do business. There are pros and cons to this. The title of the article is, “Seeking Business, States Loosen Insurance Rules” and the authors are Mary Willams Walsh and Louise Story.
The first sentence in the article says, “Companies looking to do business in secret once had to travel to places like the Cayman Islands or Bermuda.”
The article tells us lots of other interesting information. Vermont and other states including Utah, South Carolina, Delaware, and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. About 30 states now have laws allowing insurance companies to set up special insurance subsidies called captives. These companies can conduct “Bermuda-style” wizardy.
What captives do is provide insurance to the parent company. This is historicaly done overseas where there is light regulation and little concern since only the parent company is at risk.
But now the states are allowing this. And the concern is that this shadow insurance industry with less regulation and more potential debt than policyholders know, raises the possibility that some companies will find themselves without enough money to pay future claims. This is compared the the shadow banking system that contributed to the financial crisis here in the United States a few years ago.
For states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on premiums collected by captives.
For insurance companies, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. For one company, Aetna, three weeks after it closed a deal, it announced it was increasing its dividend fifteenfold.
An advantage to consumers is that as the nation’s health systems are phased in, such innovations might help hold down the cost of insurance, much like selling pooled mortgages to investors made buying a home less expensive.
The concern though has to do with reserves. These reserves are used to pay claims. This concern has caused at least one state, California, to not pursue this type of business.
Another issue is oversight. State regulators normally require insurers to make available a lot of detailed information. The information normally available is not available when the insurer relies on a captive. The state laws make the audited financial statements of the captives confidential.
A.I.G. illustrates the kind of secrets companies keep. One of its many lines of business involves a mortgage insurance unit, based in North Carolina but with affiliates as far away as Australia. The unit promised to keep making payments when homeowners defaulted, but nearly failed when the housing bubble burst in 2008 and the claims poured in.
Normally, state regulators shut down insolvent insurers, but Vermont saved the day. It allowed A.I.G. to create a subsidiary, called MG Reinsurance, that took on $7 billion worth of insurance claims. Getting the claims off the books of the North Carolina unit made it solvent again, so it could keep selling policies.
A.I.G.’s mortgage insurance affiliate in Europe and Australia sent the Vermont captive even more obligations, making the transfers retroactive to Jan. 1, 2009, even though MG Reinsurance was not licensed until May. That turned what would have been big losses into a modest profit for A.I.G.’s offshore mortgage insurers.
The article is a good read to see the plusses and minuses of the types of deals that insurance companies are now able to do in the United States versus doing a similar or same deal offhore. It would depend on your point of view whether it is something good or something sinister.