NYT: States Seek To Keep Captives Onshore
Vermont, Utah, South Carolina, Delaware and Hawaii are among the states now reworking their regulatory frameworks to attract the lucrative private insurance deals once conducted almost exclusively in Bermuda, the “New York Times” reports today [May 9].
In order to keep high-end US re/insurance transactions onshore, a number of states are aggressively pursuing the captive market — although concerns have been raised that in the process of aggressively competing with off-shore jurisdictions like Bermuda they are creating a “shadow” insurance industry.
“Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard,” said the “Times”.
“Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.
“Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims.”
The “Times” cited a captive of the American International Group [AIG} set up in Vermont with the sole purpose of transferring mortgage debts incurred by the insurance giant’s affiliates.
“AIG illustrates the kind of secrets companies can keep,” said “The Times”. “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 claims poured in.
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“Normally, state regulators shut down insolvent insurers, but Vermont saved the day. It allowed AIG 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 more policies.
“AIG’s mortgage insurance affiliates 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 AIG’s off-shore mortgage insurers.
“Vermont’s confidentiality rules make it impossible to find out how MG Re is juggling all that debt. AIG is liable, but for now the problem is hidden away.”
Vermont has been pursuing captice business since 2001 when then Governor Howard Dean announced the state intended to compete directly with Bermuda.
“Before long, the taxes it levied on the insurance premiums collected by captives, as well as from additional fees, were enough to cover two percent of state spending,” said “The Times”. “Vermont also credits these insurance subsidiaries for the creation of 1,400 full- and part-time jobs, and for roughly $1 billion deposited with banks and other financial institutions.”
Vermont’s success in the captive field had spurred other states to follow its lead, reported “The Times”, changing their insurance regulations to allow for the formation of on-shore captives.
